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THIS  BOOK 


sent  out  contains  the  law  and  all 
of  subscription.  o 


2.  It  is  kept  up  to  date  by  the  insertion  of  new  pages 
as  often  “as  new  rulings,  regulations  or  decisions  appear. 


3.  New  pages  are  sent  out  under  first-class  postage, 
accompanied  by  instructions  for  proper  insertion. 


, 4.  All  pages  are  numbered  consecutively;  all  para- 
graphs are  numbered  consecutively  in  bold  figures. 


^^^5.  On  new  pages,  under  the  bold  face  paragraph 
numbers,  in  small  type,  are  back  references  to  preceding 
paragraphs.  Corresponding  forward  .references  to  the 
new  paragraph  numbers  should  be  made  each  time  new 
pages  are  received,  thus  making  the  book  fully  cross  ref- 
erenced at  all  times. 


6,  The  pages  and  pariagraphs  are  numbered  con- 
secutively. |f,  when  new  pages  are  received,  corres- 
ponding intej^ediate  pages  are  found  to  be  missing,  notice 
thereof  shoul®^  sent  us  at  once,  so  that  we  may  for- 
ward duplicates. 


THE  CORPORATiON  TRUST  COMPANY 


t . B'  ' a 

mi 


37  W&Il  Street, 
NEW  YORK,  N.  y; 


a 


Return  this  book  on  or  before  the 
Latest  Date  stamped  below. 


University  of  Illinois  Library  


OCT 


L161— H41 


Suppietnentary  Matters 


Supplementary  Matters  i; 


The  President’s  Message:  re  Taxation. 

Mr.  Wilson,  in  his  message  to  Congress,  December  2,  1919,  said: 

“I  trust  that  the  Congress  will  give  its  immediate  consideration  to 
the  problem  of  future  taxation.  Simplification  of  the  income  and  profits 
taxes  has  become  an  immediate  necessity.  These  taxes  performed  indis- 
pensable service  during  the  war.  They  must,  however,  be  simplified,  not 
only  to  save  the  taxpayer  inconvenience  and  expense,  but  in  order  that  his 
liability  may  be  made  certain  and  definite. 

“With  reference  to  the  details  of  the  revenue  law,  the  Secretary  of  the 
Treasury  and  the  Commissioner  of  Internal  Revenue  will  lay  before  you 
for  your  consideration  certain  amendments  necessary  or  desirable  in  con- 
nection with  the  administration  of  the  law — ^recommendations  which  have 
my  approval  and  support.  It  is  of  the  utmost  importance  that  in  dealing 
with  this  matter  the  present  law  should  not  be  disturbed  so  far  as  regards 
taxes  foi  the  calendar  year  1920,  payable  in  the  calendar  year  1921.  The 
Congress  might  well  consider  whether  the  higher  rates  of  income  and  profits 
taxes  can  in  peace  times  be  effectively  productive  of  revenue,  and  whether 
they  may  not,  on  the  contrary,  be  destructive  of  business  activity  and  pro- 
ductive of  waste  and  inefficiency. 

“There  is  a point  at  which  in  peace  times  high  rates  of  income  and 
profits  taxes  discourage  energy,  remove  the  incentive  to  new  enterprise, 
encourage  extravagant  expenditures  and  produce  industrial  stagnation, 
with  consequent  unemployment  and  other  attendant  evils. 

“The  problem  is  not  an  easy  one.” 

The  Corporation  Trust  Company 
37  Wall  Street,  New  York. 


December  3,  1919. 


' s./  s 


.M  V 'j r '}  { . i; h : ~ t i /.*’!’ 


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in  2017  with  funding  from  v. 

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https://archive.org/details/corporationtrust00corp_1 


1919  Income  Tax  Service 


February  25,  1919. 

This  binder  contains  pages  5 to  54  of  our  1919 
Income  Tax  Service. 

The  compilation,  supplementary  pages  and  the 
index  will  be  sent  as  soon  as  possible. 

The  next  report  will  be  No.  1 and  will  contain 
Regulation  No.  45  “Individuals.” 

In  the  meantime  new  pages  will  be  numbered  and 
paragraphed  for  this  Service  and  should  be  put  in  this 
binder  as  received.  When  you  receive  the  com- 
pilation  it  will  supply  the  missing  pages. 

Yours  very  truly, 

THE  CORPORATION  TRUST  COMPANY. 


Ci9£  *i?JO  \o  ol  r. 


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The  Law 


Corporation  Croat  Companp'a 

1913-1919 

INCOME  TAX  SERVICE 

IN  THREE  PARTS 


PART  1.-1913-1918. 

The  Income  Tax  Law 
of 

The  Revenue  Act  of  1918 
{Public — No.  254 — 55th  Congress.) 

Approved  February  24,  1919 
Compiled  with 

Interpreting  and  Administrative  Regulations 
Issued  Under  the  Acts  of 

October  3, 1913,  September  8, 1916,  and  October  3, 1917. 
PART  II.— 1919. 

Regulations  Issued  Since  February  12,  1919. 

PART  III. 

Supplementary  Matters  Including  a Table  of  Forms 

and 

A General  Index. 

COPYRIGHT  1919,  BY 

37  V/all  Street,  New  York 
Affiliated  with 

0Jfp  (Eorporation  ®r«Ht  Olomtiatiy  g>{}0tpm 

15  Exchange  Place,  .Jersey  City 
Organized  1892. 

Boston,  53  State  Street  Washington,  D.  C.,  501  Colorado  Bldg. 

(Corporation  Registration  Company)  Philadelphia,  1428  Land  Title  Bldg. 

Chicago,  112  W.  Adams  Street  Portland,  Me.,  281  St.  John  Street 

Los  Angeles,  Title  Insurance  Bldg.  St.  Louis,  Federal  Reserve  Bank  Bldg. 

JThe  Corporation  Company^  Wilmington,  4168  duPont  Bldg. 

Mttsburgh,  1202  Oliver  Bldg.  (Corporation  Trust  Co.  of  America) 


TABLE  OF  CONTENTS. 

PART  I. 

Page 

The  Income  Tax  Law,  as  a unit 5 

THE  COMPILATION.— 1913-1918. 

Paragraph 

Individuals 470,  736 

Nonresident  aliens 492 

Corporations 1662 

Foreign  corporations 2279 

Insurance  companies. 2225 

Returns  in  general 1434 

Returns  by  individuals ' 1142 

Returns  by  corporations 1398 

Payment  of  the  tax 2339 


Fiduciaries 1158 

Partnerships  and  personal  service  corporations 1269 


Information  at  the  source 1314 

Paym.ent  of  tax  at  the  source .'C.  . 553 


Administrative 2472' 

Supreme  Court  cases 2667 


PART  II.— 1919. 

Regulations,  etc.,  officially  issued  since  February  12,  1919 2824 


PART  III.— MISCELLANY. 

See  Supplementary  Pages  at  the  back  of  the  book. 


®ijp*(!Iorjnn:atintt  ®r«0t  (Sompattg’a 

1913-1919 

INCOME  TAX  SERVICE 
PART  I. 

1913-1918 

The  Income  Tax  Law 
. of 

The  Revenue  Act  of  1918 
Compiled  with 

Interpreting  and  Administrative  Regulations 
Issued  Under  the  Acts  of 

October  3,  1913,  September  8,  1916,  and  October  3,  1917. 

The  Income  Tax  Law  of  1918  (Title  II  of  the  Revenue  Act  of  1918) 
repeals  the  Income  Tax  Titles  of  the  Acts  of  September  8,  1916,  and  October 
3,  1917.  The  new  law  imposes  higher  rates  than  heretofore  but  contains 
numerous  alleviating  provisions,  including  exemption  from  income  taxation  to 
personal  service  corporations  per  se,  restricted  allowance  for  net  losses, 
amortization  allowance  for  special  war  equipment  investments,  adjustment 
of  losses  sustained  in  1919  by  virtue  of  depreciated  1918  inventory  or  of  1919 
rebate  payments  on  1918  contracts  and  sales,  more  equitable  depletion 
allowances,  limited  taxation  of  income  derived  from  sales  of  mining  and  oil 
properties  by  the  prospector  or  wild-catter,  and  credits  against  the  tax  for 
income  and  excess-profits  taxes  paid  to  other  jurisdictions.  The  new  law 
specifically  authorizes  inventories,  calls  for  consolidated  returns  by  affiliated 
corporations,  allows  to  individuals  full  losses  in  transactions  entered  into 
for  profit  outside  of  the  trade  or  business,  permits  all  interest  on  strictly 
business  indebtedness  to  be  deducted  by  corporations,  allows  as  a deduction 
to  corporation,  dividends  received  (as  did  the  War-income-tax  Act  of 
October  3,  1917),  and  does  away  with  all  withholding  on  dividends  in  con- 
sequence, provides  for  a specific  exemption  of  $2,000  to  corporations,  grants 
the  specific  personal  exemption  to  nonresident  aliens,  does  away  with  the 
allocation,  for  the  purpose  of  applying  the  tax  rates,  of  dividends  from  funds 
earned  since  March  1,  1913  (other  than  certain  stock  dividends),  changes 
the  date  for  filing  returns  to  the  fifteenth  day  of  the  third  month  after  the 
close  of  the  taxpayer’s  taxable  year,  permits  individuals  to  file  returns  on  a 
fiscal  year  basis,  provides  for  regular  annual  returns  of  income  by  partner- 
ships, calls  for  the  payment  of  one-quarter  (or  all,  if  the  taxpayer  so  elects) 
of  the  tax  on  or  before  the  time  specified  for  filing  the  return,  the  remaining 
three-quarters  to  be  paid  in  equal  thirds  at  three-month  intervals  thereafter, 
makes  the  supplying  of  information  at  the  source  in  connection  with 
payments  of  corporate-obligation  interest  and  foreign  items  dependent  on 
the  Commissioner’s  calling  for  it,  in  his  discretion,  increases  the  minimum 
amount  paid  on  account  of  salary,  etc.,  during  the  calendar  year  necess- 
itating a return  of  information  in  connection  therewith,  to  $1,000,  and  ma- 
terially changes  certain  administrative  features.  There  are  other  modifica- 
tions of  prior  laws,  but,  in  general,  except  as  noted  above,  the  law  remains 
as  it  was. 


INC. 


3 


TAX 


COMMENT 


In  the  copy  of  the  law  printed  herein,  the  official  wording,  punc- 
tuation and  capitalization  have  been  carefully  followed.  However, 
it  has  been  considered  advisable  to  introduce  a scheme  of  spacing 
and  indentation,  numbering  the  arbitrary  paragraphs  consecutively, 
which  it  is  hoped  will  make  the  various  provisions  more  accessible. 

When  the  law  paragraphs  are  repeated  in  their  proper  places  among 
the  regulations,  they  are  given,  in  addition  to  the  Law-paragraph  num- 
bers which  they  bear,  bold  face  general  paragraph  numbers  to  fit  them 
in  properly  with  the  paragraphs  of  the  regulations  which  precede  and 
follow  them.  This  will  be  found  to  be  an  advantage  in  utilizing  the 
cross  references  and  the  general  index. 

The  date  and  designation  of  each  ruling  or  regulation  appearing 
in  the  compilation  are  given.  Some  of  the  old  regulations  have  been 
edited  by  cutting  out  matters  that  applied  solely  to  repealed  provi- 
sions of  prior  Acts  (shown  by  asterisks  ***),  or  by  inserting  in  brackets 
[ ] words  or  figures  to  be  read  in  making  the  particular  sentence 
applicable  to  the  new  law. 

These  regulations,  decisions,  special  letters,  etc.,  explaining,  enlarg- 
ing or  giving  specific  directions  for  the  enforcement  of  the  provisions 
of  the  law  in  a particular  paragraph  or  group  of  paragraphs  of  the  law, 
are  printed  immediately  following  such  law  paragraph  or  group  of 
paragraphs.  Any  regulation,  part  of  a regulation,  letter  or  other  matter 
contained  in  our  1914,  1915,  1916,  1917  and  1918  Services  not  found  in 
this  compilation,  either  has  no  application  to  the  present  provisions  or  was 
repealed,  amended,  superseded,  or  otherwise  annulled,  or  v/as  repeated 
in  a subsequent  regulation  which  has  been  used  as  being  the  latest 
ruling. 

It  must  be  remembered  that  the  compilation  was  prepared,  by 
necessity,  before  any  regulations,  based  on  the  Revenue  Act  of  1918, 
were  issued  by  the  Government. 


INC. 


4 


TAX 


THE  FEDERAL  INCOME  TAX  LAW. 

BEING  TITLE  II 
of  the 

REVENUE  ACT  OF  1918 

To  Which  Have  Been  Added 
Title  I — General  Definitions 
and  Parts  of 

Title  XIII — General  Administrative  Provisions 
and 

Title  XIV — General  Provisions 
of  the  Revenue  Act  of  1918 

The  arbitrary  paragraphs  are  numbered  consecutively  on  the  left. 
Each  paragraph  will  be  found  repeated,  followed  by  the  provisions 
of  the  regulations,  if  any,  relating  to  it,  in  the  body  of  the  book, 
beginning  on  page  55  at  the  running  paragraph  the  number  of  which 
has  been  placed  on  the  right  opposite  that  particular  paragraph  in 
the  reprint  below. 

The  headings  are  a part  of  the  Act  as  passed,  except  when  shown 
in' brackets. 

(See  Law  and  Regulations,  Page  55.) 

Be  it  enacted  by  the  Senate  and  House  of  Representatives  of  the 
United  States  of  America  in  Congress  assembled. 


Law 

ragraph 


TITLE  I.— GENERAL  DEFINITIONS. 


Section.  1.  That  when  used  in  this  Act — ■ 


Repeated 
at  If 


The  term  “person”  includes  partnerships  and  corporations,  as  well  762 
as  individuals;  ‘ 1686 

The  term  “corporation”  includes  associations,  joint-stock  com-  1685 
panics,  and  insurance  companies; 

The  term  “domestic”  when  applied  to  a corporation  or  partner-  2331 
ship  means  created  or  organized  in  the  United  States; 

The  term  “foreign”  when  applied  to  a corporation  or  partnership  2280 
means  created  or  organized  outside  the  United  States; 

The  term  “United  States”  when  used  in  a geographical  sense  in-  2281 
eludes  only  the  States,  the  Territories  of  Alaska  and  Hawaii,  and 
the  District  of  Columbia; 

The  term  “Secretary”  means  the  Secretary  of  the  Treasury;  751 

The  term  “Commissioner”  means  the  Commissioner  of  Internal  752 
Revenue; 

The  term  “collector”  means  collector  of  internal  revenue; 

5 


753 


THE  INCOME  TAX  LAW. 


t Law  Repeated 

Paragraph  at  If 

1[10  The  term  “Revenue  Act  of  1916’V  means  the  Act  entitled  “An  480 
Act  to  increase  the  revenue,  and  for  other  purposes,^’  approved 
September  8,  1916; 

mi  The  term  “Revenue  Act  of  1917”  means  the  Act  entitled  “An  Act  482 
to  provide  revenue  to  defray  war  expenses,  and  for  other  purposes,” 
approved  October  3,  1917; 

^12  The  term  “taxpayer”  includes  any  person,  trust  or  estate  subject  761 
to  a tax  imposed  by  this  Act; 

1[13  The  term  “Government  contract”  means  (a)  a contract  made  with  1313 
the  United  States,  or  with  any  department,  bureau,  officer,  commission, 
board,  or  agency,  under  the  United  States  and  acting  in  its  behalf,  or 
with  any  agency  controlled  by  any  of  the  above  if  the  contract  is  for 
the  benefit  of  the  United  States,  or  (b)  a subcontract  made  with  a con- 
tractor performing  such  a contract  if  the  products  or  services  to  be 
furnished  under  the  subcontract  are  for  the  benefit  of  the  United  States, 

The  term  “Government  contract  or  contracts  made  between  April  6, 1917, 
and  November  11,  1918,  both  dates  inclusive”  when  applied  to  a contract 
of  the  kind  referred  to  in  clause  (a)  of  this  paragraph,  includes  all  such 
contracts  which,  although  entered  into  during  such  period,  were 
originally  not  enforceable,  but  which  have  been  or  may  become  enforce- 
able by  reason  of  subsequent  validation  in  pursuance  of  law; 

^14  The  term  “military  or  naval  forces  of  the  United  States”  includes  1007 
the  Marine  Corps,  the  Coast  Guard,  the  Army  Nurse  Corps,  Female, 
and  the  Navy  Nurse  Corps,  Female,  but  this  shall  not  be  deemed  to 
exclude  other  units  otherwise  included  within  such  term; 

1115  The  term  “present  war”  means  the  war  in  which  the  United  States  1008 
is  now  engaged  against  the  German  Government. 

1116  For  the  purposes  of  this  Act  the  date  of  the  termination  of  the  1009 
present  war  shall  be  fixed  by  proclamation  of  the  President. 

TITLE  II.— INCOME  TAX. 

Part  I. — General  Provisions. 

Definitions. 

^17  Sec.  200.  That  when  used  in  this  title — 476 

1fl8  The  term  “taxable  year”  means  the  calendar  year,  or  the  fiscal  477 

year  ending  during  such  calendar  year,  upon  the  basis  of  which  the  1663 
net  income  is  computed  under  section  212  or  section  232. 

^19  The  term  “fiscal  year”  means  an  accounting  period  of  twelve  478 
months  ending  on  the  last  day  of  any  month  other  than  December.  1664 

^20  The  first  taxable  year,  to  be  called  fthe  taxable  year  1918,  shall  be  479 
the  calendar  year  1918  or  any  fiscal  year  ending  during  the  calendar  1665 
year  1918; 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  ^ . 

1[21  The  term  “fiduciary*’  means  a guardian,  trustee,  executor,  ad-  1169 
ministrator,  receiver,  conservator,  or  any  person  acting  in  any 
fiduciary  capacity  for  any  person,  trust  or  estate; 

^22  The  term  “withholding  agent”  means  any  person  required  to  584 
deduct  and  withhold  any  tax  under  the  provisions  of  section  221 
or  section  237; 

f • • ’ 

^23  The  term  “personal  service  corporation”  means  ^ a corporation  1308 
whose  income  is  to  be  ascribed  primarily  to  the  activities  of  the 
principal  owners  or  stockholders  who  are  themselves  regularly  engaged  ^ 
in  the  active  conduct  of  the  affairs  of  the  corporation  and  in  which 
capital  (whether  invested  or  borrowed)  is  not  a material  income- 
producing  factor; 

If 24  '^but  does  not  include  any  foreign  corporation,  13Q9 

1f25  nor  any  corporation  50  per  centum  or  more  of  whose  gross  income  con-  1310 
sists  either 

1f26  (1)  of  gains,  profits  or  income  derived  from  trading  as  a principal,  131 1 

or 

Tf27  (2)  of  gains,  profits,  commissions,  or  other  income,  derived  from  1312 
a Government  contract  or  contracts  made  between  April  6,  1917, 
and  November  11,  1918,  both  dates  inclusive; 

Tf28  The  term  “paid,”  for  the  purposes  of  the  deductions  and  credits  1923 
under  this  title,  means  “paid  or  accrued”  or  “paid  or  incurred,”  and  the 
terms  “paid  or  incurred”  and  “paid  or  accrued”  shall  be  construed 
according  to  the  method  of  accounting  upon  the  basis  of  which  the 
net  income  is  computed  under  section  212. 

rr1  ■'  ' ■’ 

Dividends. 

1f29  Sec.  201.  (a)  That  the  term  “dividend”  when  used  in  this  title  770 

(except  in  paragraph  (10)  of  subdivision  (a)  of  section  234)  means 

^30  (1)  any  distribution  made  by  a corporation,  other  than  a personal  771 
service  corporation,  to  its  shareholders  or  members,  whether  in  cash 
or  in  other  property  or  in  stock  of  the  corporation,  out  of  its  earnings 
or  profits  accumulated  since  February  28,  1913,  or 

^31  (2)  any  such  distribution  made  by  a personal  service  corporation  out  772 

of  its  earnings  or  profits  accumulated  since  February  28,  1913,  and 
prior  to  January  1,  1918. 

1[32  (b)  Any  distribution  shall  be  deemed  to  have  been  made  from  800 

earnings  or  profits  unless  all  earnings  and  profits  have  first  been 
distributed. 

1133  Any  distribution  made  in  the  year  1918  or  any  year  thereafter  shall  SOl 
be  deemed  to  have  been  made  from  earnings  or  profits  accumulated 
since  February  28,  1913,  or. 


7 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  ^ 

^34  in  the  case  of  a personal  service  corporation,  from  the  most  803 
recently  accumulated  earnings  or  profits; 

1[35  but  any  earnings  or  profits  accumulated  prior  to  March  1,  1913,  may  810 
be  distributed  in  stock  dividends  or  otherwise,  exempt  from  the  tax, 
after  the  earnings  and  profits  accumulated  since  February  28,  1913, 
have  been  distributed. 

1(36  (c)  A dividend  paid  in  stock  of  the  corporation  shall  be  consid-  811 

ered  income  to  the  amount  of  the  earnings  or  profits  distributed. 

^37  Amounts  distributed  in  the  liquidation  of  a corporation  shall  be  828 
treated  as  payments  in  exchange  for  stock  or  shares,  and  any  gain  or 
profit  realized  thereby  shall  be  taxed  to  the  distributee  as  other  gains 
or  profits. 

^38  (d)  If  any  stock  dividend  (1)  is  received  by  a taxpayer  between  831 

January  1 and  November  1,  1918,  both  dates  inclusive,  or 

Tf39  (2)  is  during  such  period  bona  fide  authorized  or  declared,  and  832 
entered  on  the  books  of  the  corporation,  and  is  received  by  a taxpayer 
after  November  1,  1918,  and  before  the  expiration  of  thirty  days  after 
passage  of  this  Act, 

Tf40  then  such  dividend  shall,  in  the  manner  provided  in  section  206,  be  833 
taxed  to  the  recipient  at  the  rates  prescribed  by  law  for  the  years  in 
which  the  corporation  accumulated  the  earnings  or  profits  from  which 
such  dividend  was  paid,  but  the  dividend  shall  be  deemed  to  have 
been  paid  from  the  most  recently  accumulated  earnings  or  profits. 

1[41  (e)  Any  distribution  made  during  the  first  sixty  days  of  any  tax-  845 

able  year  shall  be  deemed  to  have  been  made  from  earnings  or  profits 
accumulated  during  preceding  taxable  years; 

^42  but  any  distribution  made  during  the  remainder  of  the  taxable  year  846 
shall  be  deemed  to  have  been  made  from  earnings  or  profits  accumu- 
lated between  the  close  of  the  preceding  taxable  year  and  the  date  of 
distribution,  to  the  extent  of  such  earnings  or  profits,  and  if  the  books 
of  the  corporation  do  not  show  the  amount  of  such  earnings  or  profits, 
the  earnings  or  profits  for  the  accounting  period  within  which  the 
distribution  was  made  shall  be  deemed  to  have  been  accumulated 
jatably  during  such  period. 

Basis  for  Determining  Gain  or  Loss. 

^43  Sec.  202.  (a)  That  for  the  purpose  of  ascertaining  the  gain  1854 
derived  or  loss  sustained  from  the  sale  or  other  disposition  of  prop- 
erty, real,  personal,  or  mixed,  the  basis  shall  be — 

‘^44  (1)  In  the  case  of  property  acquired  before  March  1,  1913,  the  1855 

fair  market  price  or  value  of  such  property  as  of  that  date;  and 

^45  (2)  In  the  case  of  property  acquired  on  or  after  that  date,  the  1860 

cost  thereof;  or  the  inventory  value,  if  the  inventory  is  made  in 
accordance  with  section  203. 


8 


THE  INCOME  TAX  LAW. 


Law  Repsated 

Paragraph  at  ^ 

1[46  (b)  When  property  is  exchanged  for  other  property,  the  property  1909 

received  in  exchange  shall  for  the  purpose  of  determining  gain  or 
loss  be  treated  as  the  equivalent  of  cash  to  the  amount  of  its  fair 
market  value,  if  any; 

^47  but  when  in  connection  with  the  reorganization,  merger,  or  consolida-  1910 
tion  of  a corporation  a person  receives  in  place  of  stock  or  securities 
owned  by  him  new  stock  or  securities  of  no  greater  aggregate  par  or 
face  value, 

U48  no  gain  or  loss  shall  be  deemied  to  occur  from  the  exchange,  and  the  1911 
new  stock  or  securities  received  shall  be  treated  as  taking  the  place  of 
the  stock,  securities,  or  property  exchanged. 

1[49  When  in  the  case  of  any  such  reorganization,  merger  or  consolida-  1912 
tion  the  aggregate  par  or  face  value  of  the  new  stock  or  securities 
received  is  in  excess  of  the  aggregate  par  or  face  value  of  the  stock  or 
securities  exchanged,  a like  amount  in  par  or  face  value  of  the  new 
stock  or  securities  received  shall  be  treated  as  taking  the  place  of  the 
stock  or  securities  exchanged,  and  the  amount  of  the  excess  in  par  or 
face  value  shall  be  treated  as  a gain  to  the  extent  that  the  fair  market 
value  of  the  new  stock  or  securities  is  greater  than  the  cost  (or  if  ac- 
quired prior  to  March  1,  1913,  the  fair  market  value  as  of  that  date) 
of  the  stock  or  securities  exchanged. 


Inventories. 

T[50  Sec.  203.  That  whenever  in  the  opinion  of  the  Commissioner  1861 
the  use  of  inventories  is  necessary  in  order  clearly  to  determine  the 
income  of  any  taxpayer,  inventories  shall  be  taken  by  such  taxpayer 
upon  such  basis  as  the  Commissioner,  with  the  approval  of  the 
Secretary,  may  prescribe  as  conforming  as  nearly  as  may  be  to  the 
best  accounting  practice  in  the  trade  or  business  and  as  most  clearly 
reflecting  the  incom.e. 

Net  Losses. 

^51  Sec.  204.  (a)  That  as  used  in  this  section  the  term  “net  loss”  1913 
refers  only  to  net  losses  resulting  from  either 

T[52  (1)  the  operation  of  any  business  regularly  carried  on  by  the  1914 

taxpayer,  or 

1[53  (2)  the  bona  fide  sale  by  the  taxpayer  of  plant,  buildings,  1915 

machinery,  equipmient  or  other  facilities,  constructed,  in- 
stalled or  acquired  by  the  taxpayer  on  or  after  April  6,  1917, 
for  the  production  of  articles  contributing  to  the  prosecution 
of  the  present  war; 

^54  and  when  so  resulting  means  the  excess  of  the  deductions  allowed  1916 
by  law  (excluding  in  the  case  of  corporations  amounts  allowed  as  a 
deduction  under  paragraph  (6)  of  subdivision  (a)  of  section  234)  over 
the  sum  of  the  gross  income  plus  any  interest  received  free  from 
taxation  both  under  this  title  and  under  Title  III. 

9 


THE  INCOME  TAX  LAW. 


PK  Law  Repeated 

Paragraph  at  ^ 

T[55  (b)  If  for  any  taxable  year  beginning  after  October  31,  1918,  and  1917 

ending  prior  to  January  1,  1920,  it  appears  upon  the  production  of  evi- 
dence satisfactory  to  the  Commissioner  that  any  taxpayer  has  sustained 
a net  loss,  the  amount  of  such  net  loss  shall  under  regulations  prescribed 
by  the  Commissioner  with  the  approval  of  the  Secretary  be  deducted 
from  the  net  income  of  the  taxpayer  for  the  preceding  taxable  year; 

1[56  and  the  taxes  imposed  by  this  title  and  by  Title  III  for  such  pre-  1918 
ceding  taxable  year  shall  be  redetermined  accordingly. 

1f57  Any  amount  found  to  be  due  to  the  taxpayer  upon  the  basis  of  such  1919 
redetermination  shall  be  credited  or  refunded  to  the  taxpayer  in 
accordance  with  the  provisions  of  section  252. 

T[58  If  such  net  loss  is  in  excess  of  the  net  income  for  such  preceding  tax-  1920 
able  year,  the  amount  of  such  excess  shall  under  regulations  pre- 
scribed by  the  Commissioner  with  the  approval  of  the  Secretary  be 
allowed  as  a deduction  in  computing  the  net  income  for  the  suc- 
ceeding taxable  year. 

^59  (c)  The  benefit  of  this  section  shall  be  allowed  to  the  members  1921 

of  a partnership  and  the  beneficiaries  of  an  estate  or  trust  under  regu- 
lations prescribed  by  the  Commissioner  with  the  approval  of  the 
Secretary. 

Fiscal  Year  with  Different  Rates. 

^60  Sec.  205.  (a)  That  if  a taxpayer  makes  return  for  a fiscal  year  1666 

beginning  in  1917  and  ending  in  1918,  his  tax  under  this  title  for  the 
first  taxable  year  shall  be  the  sum  of: 

Tf61  ^ (1)  the  same  proportion  of  a tax  for  the  entire  period  compu;ted  1667 

under  Title  I of  the  Revenue  Act  of  1916  as  amended  by  the 
Revenue  Act  of  1917  and  under  Title  I of  the  Revenue  Act  of 
1917,  which  the  portion  of  such  period  falling  within  the  calen- 
dar year  1917  is  of  the  entire  period,  and 

Tf62  (2)  the  same  proportion  of  a tax  for  the  entire  period  com-  1668 

puted  under  this  title  at  the  rates  for  the  calendar  year  1918 
which  the  portion  of  such  period  falling  within  the  calendar 
year  1918  is  of  the  entire  period; 

Tf63  Provided,  That  in  the  case  of  a personal  service  corporation  the  amount  1669 
to  be  paid  shall  be  only  that  specified  in  clause  (1). 

^64  Any  amount  heretofore  or  hereafter  paid  on  account  of  the  tax  1670 
imposed  for  such  fiscal  year  by  Title  I of  the  Revenue  Act  of  1916  as 
amended  by  the  Revenue  Act  of  1917,  and  by  Title  I of  the  Revenue 
Act  of  1917,  shall  be  credited  towards  the  payment  of  the  tax  imposed 
for  such  fiscal  year  by  this  act,  and  if  the  amount  so  paid  exceeds  the 
amount  of  such  tax  imposed  by  this  act,  or,  in  the  case  of  a personal 
service  corporation,  the  amount  specified  in  clause  (1),  the  excess  shall 
be  credited  or  refunded  in  accordance  with  the  provisions  of  section  252. 


10 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  ^ 

Tf65  (b)  If  a taxpayer  makes  a return  for  a fiscal  year  beginning  in  1918  1671 
and  ending  in  1919,  the  tax  under  this  title  for  such  fiscal  year  shall  be 
the  sum  of: 

Tf66  (1)  the  same  proportion  of  a tax  for  the  entire  period  com-  1672 

puted  under  this  title  at  the  rates  specified  for  the  calendar 
year  1918  which  the  portion  of  such  period  falling  within  the 
calendar  year  1918  is  of  the  entire  period,  and 

1f67  (2)  the  same  proportion  of  a tax  for  the  entire  period  com-  1673 

puted  under  this  title  at  the  rates  specified  for  the  calendar 
year  1919  which  the  portion  of  such  period  falling  within  the 
calendar  year  1919  is  of  the  entire  period. 

1f68  (c)  If  a fiscal  year  of  a partnership  begins  in  1917  and  ends  in  1918  1674 

or  begins  in  1918  and  ends  in  1919,  then  notwithstanding  the  pro- 
visions of  subdivision  (b)  of  section  218, 

]f69  (1)  the  rates  for  the  calendar  year  during  which  such  fiscal  1675 

year  begins  shall  apply  to  an  amount  of  each  partner’s  share 
of  such  partnership  net  income  (determined  under  the  law 
applicable  to  such  year)  equal  to  the  proportion  which  the  part 
of  such  fiscal  year  falling  within  such  calendar  year  bears  to  the 
full  fiscal  year,  and 

^70  (2)  the  rates  for  the  calendar  year  during  which  such  fiscal  1676 

year  ends  shall  apply  to  an  amount  of  each  partner’s  share 
of  such  partnership  net  income  (determined  under  the  law 
applicable  to  such  calendar  year)  equal  to  the  proportion  which 
the  part  of  such  fiscal  year  falling  within  such  calendar  year 
bears  to  the  full  fiscal  year: 

T[71  Provided j That  in  the  case  of  a personal  service  corporation  with  1677 
respect  to  a fiscal  year  beginning  in  1917  and  ending  in  1918,  the  amount 
specified  in  clause  (1)  shall  not  be  subject  to  normal  tax. 


Parts  of  Income  Subject  to  Rates  for  Different  Years. 

^[72  Sec.  206.  That  whenever  parts  of  a taxpayer’s  income  are  1678 
subject  to  rates  for  different  calendar  years,  the  part  subject  to  the 
rates  for  the  most  recent  calendar  year  shall  be  placed  in  the  lower 
brackets  of  the  rate  schedule  provided  in  this  title,  the  part  subject 
to  the  rates  for  the  next  preceding  calendar  year  shall  be  placed  in 
the  next  higher  brackets  of  the  rate  schedule  applicable  to  that  year, 
and  so  on  until  the  entire  net  income  has  been  accounted  for. 

^73  In  determining  the  income,  any  deductions,  exemptions  or  credits  1679 
of  a kind  not  plainly  and  properly  chargeable  against  the  income 
taxable  at  rates  for  a preceding  year  shall  first  be  applied  against  the 
income  subject  to  rates  for  the  most  recent  calendar  year; 

1[74  but  any  balance  thereof  shall  be  applied  against  the  income  subject  1680 
to  the  rates  of  the  next  preceding  year  or  years  until  fully  allowed. 

11 


Law 

Paragraph 


THE  INCOME  TAX  LAW. 


Repeated 
at  t 


Part  II. — Individuals. 

' Normal  Tax. 

^75  Sec.  210.  That,  in  lieu  of  the  taxes  imposed  by  subdivision  (a)  471 

of  section  1 of  the  Revenue  Act  of  1916  and  by  section  1 of  the  Revenue  497 
Act  of  1917,  there  shall  be  levied,  collected,  and  paid  for  each  taxable 
year  upon  the  net  income  of  every  individual  a normal  tax  at  the 
following  rates: 

^76  (a)  For  the  calendar  year  1918,  12  per  centum  of  the  amount  472 

of  the  net  income  in  excess  of  the  credits  provided  in  section  216:  498 

lf77  Provided^  That  in  the  case  of  a citizen  or  resident  of  the  United  473 

States  the  rate  upon  the  first  $4,000  of  such  excess  amount  shall 
he  6 per  centum; 

^78  (b)  For  each  calendar  year  thereafter,  8 per  centum  of  the  474 

amount  of  the  net  income  in  excess  of  the  credits  provided  in  section  499 
216: 

If 79  Provided,  That  in  the  case  of  a citizen  or  resident  of  the  United  475 

States  the  rate  upon  the  first  $4,000  of  such  excess  amount  shall 
be  4 per  centum. 

Surtax. 

180  Sec.  211.  (a)  That,  in  lieu  of  the  taxes  imposed  by  sub-  736 

division  (b)  of  section  1 of  the  Revenue  Act  of  1916  and  by  section  500 
2 of  the  Revenue  Act  of  1917,  but  in  addition  to  the  normal  tax 
imposed  by  section  210  of  this  Act,  there  shall  be  levied,  collected, 
and  paid  for  each  taxable  year  upon  the  net  income  of  every  in- 
dividual, a surtax  equal  to  the  sum  of  the  following: 

^81  1 per  centum  of  the  amiount  by  which  the  net  income  exceeds  737 

$5,000  and  does  not  exceed  $6,000; 

2 per  centum  of  the  amount  by  which  the  net  income  exceeds 
$6,000  and  does  not  exceed  $8,000; 

3 per  centum  of  the  amount  by  which  the  net  income  exceeds 
$8,000  and  does  not  exceed  $10,000; 

4 per  centum  of  the  amount  by  which  the  net  income  exceeds 
$10,000  and  does  not  exceed  $12,000; 

5 per  centum  of  the  amount  by  which  the  net  income  exceeds 
$12,000  and  does  not  exceed  $14,000; 

6 per  centum  of  the  amount  by  which  the  net  income  exceeds 
$14,000  and  does  not  exceed  $16,000; 

7 per  centum  of  the  amount  by  which  the  net  income  exceeds 
$16,000  and  does  not  exceed  $18,000; 

8 per  centum  of  the  amount  by  which  the  net  income  exceeds 
$18,000  and  does  not  exceed  $20,000; 

9 per  centum  of  the  amount  by  which  the  net  income  exceeds 
$20,000  and  does  not  exceed  $22,000; 

10  per  centum  of  the  amount  by  which  the  net  income  ex- 
ceeds $22,000  and  does  not  exceed  $24,000; 

11  per  centum  of  the  amount  by  which  the  net  income  ex- 
ceeds $24,000  and  does  not  exceed  $26,000; 

12 


THE  INCOME  TAX  LAW. 


Law 

Paragraph 

(^81)  12  per  centum  of 

ceeds  $26,000  and 

13  per  centum  of 
ceeds  $28,000  and 

14  per  centum  of 
ceeds  $30,000  and 

15  per  centum  of 
ceeds  $32,000  and 

16  per  centum  of 
ceeds  $34,000  and 

17  per  centum  of 
ceeds  $36,000  and 

18  per  centum  of 
ceeds  $38,000  and 

19  per  centum  of 
ceeds  $40,000  and 

20  per  centum  of 
ceeds  $42,000  and 

21  per  centum  of 
ceeds  $44,000  and 

22  per  centum  of 
ceeds  $46,000  and 

23  per  centum  of 
ceeds  $48,000  and 

24  per  centum  of 
ceeds  $50,000  and 

25  per  centum  of 
ceeds  $52,000  and 

26  per  centum  of 
ceeds  $54,000  and 

27  per  centum  of 
ceeds  $56,000  and 

28  per  centum  of 
ceeds  $58,000  and 

29  per  centum  of 
ceeds  $60,000  and 

30  per  centum  of 
ceeds  $62,000  and 

31  per  centum  of 
ceeds  $64,000  and 

32  per  centum  of 
ceeds  $66,000  and 

33  per  centum  of 
ceeds  $68,000  and 

34  per  centum  of 
ceeds  $70,000  and 

35  per  centum  of 
ceeds  $72,000  and 

36  per  centum  of 
ceeds  $74,000  and 

37  per  centum  of 
ceeds  $76,000  and 

38  per  centum  of 
ceeds  $78,000  and 


the  amount  by  which  the 
does  not  exceed  $28,000; 
the  amount  by  which  the 
does  not  exceed  $30,000; 
the  amount  by  which  the 
does  not  exceed  $32,000; 
the  amount  by  which  the 
does  not  exceed  $34,000; 
the  amount  by  which  the 
does  not  exceed  $36,000; 
the  amount  by  which  the 
does  not  exceed  $38,000; 
the  amount  by  which  the 
does  not  exceed  $40,000; 
the  amount  by  which  the 
does  not  exceed  $42,000; 
the  amount  by  which  the 
does  not  exceed  $44,000; 
the  amount  by  which  the 
does  not  exceed  $46,000; 
the  amount  by  which  the 
does  not  exceed  $48,000; 
the  amount  by  which  the 
does  not  exceed  $50,000; 
the  amount  by  which  the 
does  not  exceed  $52,000; 
the  amount  by  which  the 
does  not  exceed  $54,000; 
the  amount  by  which  the 
does  not  exceed  $56,000; 
the  amount  by  which  the 
does  not  exceed  $58,000; 
the  amount  by  which  the 
does  not  exceed  $60,000; 
the  amount  by  which  the 
does  not  exceed  $62,000; 
the  amount  by  which  the 
does  not  exceed  $64,000; 
the  amount  by  which  the 
does  not  exceed  $66,000; 
the  amount  by  which  the 
does  not  exceed  $68,000; 
the  amount  by  which  the 
does  not  exceed  $70,000; 
the  amount  by  which  the 
does  not  exceed  $72,000; 
the  amount  by  which  the 
does  not  exceed  $74,000; 
the  amount  by  which  the 
does  not  exceed  $76,000; 
the  amount  by  which  the 
does  not  exceed  $78,000; 
the  amount  by  which  the 
does  not  exceed  $80,000; 


Repeated 


net 

income 

ex- 

<at  ^ 

(737) 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

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income 

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ex- 

net 

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ex- 

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ex- 

net 

income 

ex- 

13 


THE  INCOME  TAX  LAW. 


lK>|Law  Repeated 

Paragraph  at  t 

(1f81)  39  per  centum  of  the  amount  by  which  the  net  income  ex-  (737) 

ceeds  $80,000  and  does  not  exceed  $82,000; 

40  per  centum  of  the  amount  by  which  the  net  income  ex- 
ceeds $82,000  and  does  not  exceed  $84,000; 

41  per  centum  of  the  amount  by  which  the  net  income  ex- 
ceeds $84,000  and  does  not  exceed  $86,000; 

42  per  centum  of  the  amount  by  which  the  net  income  ex- 
ceeds $86,000  and  does  not  exceed  $88,000; 

43  per  centum  of  the  amount  by  which  the  net  income  ex- 
ceeds $88,000  and  does  not  exceed  $90,000; 

44  per  centum  of  the  amount  by  which  the  net  income  ex- 
ceeds $90,000  and  does  not  exceed  $92,000; 

45  per  centum  of  the  amount  by  which  the  net  income  ex- 
ceeds $92,000  and  does  not  exceed  $94,000; 

46  per  centum  of  the  amount  by  which  the  net  income  ex- 
ceeds $94,000  and  does  not  exceed  $96,000; 

47  per  centum  of  the  amount  by  which  the  net  income  ex- 
ceeds $96,000  and  does  not  exceed  $98,000; 

48  per  centum  of  the  amount  by  which  the  net  income  ex- 
ceeds $98,000  and  does  not  exceed  $100,000; 

52  per  centum  of  the  amount  by  which  the  net  income  ex- 
ceeds $100,000  and  does  not  exceed  $150,000; 

56  per  centum  of  the  amount  by  which  the  net  income  ex- 
ceeds $150,000  and  does  not  exceed  $200,000; 

60  per  centum  of  the  amount  by  which  the  net  income  ex- 
ceeds $200,000  and  does  not  exceed  $300,000; 

63  per  centum  of  the  amount  by  which  the  net  income  ex- 
ceeds $300,000  and  does  not  exceed  $500,000; 

64  per  centum  of  the  amount  by  which  the  net  income  ex- 
ceeds $500,000  and  does  not  exceed  $1,000,000; 

65  per  centum  of  the  amount  by  which  the  net  income  ex- 
ceeds $1,000,000. 


^82  r (b)  In  the  case  of  a bona  fide  sale  of  mines,  oil  or  gas  wells,  or''any  738 
interest  therein,  where  the  principal  value  of  the  property  has  been 
demonstrated  by  prospecting  or  exploration  and  discovery  work 
done  by  the  taxpayer,  the  portion  of  the  tax  imposed  by  this  section 
attributable  to  such  sale  shall  not  exceed  20  per  centum  of  the  selling 
price  of  such  property  or  interest. 

Net  Income  Defined 

Tf83  ^ Sec.  212.  (a)  That  in  the  case  of  an  individual  the  term  “net  J.754 

income”  means  the  gross  income  as  defined  in  section  213,  less  the^501 
deductions  allowed  by  section  214. 

1184  (b)  The  net  income  shall  be  computed  upon  the  basis  of  the  tax-  755 

payer’s  annual  accounting  period  (fiscal  year  or  calendar  year,  as 
the  case  may  be)  in  accordance  with  the  method  of  accounting 
regularly  employed  in  keeping  the  books  of  such  taxpayer; 

1f85  but  if  no  such  method  of  accounting  has  been  so  employed,  756 

or  if  the  method  employed  does  not  clearly  reflect  the  in- 
come, the  computation  shall  be  made  upon  such  basis  and 
in  such  manner  as  in  the  opinion  of  the  Commissioner  does 
clearly  reflect  the  income. 


14 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  ^ 

^86  If  the  taxpayer’s  annual  accounting  period  is  other  than  a fiscal  year  757 
as  defined  in  section  200  or  if  the  taxpayer  has  no  annual  accounting 
period  or  does  not  keep  books,  the  net  income  shall  be  computed  on 
the  basis  of  the  calendar  year. 

1f87  If  a taxpayer  changes  his  accounting  period  from  fiscal  year  to  758 
calendar  year,  from  calendar  year  to  fiscal  year,  or  from  one  fiscal 
year  to  another,  the  net  income  shall,  with  the  approval  of  the 
Commissioner,  be  computed  on  the  basis  of  such  new  accounting 
period,  subject  to  the  provisions  of  section  226. 


Gross  Income  Defined. 

Tf88  bee.  213.  That  for  the  purposes  of  this  title  (except  as  other-  763 
wise  provided  in  section  233)  the  term  “gross  income” — 

Tf89  (a)  Includes  gains,  profits,  and  income  derived  from  salaries,  764 
wages,  or  compensation  for  personal  service  (including  in  the  case  of  the 
President  of  the  United  States,  the  judges  of  the  Suprem.e  and  inferior 
courts  of  the  United  States,  and  all  other  officers  and  employees,  whether 
elected  or  appointed,  of  the  United  States,  Alaska,  Hawaii,  or  any 
political  subdivision  thereof,  or  the  District  of  Columbia,  the  com- 
pensation received  as  such),  of  whatever  kind  and  in  whatever  form 
paid,  or 

Tf90  from  professions,  vocations,  trades,  businesses,  commerce,  or  sales,  765 
or  dealings  in  property,  whether  real  or  personal,  growing  out  of  the 
ownership  or  use  of  or  interest  in  such  property; 

1[91  also  from  interest,  rent,  dividends,  securities,  [or  the  transaction  766 
of  any  business  carried  offifor  gain  or  profit,  or 

^92  gains'or  profits  and  income  derived  from  any  source  whatever.  767 

^93  The  amount  of  all  such  items  shall  be  included  in  the  gross  income  768 
for  the  taxable  year  in  which  received  by  the  taxpayer,  unless,  under 
methods  of  accounting  permitted  under  subdivision  (b)  of  section  212, 
any  such  amounts  are  to  be  properly  accounted  for  as  of  a different 
period;  but 

Tf94  (b)  Does  not  include  the  following  items,  which  shall  be  exempt  944 
from  taxation  under  this  title: 

Tf95  (1)  The  proceeds  of  life  insurance  policies  paid  upon  the  death  945 
of  the  insured  to  individual  beneficiaries  or  to  the  estate  of  the  Insured; 

Tf96  (2)  The  amount  received  by  the  Insured  as  a return  of  premium  946 
or  premiums  paid  by  him  under  life  insurance,  endowment,  or  an- 
nuity contracts,  either  during  the  term  or  at  the  maturity  of  the 
term  mentioned  in  the  contract  or  upon  surrender  of  the  contract; 

1(97  (3)  The  value  of  property  acquired  by  gift,  bequest,  devise,  or  961 

descent  (but  the  income  from  such  property  shall  be  Included  in 
gross  income); 


15 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  ^ 

^98  (4)  Interest  upon  (a)  the  obligations  of  a State,  Territory,  or  963 

any  political  subdivision  thereof,  or  the  District  of  Columbia;  or 

^99  (b)  securities  issued  under  the  provisions  of  the  Federal  964 

Farm  Loan  Act  of  July  17,  1916;  or 

IflOO  (c)  the  obligations  of  the  United  States  or  its  possessions;  or  965 

^[101  (d)  bonds  issued  by  the  War  Finance  Corporation:  966 

1[102  Provided^  That  every  person  owning  any  of  the  obligations,  securities  or  967 
bonds  enumerated  in  clauses  {a),{b),  (c)  and  {d)  shall,  in  the  return  re- 
quired by  this  title,  submit  a statement  showing  the  number  and  amount 
of  such  obligations,  securities  and  bonds  owned  by  him  and  the  income 
received  therefrom,  in  such  form  and  with  such  information  as  the  Commis- 
sioner may  require. 

^103  In  the  case  of  obligations  of  the  United  States  issued  after  September  975 
1,  1917,  and  in  the  case  of  bonds  issued  by  the  War  Finance  Corpora- 
tion, the  interest  shall  be  exempt  only  if  and  to  the  extent  provided 
in  the  respective  Acts  authorizing  the  issue  thereof  as  amended  and 
supplemented,  and  shall  be  excluded  from  gross  income  only  if  and 
to  the  extent  it  is  wholly  exempt  from  taxation  to  the  taxpayer  both 
under  this  title  and  under  Title  III; 

If  104  (5)  The  income  of  foreign  governments  received  from  invest-  996 

merits  in  the  United  States  in  stocks,  bonds,  or  other  domestic 
securities,  owned  by  such  foreign  governments,  or  from  interest  on 
deposits  in  banks  in  the  United  States  of  moneys  belonging  to  such 
foreign  governments,  or  from  any  other  source  within  the  United 
States; 

1[105  (6)  Amounts  received,  through  accident  or  health  insurance  998 

or  under  workmen’s  compensation  acts,  as  compensation  for  personal 
injuries  or  sickness,  plus  the  amount  of  any  damages  received  whether 
by  suit  or  agreement  on  account  of  such  injuries  or  sickness; 

lfl06  (7)  Income  derived  from  any  public  utility  or  the  exercise  of  any  1004 
essential  governmental  function  and  accruing  to  any  State,  Territory, 
or  the  District  of  Columbia,  or  any  political  subdivision  of  a State 
or  Territory,  or  income  accruing  to  the  government  of  any  possession 
of  the  United  States,  or  any  political  subdivision  thereof. 

11107  Whenever  any  State,  Territory,  or  the  District  of  Columbia,  or  any  1005 
political  subdivision  of  a State  or  Territory,  prior  to  September  8, 

1916,  entered  in  good  faith  into  a contract  with  any  person,  the 
object  and  purpose  of  which  is  to  acquire,  construct,  operate,  or 
maintain  a public  utility,  no  tax  shall  be  levied  under  the  provisions 
of  this  title  upon  the  income  derived  from  the  operation  of  such 
public  utility,  so  far  as  the  payment  thereof  will  impose  a loss  or 
burden  upon  such  State,  Territory,  District  of  Columbia,  or  political 
subdivision;  but  this  provision  is  not  intended  to  confer  upon  such 
person  any  financial  gain  or  exempton  or  to  relieve  such  person 
from  the  payment  of  a tax  as  provided  for  in  this  title  upon  the  part  or 

16 


THE  INCOME  TAX  LAW.. 


Law  Repeated 

Paragraph  at  ^ 

portion  of  such  income  to  which  such  person  is  entitled  under  such 
contract; 

^108  (8)  So  much  of  the  amount  received  during  the  present  war  by  a person  1006 

in  the  military  or  naval  forces  of  the  United  States  as  salary  or  com- 
pensation in  any  form  from  the  United  States  for  active  services  in  such 
forces,  as  does  not  exceed  $3,500. 

^109  (c)  In  the  case  of  nonresident  alien  individuals,  gross  income  503 

includes  only  the  gross  income  from  sources  within  the  United  States, 

^[110  including  interest  on  bonds,  notes,  or  other  interest-bearing  obliga-  505 
tions  of  - residents,  corporate  or  otherwise,  dividends  from  resident 
corporations,  and 

1[111  including  all  amounts  received  (although  paid  under  a contract  for  508 
the  sale  of  goods  or  otherwise)  representing  profits  on  the  manu- 
facture and  disposition  of  goods  within  the  United  States. 

Deductions  Allowed. 

T[112  Sec.  214.  (a)  That  in  computing  net  income  there  shall  be  allowed  1019 
as  deductions: 

^113  (1)  All  the  ordinary  and  necessary  expenses  paid  or  incurred  1020 

during  the  taxable  year  in  carrying  on  any  trade  or  business, 

1fll4  including  a reasonable  allowance  for  salaries  or  other  compensation  1021 
for  personal  services  actually  rendered,  and 

^115  including  rentals  or  other  payments  required  to  be  made  as  a con-  1022 
dition  to  the  continued  use  or  possession,  for  purposes  of  the  trade 
or  business,  of  property  to  which  the  taxpayer  has  not  taken  or  is  not 
taking  title  or  in  which  he  has  no  equity; 

(2)  All  interest  paid  or  accrued  within  the  taxable  year  on  in-  1049 
debtedness, 

except  on  indebtedness  incurred  or  continued  to  purchase  or  1050 
carry  obligations  or  securities  (other  than  obligations  of  the 
United  States  issued  after  September  24,  1917),  the  interest 
upon  which  is  wholly  exempt  from  taxation  under  this  title 
as  income  to  the  taxpayer,  or, 

in  the  case  of  a nonresident  alien  individual,  the  proportion  of  such  531 
interest  which  the  amount  of  his  gross  income  from  sources  within 
the  United  States  bears  to  the  amount  of  his  gross  income  from  all 
sources  within  and  without  the  United  States; 

(3)  Taxes  paid  or  accrued  within  the  taxable  year  imposed  1052 

(a)  by  the  authority  of  the  United  States,  except  income,  war-  1053 
profits  and  excess-profits  taxes;  or 

(b)  by  the  authority  of  any  of  its  possessions,  except  the  amount  of  1054 
income,  war-profits  and  excess-profits  taxes  allowed  as  a credit  under 
section  222;  or 


11116 

mu 

1fll8 

mi9 

i;i2o 

11121 


17 


THE.  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  ^ 

^122  (c)  by  the  authority  of  any  State  or  Territory,  or  any  county,  1055 
school  district,  municipality,  or  other  taxing  subdivision  of  any 
State  or  Territory, 

1[123  not  including  those  assessed  against  local  benefits  of  a kind  tending  1056 
to  increase  the  value  of  the  property  assessed;  or 

1[124  (d)  in  the  case  of  a citizen  or  resident  of  the  United  States,  by  1057 
the  authority  of  any  foreign  country,  except  the  amount  of  income, 
war-profits  and  excess-profits  taxes  allowed  as  a credit  under  section 
222;  or 

1(125  (e)  in  the  case  of  a nonresident  alien  individual,  by  the  authority  of  533 
any  foreign  country  (except  income,  war-profits  and  excess-profits 
taxes,  and  taxes  assessed  against  local  benefits  of  a kind  tending  to 
increase  the  value  of  the  property  assessed),  upon  property  or  busi- 
ness; 

1(126  (4)  Losses  sustained  during  the  taxable  year  and  not  compen-  1066 

sated  for  by  insurance  or  otherwise,  if  incurred  in  trade  or  business; 

1(127  (5)  Losses  sustained  during  the  taxable  year  and  not  compensated  1084 

for  by  insurance  or  otherwise,  if  incurred  in  any  transaction  entered 
into  for  profit,  though  not  connected  with  the  trade  or  business; 

1(128  but  in  the  case  of  a nonresident  alien  individual  only  as  to  534 

such  transactions  within  the  United  States; 

1(129  (6)  Losses  sustained  during  the  taxable  year  of  property  not  1085 

connected  with  the  trade  or  business 

1(130  (but  in  the  case  of  a nonresident  alien  individual  only  prop-  535 

erty  within  the  United  States) 

K131  if  arising  from  fires,  storms,  shipwreck,  or  other  casualty,  or  from  1086 
theft,  and  if  not  com.pensated  for  by  insurance  or  otherwise; 

1(132  (7)  Debts  ascertained  to  be  worthless  and  charged  off  within  1088 

the  taxable  year; 

1(133  (8)  A reasonable  allowance  for  the  exhaustion,  wear  and  tear  of  1089 

property  used  in  the  trade  or  business,  including  a reasonable  allowance 
for  obsolescence; 

1(134  (9)  In  the  case  of  buildings,  machinery,  equipment,  or  other  1093 

facilities,  constructed,  erected,  installed,  or  acquired,  on  or  after 
April  6,  1917,  for  the  production  of  articles  contributing  to  the 
prosecution  of  the  present  war,  and  in  the  case  of  vessels  constructed 
or  acquired  on  or  after  such  date  for  the  transportation  of  articles  or 
men  contributing  to  the  prosecution  of  the  present  war,  there  shall 
be  allowed  a reasonable  deduction  for  the  amortization  of  such  part 
of  the  cost  of  such  facilities  or  vessels  as  has  been  borne  by  the  tax- 
payer, but  not  again  including  any  amount  otherwise  allowed  under 
this  title  or  previous  Acts  of  Congress  as  a deduction  in  computing 
net  income. 


18 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  ^ 

ifl35  At  any  time  within  three  years  after  the  termination  of  the  present  1094 
war,  the  Commissioner  may,  and  at  the  request  of  the  taxpayer  shall, 
reexamine  the  return,  and  if  he  then  finds  as  a result  of  an  appraisal 
or  from  other  evidence  that  the  deduction  originally  allowed  was  in- 
correct, the  taxes  imposed  by  this  title  and  by  Title  III  for  the  year 
or  years  affected  shall  be  redetermined;  and 

1fl36  the  amount  of  tax  due  upon  such  redetermination,  if  any,  shall  be  1095 
paid  upon  notice  and  demand  by  the  collector,  or  the  amount  of  tax 
overpaid,  if  any,  shall  be  credited  or  refunded  to  the  taxpayer  in 
accordance  with  the  provisions  of  section  252; 

TI137  (10)  In  the  case  of  mines,  oil  and  gas  wells,  other  natural  de-  1096 

posits,  and  timber,  a reasonable  allowance  for  depletion  and  for 
depreciation  of  improvements,  according  to  the  peculiar  conditions 
in  each  case,  based  upon  cost  including  cost  of  development  not 
otherwise  deducted: 

1fl38  Provided,  That  in  the  case  of  such  properties  acquired  prior  1097 

to  March  1,  1913,  the  fair  market  value  of  the  property  {or  the 
taxpayers  interest  therein)  on  that  date  shall  be  taken  in  lieu 
of  cost  up  to  that  date: 

Tfl39  Provided  further.  That  in  the  case  of  mines,  oil  and  gas  wells,  1098 

discovered  by  the  taxpayer,  on  or  after  March  1,  1913,  and  not 
acquired  as  the  result  of  purchase  of  a proven  tract  or  lease, 
where  the  fair  market  value  of  the  property  is  materially  dis- 
proportionate to  the  cost,  the  depletion  allowance  shall  be 
based  upon  the  fair  market  value  of  the  property  at  the  date  of 
the  discovery,  or  within  thirty  days  thereafter; 

If  140  such  reasonable  allowance  in  all  the  above  cases  to  be  made  under  1099 
rules  and  regulations  to  be  prescribed  by  the  Commissioner  with  the 
approval  of  the  Secretary. 

^141  In  the  case  of  leases  the  deductions  allowed  by  this  paragraph  shall  be  1100 
equitably  apportioned  between  the  lessor  and  lessee; 

1(142  (11)  Contributions  or  gifts  made  within  the  taxable  year  to  1102 

corporations  organized  and  operated  exclusively  for  religious,  charit- 
able, scientific,  or  educational  purposes,  or  for  the  prevention  of 
cruelty  to  children  or  animals,  no  part  of  the  net  earnings  of  which 
inures  to  the  benefit  of  any  private  stockholder  or  individual,  or  to  the 
special  fund  for  vocational  rehabilitation  authorized  by  section  7 of 
the  Vocational  Rehabilitation  Act,  to  an  amount  not  in  excess  of 
15  per  centum  of  the  taxpayer’s  net  income  as  computed  without  the 
benefit  of  this  paragraph.  Such  contributions  or  gifts  shall  be 
allowable  as  deductions  only  if  verified  under  rules  and  regulations 
prescribed  by  the  Commissioner,  with  the  approval  of  the  Secretary. 

1fl43  In  the  case  of  a nonresident  alien  individual  this  deduction  536 

shall  be  allowed  only  as  to  contributions  or  gifts  made  to 
domestic  corporations,  or  to  such  vocational  rehabilitation 
fund; 


19 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  ^ 

^144  (12)  (a)  At  the  time  of  filing  return  for  the  taxable  year  1918  a 1119 

taxpayer  may  file  a claim  in  abatement  based  on  the  fact  that  he  has 
sustained  a substantial  loss  (whether  or  not  actually  realized  by  sale 
or  other  disposition)  resulting  from  any  material  reduction  (not  due 
to  temporary  fluctuation)  of  the  value  of  the  inventory  for  such  taxable 
year, 

1fl45  or  from  the  actual  payment  after  the  close  of  such  taxable  year  of  re-  1120 
bates  in  pursuance  of  contracts  entered  into  during  such  year  upon 
sales  made  during  such  year. 

^146  In  such  case  payment  of  the  amount  of  the  tax  covered  by  such  claim  1121 
shall  not  be  required  until  the  claim  is  decided,  but  the  taxpayer  shall 
accompany  his  claim  with  a bond  in  double  the  amount  of  the  tax 
covered  by  the  claim,  with  sureties  satisfactory  to  the  Commissioner, 
conditioned  for  the  payment  of  any  part  of  such  tax  found  to  be  due, 
with  interest.  If  any  part  of  such  claim  is  disallowed  then  the  remain- 
der of  the  tax  due  shall  on  notice  and  demand  by  the  collector  be  paid 
by  the  taxpayer  with  interest  at  the  rate  of  1 per  centum  per  month  from 
the  timie  the  tax  would  have  been  due  had  no  such  claim  been  filed. 

^147  If  it  is  shown  to  the  satisfaction  of  the  Commissioner  that  such  sub-  1122 
stantial  loss  has  been  sustained,  then  in  computing  the  tax  imposed  by 
this  title  the  am^ount  of  such  loss  shall  be  deducted  from  the  net  income. 

1[148  (b)  If  no  such  claim  is  filed,  but  it  is  shown  to  the  satisfaction  of  the  1123 
Commissioner  that  during  the  taxable  year  1919  the  taxpayer  has 
sustained  a substantial  loss  of  the  character  above  described  then  the 
amiount  of  such  loss  shall  be  deducted  from  the  net  incom.e  for  the 
taxable  year  1918  and  the  tax  imposed  by  this  title  for  such  year  shall 
be  redetermined  according!]/.  Any  amiount  found  to  be  due  to  the 
taxpayer  upon  the  basis  of  such  redetermination  shall  be  credited  or 
refunded  to  the  taxpayer  in  accordance  with  the  provisions  of  section 
252. 

^149  (b)  In  the  case  of  a nonresident  alien  individual  the  deductions  529 

allowed  in  paragraphs  (1),  (4),  (7),  (8),  (9),  (10),  (12), and  clause  (e) 
of  paragraph  (3),  of  subdivision  (a)  shall  be  allowed  only  if  and  to  the 
extent  that  they  are  connected  with  income  arising  from  a source 
within  the  United  States; 

lfl50  and  the  proper  apportionment  and  allocation  of  the  deductions  with  530 
respect  to  sources  of  income  within  and  without  the  United  States 
shall  be  determined  under  rules  and  regulations  prescribed  by  the 
Commissioner  with  the  approval  of  the  Secretary. 

Items  Not  Deductible. 

^151  Sec.  215.  That  in  computing  net  income  no  deduction  shall  in  1023 
any  case  be  allowed  in  respect  of— 

^152  (a)  Personal,  living,  or  family  expenses;  1024 

^153  (b)  Any  amount  paid  out  for  new  buildings  or  for  permanent  1025 

improvements  or  betterments  made  to  increase  the  value  of  any 
property  or  estate; 


20 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  ^ 

If  154  (c)  Any  amount  expended  in  restoring  property  or  in  making  1027 

good  the  exhaustion  thereof  for  which  an  allowance  is  or  has  been 
made;  or 

Tfl55  (d)  Premiums  paid  on  any  life  insurance  policy  covering  the  life  of  1028 
any  officer  or  employee,  or  of  any  person  financially  interested  in 
any  trade  or  business  carried  on  by  the  taxpayer,  when  the  taxpayer 
is  directly  or  indirectly  a beneficiary  under  such  policy. 

Credits  Allowed. 

1fl563  Sec.  216.  That  for  the  purpose  of  the  normal  tax  only  there  1124 
shall  be  allowed  the  following  credits: 

^157  (a)  The  amount  received  as  dividends  from  a corporation  which  1125 

is  taxable  under  this  title  upon  its  net  income,  and  amounts  received 
as  dividends  from  a personal  service  corporation  out  of  earnings  or 
profits  upon  which  income  tax  has  been  imposed  by  Act  of  Congress; 

If  158  (b)  The  amount  received  as  interest  upon  obligations  of  the  1127 

United  States  and  bonds  issued  by  the  War  Finance  Corporation, 
which  is  included  in  gross  income  under  section  213; 

If  159  (c)  In  the  case  of  a single  person,  a personal  exemption  of  1128 

$1,000,  or 

^160  in  the  case  of  the  head  of  a family  or  a married  person  living  with  1129 
husband  or  wife,  a personal  exemption  of  $2,000. 

3fl61  A husband  and  wife  living  together  shall  receive  but  one  personal  1134 
exemption  of  $2,000  against  their  aggregate  net  income; 

1fl62jand  in  case  they  make  separate  returns,  the  personal  exemption  of  1136 
$2,000  may  be  taken  by  either  or  divided  between  them; 

Tfl63  (d)  $200  for  each  person  (other  than  husband  or  wife)  dependent  1138 
upon  and  receiving  his  chief  support  from  the  taxpayer,  if  such  de- 
pendent person  is  under  eighteen  years  of  age  or  is  incapable  of  self- 
support  because  mentally  or  physically  defective .'J 

^164  J''(e)  In  the  case  of  a nonresident  alien  individual  who  is  a citizen  537 

or  subject  of  a country  which  imposes  an  income  tax,  the  credits 
allowed  in  subdivisions  (c)  and  (d)  shall  be  allowed  only  if  such 
country  allows  a similar  credit  to  citizens  of  the  United  States  not 
.residing  in  such  country. 

Nonresident  Aliens — Allowance  ofjDeductions  and  Credits .j 

If  165]  Sec.  217.  That  a nonresident  alien  individual  shall  receive  the  538 
benefit  of  the  deductions  and  credits  allowed  in  this  title  only  by  filing 
or  causing  to  be  filed  with  the  collector  a true  and  accurate  return  of 
his  total  income  received  from  all  sources  corporate  or  otherwise  in 
the  United  States,  in  the  manner  prescribed  by  this  title,  including 
therein  all  the  information  which  the  Commissioner  may  deem 
necessary  for  the  calculation  of  such  deductions  and  credits: 

21 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  ^ 

Tfl66  Provided,  That  the  benefit  of  the  credits  allowed  in  subdivisions  541 

{c)  and  (d)  of  section  216  may,  in  the  discretion  of  the  Com- 
missioner, and  except  as  otherwise  provided  in  subdivision  {e) 
of  that  section,  be  received  by  filing  a claim  therefor  with  the 
zvithholding  agent. 

1[167  In  case  of  failure  to  file  a return,  the  collector  shall  collect  the  tax  542 
on  such  income,  and  all  property  belonging  to  such  nonresident  alien 
individual  shall  be  liable  to  distraint  for  the  tax. 


Partnerships  and  Personal  Service  Corporations. 

T[168  Sec.  218.  (a)  That  individuals  carrying  on  business  in  partner-  1269 

ship  shall  be  liable  for  income  tax  only  in  their  individual  capacity. 

T[169  There  shall  be  included  in  computing  the  net  income  of  each  partner  1280 
his  distributive  share,  whether  distributed  or  not,  of  the  net  income 
of  the  partnership  for  the  taxable  year,  or, 

1[170  if  his  net  income  for  such  taxable  year  is  computed  upon  the  basis  1281 
of  a period  different  from  that  upon  the  basis  of  which  the  net  income 
of  the  partnership  is  computed,  then  his  distributive  share  of  the  net 
income  of  the  partnership  for  any  accounting  period  of  the  partner- 
ship ending  within  the  fiscal  or  calendar  year  upon  the  basis  of  which 
the  partner’s  net  income  is  computed. 

1[171  The  partner  shall,  for  the  purpose  of  the  normal  tax,  be  allowed  1289 
as  credits,  in  addition  to  the  credits  allowed  to  him  under  section  216, 
his  proportionate  share  of  such  amounts  specified  in  subdivisions  (a) 
and  (b)  of  section  216  as  are  received  by  the  partnership. 

11172  (b)  If  a fiscal  year  of  a partnership  ends  during  a calendar  year  1290 

for  which  the  rates  of  tax  differ  from  those  for  the  preceding  calendar 
year,  then 

1[173  (1)  the  rates  for  such  preceding  calendar  year  shall  apply  1291 

to  an  amount  of  each  partner’s  share  of  such  partnership  net 
incom^e  equal  to  the  proportion  which  the  part  of  such  fiscal 
year  falling  within  such  calendar  year  bears  to  the  full  fiscal 
year,  and 

If  174  (2)  the  rates  for  the  calendar  year  during  which  such  fiscal  1292 

year  ends  shall  apply  to  the  remainder. 

If  175  (c)  In  the  case  of  an  individual  member  of  a partnership  which  1294 

makes  return  for  a fiscal  year  beginning  in  1917  and  ending  in  1918, 
his  proportionate  share  of  any  excess-profits  tax  imposed  upon  the  part- 
nership under  the  Revenue  Act  of  1917  with  respect  to  that  part  of 
such  fiscal  year  falling  in  1917,  shall,  for  the  purpose  of  determining 
the  tax  imposed  by  this  title,  be  credited  against  that  portion  of 

the  net  income  embraced  in  his  personal  return  for  the  taxable 

year  1918  to  which  the  rates  for  1917  apply. 

1fl76  (d)  The  net  income  of  the  partnership  shall  be  computed  in  the  1295 

samie  manner  and  on  the  same  basis  as  provided  in  section  212  except 

22 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at 

that  the  deduction  provided  in  paragraph  (11)  of  subdivision  (a)  of 
section  214  shall  not  be  allowed. 

1[177  (e)  Personal  service  corporations  shall  not  be  subject  to  taxation  1305 

under  this  title,  but  the  individual  stockholders  thereof  shall  be 
taxed  in  the  same  manner  as  the  members  of  partnerships. 

1[178  All  the  provisions  of  this  title  relating  to  partnerships  and  the  mem-  1306 
bers  thereof  shall  so  far  as  practicable  apply  to  personal  service  cor- 
porations and  the  stockholders  thereof: 

If  179  Provided,  That  for  the  purpose  of  this  subdivision  amounts  dis~  1307 

tributed  by  a personal  service  corporation  during  its  taxable  year 
shall  be  accounted  for  by  the  distributees ; and  any  portion  of  the 
net  income  remaining  undistributed  at  the  close  of  its  taxable 
year  shall  be  accounted  for  by  the  stockholders  of  such  corpora- 
tion at  the  close  of  its  taxable  year  in  proportion  to  their  re- 
spective shares. 

Estates  and  Trusts. 

IflSO  Sec.  219.  (a)  That  the  tax  imposed  by  sections  210  and  211  1217 

shall  apply  to  the  income  of  estates  or  of  any  kind  of  property  held 
in  trust,  including — 

lfl81  (1)  Income  received  by  estates  of  deceased  persons  during  the  1218 
period  of  administration  or  settlement  of  the  estate; 

•Tfl82  (2)  Incom.e  accumulated  in  trust  for  the  benefit  of  unborn  or  1227 
unascertained  persons  or  persons  with  contingent  interests; 

^183  (3)  Income  held  for  future  distribution  under  the  terms  of  the  1231 

will  or  trust;  and 

Tfl84  (4)  Income  which  is  to  be  distributed  to  the  beneficiaries  period-  1207 
ically,  whether  or  not  at  regular  intervals,  and  the  income  collected 
by  a guardian  of  an  infant  to  be  held  or  distributed  as  the  court  may 
direct. 

Ifl85  (b)  The  fiduciary  shall  be  responsible  for  making  the  return  of  1179 
income  for  the  estate  or  trust  for  which  he  acts. 

1[186  The  net  income  of  the  estate  or  trust  shall  be  computed  in  the  same  1247 
manner  and  on  the  same  basis  as  provided  in  section  212, 

1[187  except  that  there  shall  also  be  allowed  as  a deduction  (in  lieu  1248 
of  the  deduction  authorized  by  paragraph  (11)  of  subdivision 
(a)  of  section  214)  any  part  of  the  gross  income  which,  pur- 
suant to  the  terms  of  the  will  or  deed  creating  the  trust,  is 
during  the  taxable  year  paid  to  or  permanently  set  aside  for  the 
United  States,  any  State,  Territory,  or  any  political  subdivi- 
sion thereof,  or  the  District  of  Columbia,  or  any  corporation  or- 
ganized and  operated  exclusively  for  religious,  charitable,  scien- 
tific, or  educational  purposes,  or  for  the  prevention  of  cruelty 
to  children  or  animals,  no  part  of  the  net  earnings  of  which 
inures  to  the  benefit  of  any  private  stockholder  or  individual; 

23 


THE  INCOME  TAX  LAW. 


Law 

Parasraph 


Repeata4 

atl 


1[188  and  in  cases  under  paragraph  (4)  of  subdivision  (a)  of  this  section  1260 
the  fiduciary  shall  include  in  the  return  a statement  of  each  bene- 
ficiary’s distributive  share  of  such  net  income,  whether  or  not 
distributed  before  the  close  of  the  taxable  year  for  which  the  return 
is  made. 


1[189  (c)  In  cases  under  paragraph  (1),  (2),  or  (3)  of  subdivision  (a)  1244 

the  tax  shall  be  imposed  upon  the  net  income  of  the  estate  or  trust 
and  shall  be  paid  by  the  fiduciary, 

1[190  except  that  in  determining  the  net  income  of  the  estate  of  1249 
any  deceased  person  during  the  period  of  administration 
or  settlement  there  may  be  deducted  the  amount  of  any 
income  properly  paid  or  credited  to  any  legatee,  heir  or  other 
beneficiary. 

1[191  In  such  cases  the  estate  or  trust  shall,  for  the  purpose  of  the  nor-  1258 
mal  tax,  be  allowed  the  same  credits  as  are  allowed  to  single  per- 
sons under  section  216. 


\\92  (d)  In  cases  under  paragraph  (4)  of  subdivision  (a),  1208 

^193  and  in  the  case  of  any  income  of  an  estate  during  the  period  of  ad-  1209 
ministration  or  settlement  permitted  by  subdivision  (c)  to  be  de- 
ducted from  the  net  income  upon  which  tax  is  to  be  paid  by  the 
fiduciary. 


1fl94  the  tax  shall  not  be  paid  by  the  fiduciary,  but  there  shall  be  included  1210 
in  computing  the  net  income  of  each  beneficiary  his  distributive  share, 
whether  distributed  or  not,  of  the  net  income  of  the  estate  or  trust 
for  the  taxable  year,  or, 

^195  if  his  net  income  for  such  taxable  year  is  computed  upon  the  basis  1211 
of  a period  different  from  that  upon  the  basis  of  which  the  net 
income  of  the  estate  or  trust  is  computed,  then  his  distributive  share  of 
the  net  income  of  the  estate  or  trust  for  any  accounting  period  of  such 
estate  or  trust  ending  within  the  fiscal  or  calendar  year  upon  the 
basis  of  which  such  beneficiary’s  net  income  is  computed. 

1fl96  In  such  cases  the  beneficiary  shall,  for  the  purpose  of  the  normal  1214 
tax,  be  allowed  as  credits  in  addition  to  the  credits  allowed  to  him 
under  section  216,  his  proportionate  share  of  such  amounts  specified 
in  subdivisions  (a)  and  (b)  of  section  216  as  are  received  by  the 
estate  or  trust. 


Profits  of  Corporations  Taxable  to  Stockholders. 

1[197  Sec.  220.  That  if  any  corporation,  however  created  or  organ-  746 
ized,  is  formed  or  availed  of  for  the  purpose  of  preventing  the  im- 
position of  the  surtax  upon  its  stockholders  or  members  through  the 
medium  of  permitting  its  gains  and  profits  to  accumulate  instead  of 
being  divided  or  distributed,  such  corporation  shall  not  be  subject 
to  the  tax  imposed  by  section  230,  but  the  stockholders  or  members 
thereof  shall  be  subject  to  taxation  under  this  title  in  the  same  manner 
as  provided  in  subdivision  (e)  of  section  218  in  the  case  of  stockholders 

24 


THE  INCOME  TAX  LAW. 


L«w  Repeated 

Paragraph  at  t 

of  a personal  service  corporation,  except  that  the  tax  imposed  by  Title 
III  shall  be  deducted  from  the  net  income  of  the  corporation  before 
the  computation  of  the  proportionate  share  of  each  stockholder  or 
member. 

^198  The  fact  that  any  corporation  is  a mere  holding  company,  or  that  747 
the  gains  and  profits  are  permitted  to  accumulate  beyond  the  reas- 
onable needs  of  the  business,  shall  be  prima  facie  evidence  of  a pur- 
pose to  escape  the  surtax; 

^199  but  the  fact  that  the  gains  and  profits  are  in  any  case  permitted  to  748 
accumulate  and  become  surplus  shall  not  be  construed  as  evidence  of 
a purpose  to  escape  the  tax  in  such  case  unless  the  Commissioner  certifies 
that  in  his  opinion  such  accumulation  is  unreasonable  for  the  pur- 
poses of  the  business. 

TI200  When  requested  by  the  Commissioner,  or  any  collector,  every  cor-  749 
poration  shall  forward  to  him  a correct  statement  of  such  gains  and 
profits  and  the  namies  and  addresses  of  the  individuals  or  share- 
holders who  would  be  entitled  to  the  samie  if  divided  or  distributed, 
and  of  the  amounts  that  would  be  payable  to  each. 

Payment^of|Tax^at  ^Source . 

1[201  Sec.  221.  (a)  That  all  individuals,  corporations  and  partner-  553 

ships,  in  whatever  capacity  acting,  including  lessees  or  mortgagors 
of  real  or  personal  property,  fiduciaries,  employers,  and  all  officers 
and  employees  of  the  United  States, 

TI202  having  the  control,  receipt,  custody,  disposal,  or  paym.ent,  of  interest,  554 
rent,  salaries,  wages,  prem-iumiS,  annuities,  compensations,  remuner- 
ations, emoluments,  or  other  fixed  or  determinable  annua  or  period- 
ical gains,  profits,  and  income, 

T[203  of  any  nonresident  alien  individual  555 

1f204  (other  than  incom.e  received  as  dividends  from  a corporation  which  556 
taxable  under  this  title  upon  its  net  income) 

1[205  shall  (except  in  the  cases  provided  for  in  subdivision  (b)  and  except  557 
as  otherwise  provided  in  regulations  prescribed  by  the  Commissioner 
under  section  217) 

1[206  deduct  and  withhold  from  such  annuaUor  periodical  gains,  profits,®|;  558 
and  income 

If 207  a tax  equaljto  8 per  centum  thereof:  559 

If 208  Provided^  That  the  Commissioner  may  authorize  such  tax  602' 

to  be  deducted  and  withheld  from  the  interest  upon  any  securi- 
ties the  owners  of  which  are  not  known  to  the  withholding  agent . 

1f209  (b)  In  any  case  where  bonds,  mortgages,  or  deeds  of  trust,  or  604 

other  similar  obligations  of  a corporation  contain  a contract  or  pro- 
vision by  which  the  obligor  agrees 

25 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  ^ 

^[210  to  pay  any  portion  of  the  tax  imposed  by  this  title  upon  the^obligee,  605 
or 

1[211  to  reimburse  the  obligee^for  any  portion_^of  the  tax,  or  606 

^212  to  pay  the  interest  without  deduction  for  any  tax  which  the  obligor  607 
may  be  required  or  permitted  to  pay  thereon  or  to  retain  therefrom 
under  any  law  of  the  United  States, 

Tf213  the  obligor  shall  deduct  and  withhold  a tax  equal  to  2 per  centum  608 
of  the  interest  upon  such  bonds,  mortgages,  deeds  of  trust,  or  other 
obligations,  whether  such  interest  is  payable  annually  or  at  shorter 
or  longer  periods  and 

^214  whether  payable  to  a nonresident  alien  individual  or  to  an  individual  609 
citizen  or  resident  of  the  United  States  or  to  a partnership: 

T[215  Provided y That  the  Commissioner  may  authorize  such  tax  to  612 

be  deducted  and  withheld  in  the  case  of  interest  upon  any  such 
bonds y mortgages,  deeds  of  trust  or  other  obligations , the  owners 
of  which  are  not  known  to  the  withholding  agent. 

^216  Such  deduction  and  withholding  shall  not  be  required  in  the  case  638 
of  a citizen  or  resident  entitled  to  receive  such  interest,  if  he  files 
with  the  withholding  agent  on  or  before  February  1,  a signed  notice 
in  writing  claiming  the  benefit  of  the  credits  provided  in  subdivisions 
(c)  and  (d)  of  section  216; 

1|217  nor  in  the  case  of  a nonresident  alien  individual  if  so  provided  for  641 
in  regulations  prescribed  by  the  Commissioner  under  section  217. 

1[218  (c)  Every  individual,  corporation,  or  partnership  required  to  698 

deduct  and  withhold  any  tax  under  this  section  shall  make  return 
thereof  on  or  before  March  first  of  each  year 

^219  and  shall  on  or  before  June  fifteenth  pay  the  tax  to  the  official  of  the  720 
United  States  Government  authorized  to  receive  it. 

1f220  Every  such  individual,  corporation,  or  partnership  is  hereby  made  728 
liable  for  such  tax  and 

1[221  is  hereby  indemnified  against  the  claims  and  demands  of  any  in-  729 
dividual,  corporation,  or  partnership  for  the  amount  of  any  pay- 
ments made  in  accordance  with  the  provisions  of  this  section. 

^222  (d)  Income  upon  which  any  tax  is  required  to  be  withheld  at  the  730 

source  under  this  section  shall  be  included  in  the  return  of  the  recipient 
of  such  income, 

11223  but  any  amount  of  tax  so  withheld  shall  be  credited  against  the  731 
amount  of  income  tax  as  computed  in  such  return. 

11224  (e)  If  any  tax  required  under  this  section  to  be  deducted  and  with-  734 
held  is  paid  by  the  recipient  of  the  income,  it  shall  not  be  re-collected 
from  the  withholding  agent; 


26 


THE  INCOME  TAX  LAW. 


I^aw  Repeated 

Paragraph  at  H 

1[225  nor  in  cases  in  which  the  tax  is  so  paid  shall  any  penalty  be  imposed  735 
upon  or  collected  from  the  recipient  of  the  income  or  the  withholding 
agent  for  failure  to  return  or  pay  the  same,  unless  such  failure  was 
fraudulent  and  for  the  purpose  of  evading  payment. 


Credit  for  Taxes. 

11226  Sec.  222.  (a)  That  the  tax  computed  under  Part  II  of  this  title  1059 
shall  be  credited  with: 

1f227  (1)  In  the  case  of  a citizen  of  the  United  States,  the  amount  1060 

of  any  income,  war-profits  and  excess-profits  taxes  paid  during  the 
taxable  year  to  any  foreign  country,  upon  income  derived  from 
sources  therein,  or  to  any  possession  of  the  United  States;  and 

1[228  (2)  In  the  case  of  a resident  of  the  United  States,  the  amount  1061 

of  any  such  taxes  paid  during  the  taxable  year  to  any  possession  of  the 
United  States;  and 

1[229  (3)  In  the  case  of  an  alien  resident  of  the  United  States  who  is  a 1062 

citizen  or  subject  of  a foreign  country,  the  amount  of  any  such  taxes 
paid  during  the  taxable  year  to  such  country,  upon  income  derived 
from  sources  therein,  if  such  country,  in  imposing  such  taxes,  allows 
a similar  credit  to  citizens  of  the  United  States  residing  in  such 
country;  and 

1f230  (4)  In  the  case  of  any  such  individual  who  is  a member  of  a part-  1063 

nership  or  a beneficiary  of  an  estate  or  trust,  his  proportionate  share  of 
such  taxes  of  the  partnership  or  the  estate  or  trust  paid  during  the 
taxable  year  to  a foreign  country  or  to  any  possession  of  the  United 
States,  as  the  case  may  be, 

1f231  (b)  If  accrued  taxes  when  paid  differ  from  the  amounts  claimed  1064 

as  credits  by  the  taxpayer,  or  if  any  tax  paid  is  refunded  in  whole  or  in 
part,  the  taxpayer  shall  notify  the  Commissioner  who  shall  redetermine 
the  amount  of  the  tax  due  under  Part  II  of  this  title  for  the  year  or  years 
affected,  and  the  amount  of  tax  due  upon  such  redetermination,  if  any, 
shall  be  paid  by  the  taxpayer  upon  notice  and  demand  by  the  collector, 
or  the  amount  of  tax  overpaid,  if  any,  shall  be  credited  or  refunded 
to  the  taxpayer  in  accordance  with  the  provisions  of  section  252.  In 
the  case  of  such  a tax  accrued  but  not  paid,  the  Commissioner  as  a 
condition  precedent  to  the  allowance  of  this  credit  may  require  the  tax- 
payer to  give  a bond  with  sureties  satisfactory  to  and  to  be  approved 
by  the  Commissioner  in  such  penal  sum  as  the  Commissioner  may 
require,  conditioned  for  the  payment  by  the  taxpayer  of  any  amount 
of  tax  found  due  upon  any  such  redetermination;  and  the  bond  herein 
prescribed  shall  contain  such  further  conditions  as  the  Commissioner 
may  require. 

^232^'  (c)  These  credits  shall  be  allowed  only  if  the  taxpayer  furnishes  1065 
evidence  satisfactory  to  the  Commissioner  showing  the  amount  of 
income  derived  from  sources  within  such  foreign  country  or  such 
possession  of  the  United  States,  and  all  other  information  necessary 
for  the  computation  of  such  credits. 

27 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  H 

Individual  Returns.  n 

1[233  Sec.  223.  That  every  individual  having  a net  income  for  the  1142 
taxable  year  of  $1,000  or  over  if  single  or  if  married  and  not  living  with 
husband  or  wife, 

^[234  or  of  $2,000^or  over^if  married  and  living' withj husband  or  wife,  1143 

1f235  shall  make  under  oath  a return  stating  specifically  the  items  of  his  1144 
gross  income  and  the  deductions  and  credits  allowed  by  this  title. 

1[236  If  a husband  and  wife  living  together  have  an  aggregate  net  income  1150 
of  $2,000  or  over,  each  shall  make  such  a return  unless  the  income 
of  each  is  included  in  a single  joint  return. 

1f237  [If  the  taxpayer  is  unable  to  make  his  own  return,  the  return  1158 
shall  be  made  by  a duly  authorized  agent  or  by  the  guardian  or  other 
person  charged  with  the  care  of  the  person  or  property  of  such  tax- 
payer. 

Partnership^^  Returns . 

T[238  Sec.  224.  That  every  partnership  shall  make  a return  for  each  1298 
taxable  year,  stating  specifically  the  items  of  its  gross  income  and  to 
the  deductions  allowed  by  this  title,  and  shall  include  in  the  return  1304 
the  names  and  addresses  of  the  individuals  who  would  be  entitled 
to  share  in  the  net  income  if  distributed  and  the  amount  of  the  dis- 
tributive share  of  each  individual.  The  return  shall  be  sworn  to  by 
any  one  of  the  partners. 

Fidu  ciary  I Returns . 

^239  Sec.  225.  That"" every  fiduciary  (except  receivers  appointed  by  1168 
authority  of  law  in  possession  of  part  only  of  the  property  of  an 
individual) 

Tf240  shall  make  under  oath  a return^for  the' individual, "estate' or  trust  for  1175 
which  he  acts 

^241  (1)  if  the  net  income  of  such  individual  is  $1,000  or  over  if  single  or  1196 
if  married  and  not  living  with  husband  or  wife,  or  $2,000  or  over  if  mar- 
ried and  living  with  husband  or  wife,  or 

^242  (2)  if  the  net  income  of  such  estate  or  trust  is  $1,000  or  over  or  if  any  1215 
beneficiary  of  such  estate  or  trust  is  a nonresident  alien, 

^243  stating  specifically  the  items  of  the  gross  income"'and  the  deductions  1259 
and  credits  allowed  by  this  title. 

^244  Under  such  regulations  as  the  Commissioner  with  the  approval  of  the  1265 
Secretary  may  prescribe,  a return  made  by  one  of  two  or  more  joint 
fiduciaries  and  filed  in  the  office  of  the  collector  of  the  district  where 
such  fiduciary  resides  shall  be  a sufficient  compliance  with  the  above 
requirement. 

^245  The  fiduciary  shall  make  oath  that  he  has  sufficient  knowledge  of  the  1176 
affairs  of  such  individual,  estate  or  trust  to  enable  him  to  make  the 

28 


3-10-19. 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  ^ 

return,  and  that  the  same  is,  to  the  best  of  his  knowledge  and  belief, 
true  and  correct. 

^246  Fiduciaries  required  to  make  returns  under  this  Act  shall  be  1267 
subject  to  all  the  provisions  of  this  Act  which  applies  [apply]  to 
individuals. 

Returns  When  Accounting  Period  Changed. 

1[247  Sec.  226.  That  if  a taxpayer,  with  the  approval  of  the  Com-  1479 
missioner,  changes  the  basis  of  computing  net  income  from  fiscal  year 
to  calendar  year  a separate  return  shall  be  made  for  the  period  between 
the  close  of  the  last  fiscal  year  for  which  return  was  made  and  the 
following  December  thirty-first. 

^248  If  the  change  is  from  calendar  year  to  fiscal  year,  a separate  return  1480 
shall  be  made  for  the  period  between  the  close  of  the  last  calendar  year 
for  which  return  was  made  and  the  date  designated  as  the  close  of 
the  fiscal  year. 

^1249  If  the  change  Is  from  one  fiscal  year  to  another  fiscal  year  a separate  1481 
return  shall  be  made  for  the  period  between  the  close  of  the  former 
fiscal  year  and  the  date  designated  as  the  close  of  the  new  fiscal  year. 

^250  If  a taxpayer  making  his  first  return  for  income  tax  keeps  his  accounts  1482 
on  the  basis  of  a fiscal  year  he  shall  make  a separate  return  for  the 
period  between  the  beginning  of  the  calendar  year  in  which  such 
fiscal  year  ends  and  the  end  of  such  fiscal  year. 

1|251  In  all  of  the  above  cases  the  net  income  shall  be -Computed  on  the  148v' 
basis  of  such  period  for  which  separate  return  is  miade,  and  the  tax 
shall  be  paid  thereon  at  the  rate  for  the  calendar  year  in  which  such 
period  is  included; 

^252  and  the  credits  provided  in  subdivisions  (c)  and  (d)  of  section  216  1484 
shall  be  reduced  respectively  to  amounts  which  bear  the  sam.e  ratio 
to  the  full  credits  provided  in  such  subdivisions  as  the  number  of 
months  in  such  period  bears  to  twelve  months. 


Time  and  Place  for  Filing  Returns. 

^253  Sec.  227.  (a)  That  returns  shall  be  made  on  or  before  the  1472 

fifteenth  day  of  the  third  month  following  the  close  of  the  fiscal 
year,  or, 

1i254  if  the  return  Is  made  on  the  basis  of  the  calendar  year,  then  the  re-  1473 
turn  shall  be  made  on  or  befor^ the  fifteenth  day  of  March. 

^[255  The  Commissioner  may  grant  a reasonable  extension  of  time  for  1507 
filing  returns  whenever  in  his  judgment  good  cause  exists  and  shall 
keep  a record  of  every  such  extension  and  the  reason  therefor.  Except 
in  the  case  of  taxpayers  who  are  abroad,  no  such  extension  shall  be  for 
more  than  six  months. 


29 


THE  INCOME  tAX  LAW. 


Law  Repeated 

Paragraph  at  % 

1[256  (b)  Returns  shall  be  made  to  the  collector  for  the  district  in  1526 

which  is  located  the  legal  residence  or  principal  place  of  business 
of  the  person  making  the  return,  or, 

^257  if  he  has  no  legal  residence  or  principal  place  of  business  in  the  United  1527 
States,  then  to  the  collector  at  Baltimore,  Maryland. 


Understatement  in  Returns. 

^258  Sec.  228.  That  if  the  collector  or  deputy  collector  has  reason  to  1538 
believe  that  the  amount  of  any  income  returned  is  understated,  he 
shall  give  due  notice  to  the  taxpayer  making  the  return  to  show 
cause  why  the  amount  of  the  return  should  not  be  increased,  and 
upon  proof  of  the  amount  understated,  may  increase  the  same  ac- 
cordingly. 

^259  Such  taxpayer  may  furnish  sworn  testimony  to  prove  any  relevant  1539 
facts  and  if  dissatisfied  with  the  decision  of  the  collector  may  appeal 
to  the  Commissioner  for  his  decision,  under  such  rules  of  procedure 
as  may  be  prescribed  by  the  Commissioner  with  the  approval  of  the 
Secretary. 

PART  III, — Corporations. 

Tax  On  Corporations. 

%260  Sec.  230.  (a)  That,  in  lieu  of  the  taxes  imposed  by  section  10  1662 

of  the  Revenue  Act  of  1916,  as  am.ended  by  the  Revenue  Act  of 
1917,  and  by  section  4 of  the  P.evenue  Act  of  1917,  there  shall  be 
levied,  collected,  and  paid  for  each  taxable  year  upon  the  net  in- 
come of  every  corporation 

1f261  a tax  at  the  following  rates:  1681 

^262  (1)  For  the  calendar  year  1918,  12  per  centum  of  the  amount  of  1682 

the  net  income  in  excess  of  the  credits  provided  in  section  236;  and 

^263  (2)  For  each  calendar  year  thereafter,  10  per  centum  of  such  1683 

excess  amount. 

11264  (b)  For  the  purposes  of  the  Act  approved  March  21,  1918,  en-  1684 
titled  “An  Act  to  provide  for  the  operation  of  transportation  systems 
while  under  Federal  control,  for  the  just  compensation  of  their 
owners,  and  for  other  purposes,”  five-sixths  of  the  tax  imposed  by 
paragraph  (1)  of  subdivision  (a)  and  four-fifths  of  the  tax  imposed  by 
paragraph  (2)  of  subdivision  (a)  shall  be  treated  as  levied  by  an  Act 

in  amendment  of  Title  I of  the  Revenue  Act  of  1917. 

Conditional  and  Other  Exemptions. 

11265  Sec.  231.  That  the  following  organizations  shall  be  exempt  1739 
from  taxation  under  this  title — 

1f266  (1)  Labor,  agricultural,  or  horticultural  organizations; 

30 


1740 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  ^ 

1[267  (2)  Mutual  savings  banks  not  having  a capital  stock  represented  1741 

by  shares; 

^268  (3)  Fraternal  beneficiary  societies,  orders,  or  associations,  (a)  1742 

operating  under  the  lodge  sj^stem  or  for  the  exclusive  benefit  of  the 
members  of  a fraternity  itself  operating  under  the  lodge  system,  and 
(b)  providing  for  the  payment  of  life,  sick,  accident,  or  other  benefits 
to  the  members  of  such  society,  order,  or  association  or  their  de- 
pendents; 

^269  (4)  Domestic  building  and  loan  associations  and  cooperative  1743 

banks  without  capital  stock  organized  and  operated  for  mutual 
purposes  and  without  profit; 

1(270  (5)  Cemetery  companies  owned  and  operated  exclusively  for  the  1744 

benefit  of  their  members; 

1(271  (6)  Corporations  organized  and  operated  exclusively  for  re-  1745 

ligious,  charitable,  scientific,  or  educational  purposes,  or  for  the 
prevention  of  cruelty  to  children  or  animals,  no  part  of  the  net  earn- 
ings of  which  inures  to  the  benefit  of  any  private  stockholder  or 
individual; 

1(272  (7)  Business  leagues,  chambers  of  commerce,  or  boards  of  trade,  1746 

not  organized  for  profit  and  no  part  of  the  net  earnings  of  which 
inures  to  the  benefit  of  any  private  stockholder  or  individual; 

1(273  (8)  Civic  leagues  or  organizations  not  organized  for  profit  but  1747 

operated  exclusively  for  the  promotion  of  social  welfare; 

K274  (9)  Clubs  organized  and  operated  exclusively  for  pleasure,  recrea-  1748 

tion,  and  other  nonprofitable  purposes,  no  part  of  the  net  earnings  of 
which  inures  to  the  benefit  of  any  private  stockholder  or  mxember; 

1(275  (10)  Farm.ers’  or  other  mutual  hail,  cyclone,  or  fire  insurance  1749 

companies,  miutual  ditch  or  irrigation  companies,  mutual  or  co- 
operative telephone  companies,  or  like  organizations  of  a purely 
local  character,  the  income  of  which  consists  solely  of  assessments, 
dues,  and  fees  collected  from  miembers  for  the  sole  purpose  of  meeting 
expenses; 

1(276  (11)  Farmers’,  fruit  growers’,  or  like  associations,  organized  and  1750 

operated  as  sales  agents  for  the  purpose  of  marketing  the  products  of 
members  and  turning  back  to  them  the  proceeds  of  sales,  less  the 
necessary  selling  expenses,  on  the  basis  of  the  quantity  of  produce  fur- 
nished by  them; 

1(277  (12)  Corporations  organized  for  the  exclusive  purpose  of  holding  1751 

title  to  property,  collecting  income  therefrom,  and  turning  over  the 
entire  amount  thereof,  less  expenses,  to  an  organization  which  itself 
is  exempt  from  the  tax  imposed  by  this  title; 

1(278  (13)  Federal  land  banks  and  national  farm-loan  associations  as  1752 

provided  in  section  26  of  the  act  approved  July  17,  1916,  entitled 
“An  Act  to  provide  capital  for  agricultural  development,  to  create 

31 


THE  INCOME  TAX  LAW. 


^Law  Repeated 

Paragraph  at  *[[ 

Standard  forms  of  investment  based  upon  farm  mortgage,  to  equalize 
rates  of  interest  upon  farm  loans,  to  furnish  a market  for  United 
States  bonds,  to  create  Government  depositaries  and  financial  agents 
for  the  United  States,  and  for  other  purposes”; 

^279  (14)  Personal  service  corporations.  1753 

Net  Income  Defined. 

1(280  Sec.  232.  That  in  the  case  of  a corporation  subject  to  the  tax  1787 
imposed  by  section  230  the  term  “net  income”  means  the  gross  2285 
income  as  defined  in  section  233  less  the  deductions  allowed  by  sec- 
tion 234,  and  the  net  income  shall  be  computed  on  the  same  basis  as 
is  provided  in  subdivision  (b)  of  section  212  or  in  section  226. 

Gross  Income  Defined. 

1(281?  Sec.  233.  (a)  That  in  the  case  of  a corporation  subject  to  the  1788 

tax  imposed  by  section  230  the  term  “gross  income”  means  the  gross  2286 
income  as  defined  in  section  213,  except  that: 

1(282  (1)  In  the  case  of  life  insurance  companies  there  shall  not  be  2256 

included  in  gross  income  such  portion  of  any  actual  premium  re- 
ceived from  any  individual  policyholder  as  is  paid  back  or  credited  to 
or  treated  as  an  abatement  of  premium  of  such  policyholder  within  the 
taxable  year. 

1(283  (2)  Mutual  marine  insurance  companies  shall  include  in  gross  2264 

income  the  gross  premiums  collected  and  receivedi  by  them  less 
amounts  paid  for  reinsurance. 

1(284  (b)  In  the  case  of  a foreign  corporation  gross  income  includes^  2287 

only  the  gross  income  from  sources  within  the  United  States, 

1(285  including  the  interest  on  bonds,  notes,  or  other  interest-  2296 

bearing  obligations  of  residents,  corporate  or  otherwise, 
dividends  from  resident  corporations,  and 

K286  including  all  amounts  received  (although  paid  under  a 2298 

contract  for  the  sale  of  goods  or  otherwise)  representing 
profits  on  the  manufacture  and  disposition  of  goods  within 
the  United  States. 

DeductionsjAUowed . 

K287  Sec.  234.  (a)  That  in  computing  the  net  income  of  a corpora-  1922 

tion  subject  to  the  tax  imposed  by  section  230  there  shall  be  allowed  2300 
as  deductions: 

K288  (1)  All  the  ordinary  and  necessary  expenses  paid  or  incurred  1943 

during  the  taxable  year  in  carrying  on  any  trade  or  business, 

K289  including  a reasonable  allowance  for  salaries  or^other' compensation  1978 
for  personal  services  actually  rendered,  and 

32 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at 

1[290  including  rentals  or  other  payments  required  to  be  made  as  a con-  2016 
dition  to  the  continued  use  or  possession  of  property  to  which  the  cor- 
poration has  not  taken  or  is  not  taking  title,  or  in  which  it  has  no  equity; 

11291  (2)  All  interest  paid  or  accrued  within  the  taxable  year  on  its  2027 

indebtedness, 

1[292  except  on  indebtedness  incurred  or  continued  to  purchase  2028 
or  carry  obligations  or  securities  (other  than  obligations  of 
the  United  States  issued  after  September  24,  1917)  the 
interest  upon  which  is  wholly  exempt  from  taxation  under 
this  title  as  income  to  the  taxpayer,  or, 

1f293  in  the  case  of  a foreign  corporation,  the  proportion  of  such  interest  2302 
which  the  amount  of  its  gross  income  from  sources  within  the  United 
States  bears  to  the  amount  of  its  gross  income  from  all  sources  within 
and  without  the  United  States; 

1f294  (3)  Taxes  paid  or  accrued  within  the  taxable  year  imposed  2036 

1[295  (a)  by  the  authority  of  the  United  States,  except  income,  war-profits  2037 
and  excess-profits  taxes;  or 

1[296  (b)  by  the  authority  of  any  of  its  possessions,  except  the  amount  of  2039 
income,  war-profits  and  excess-profits  taxes  allowed  as  a credit  under 
section  238;  or 

11297  (c)  by  the  authority  of  any  State  or  Territory,  or  any  county,  school  2040 
district,  municipality,  or  other  taxing  subdivision  of  any  State  or 
Territory, 

11298  not  including  those  assessed  against  local  benefits  of  a kind  2041 

tending  to  increase  the  value  of  the  property  assessed;  or 

%299  (d)  in  the  case  of  a domestic  corporation,  by  the  authority  of  any  2060 
foreign  country,  except  the  amount  of  income,  war-profits  and 
excess-profits  taxes  allowed  as  a credit  under  section  238;  or 

1[300  (e)  in  the  case  of  a foreign  corporation,  by  the  authority  of  any  2303 
foreign  country  (except  income,  war-profits  and  excess-profits  taxes, 
and  taxes  assessed  against  local  benefits  of  a kind  tending  to  increase 
the  value  of  the  property  assessed),  upon  the  property  or  business: 

If 301  Provided^  That  in  the  case  of  obligors  specified  in  subdivision  {b)  2061 

of  section  221  no  deduction  for  the  payment  of  the  tax  imposed  \ 
by  this  title  or  any  other  tax  paid  pursuant  to  the  contract  or 
provision  referred  to  in  that  subdivision,  shall  be  allowed; 

1f302  (4)  Losses  sustained  during  the  taxable  year  and  not  compen-  2063 

sated  for  by  insurance  or  otherwise, 

1f303  (5)  Debts  ascertained  to}be  worthless  and  charged  off  within  the  2090 

taxable  year; 


33 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  If 

^304  (6)  Amounts  received  as  dividends  from  a corporation  which  is  2102 

taxable  under  this  title  upon  its  net  income,  and 

1f305  amounts  received  as  dividends  from  a personal  service  corporation  2103 
out  of  earnings  or  profits  upon  which  income  tax  has  been  imposed  by 
Act  of  Congress; 

1f306  (7)  A reasonable  allowance  for  the  exhaustion,  wear  and  tear  of  2105 

property  used  in  the  trade  or  business,  including  a reasonable  allow- 
ance for  obsolescence; 

^307  (8)  In  the  case  of  buildings,  machinery,  equipment,  or  other  2164 

facilities,  constructed,  erected,  installed,  or  acquired,  on  or  after 
April  6,  1917,  for  the  production  of  articles  contributing  to  the 
prosecution  of  the  present  war,  and  in  the  case  of  vessels  constructed 
or  acquired  on  or  after  such  date  for  the  transportation  of  articles  or 
men  contributing  to  the  prosecution  of  the  present  war,  there  shall  be 
allowed  a reasonable  deduction  for  the  amortization  of  such  part  of 
the  cost  of  such  facilities  or  vessels  as  has  been  borne  by  the  taxpayer, 
but  not  again  including  any  amount  otherwise  allowed  under  this 
title  or  previous  Acts  of  Congress  as  a deduction  in  computing  net 
income. 

1[308  At  any  time  within  three  years  after  the  termination  of  the  present  2165 
war  the  Commissioner  may,  and  at  the  request  of  the  taxpayer  shall, 
reexamine  the  return,  and  if  he  then  finds  as  a result  of  an  appraisal 
or  from  other  evidence  that  the  deduction  originally  allowed  was  in- 
correct, the  taxes  imposed  by  this  title  and  by  Title  III  for  the  year 
or  years  affected  shall  be  redetermined  and 

1f309  the  amount  of  tax  due  upon  such  redetermination,  if  any,  shall  be  2166 
paid  upon  notice  and  demand  by  the  collector,  or  the  amount  of  tax 
overpaid,  if  any,  shall  be  credited  or  refunded  to  the  taxpayer  in 
accordance  with  the  provisions  of  section  252; 

^310  (9)  In  the  case  of  mines,  oil  and  gas  wells,  other  natural  deposits,  2167 

and  timber,  a reasonable  allowance  for  depletion  and  for  depreciation 
of  improvements,  according  to  the  peculiar  conditions  in  each  case, 
based  upon  cost  including  cost  of  development  not  otherwise 
ducted: 

1[311  Provided,  That  in  the  case  of  such  properties  acquired  prior  to 
March  1,  1913,  the  fair  market  value  of  the  property  {or  the 
taxpayers  interest  therein)  on  that  date  shall  he  taken  in  lieu 
of  cost  up  to  that  date: 

1[312  Provided  further , That  in  the  case  of  mines,  oil  and  gas  wells, 
discovered  by  the  taxpayer,  on  or  after  March  1,  1913,  and  not 
acquired  as  the  result  of  purchase  of  a proven  tract  or  lease, 
where  the  fair  market  value  of  the  property  is  materially  dis- 
proportionate to  the  cost,  the  depletion  allowance  shall  he  based 
upon  the  fair  market  value  of  the  property  at  the  date  of  the 
discovery,  or  within  thirty  days  thereafter; 

1[313  such  reasonable  allowance  in  all  the  above  cases  to  be  made  under  2170 
rules  and  regulations  to  be  prescribed  by  the  Commissioner  with  the 
approval  of  the  Secretary. 


de- 

2168 

2169 


34 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph 

1[314  In  the  case  of  leases  the  deductions  allowed  by  this  paragraph  shall 
be  equitably  apportioned  between  the  lessor  and  lessee; 

1[315  (10)  In  the  case  of  insurance  companies,  in  addition  to  the  above: 

(a)  The  net  addition  required  by  law  to  be  made  within  the  taxable 
year  to  reserve  funds  (including  in  the  case  of  assessment  insurance 
companies  the  actual  deposit  of  sums  with  State  or  Territorial  officers 
pursuant  to  law  as  additions  to  guarantee  or  reserve  funds);  and 

(b)  the  sums  other  than  dividends  paid  within  the  taxable  year  on 
policy  and  annuity  contracts; 

1[316  (11)  In  the  case  of  corporations  issuing  policies  covering  life, 

health,  and  accident  insurance  combined  in  one  policy  issued  on  the 
weekly  premium  payment  plan  continuing  for  life  and  not  subject 
to  cancellation,  in  addition  to  the  above,  such  portion  of  the  net 
addition  (not  required  by  law)  made  within  the  taxable  year  to  reserve 
funds  as  the  Commissioner  finds  to  be  required  for  the  protection  of 
the  holders  of  such  policies  only; 

1[317  (12)  In  the  case  of  mutual  marine  insurance  companies,  there 

shall  be  allowed,  in  addition  to  the  deductions  allowed  in  paragraphs 
(1)  to  (10),  inclusive,  amounts  repaid  to  policyholders  on  account  of 
premiums  previously  paid  by  them,  and  interest  paid  upon  such 
amounts  between  the  ascertainment  and  the  payment  thereof: 

1[318  (13)  In  the  case  of  mutual  insurance  companies  (other  than 

mutual  life  or  mutual  marine  insurance  companies)  requiring  their 
members  to  make  premium  deposits  to  provide  for  losses  and  expenses, 
there  shall  be  allowed,  in  addition  to  the  deductions  allowed  in 
paragraphs  (1)  to  (10),  inclusive,  (unless  otherwise  allowed  under 
such  paragraphs)  the  amount  of  premium  deposits  returned  to  their 
policyholders  and  the  amount  of  premium  deposits  retained  for  the 
payment  of  losses,  expenses,  and  reinsurance  reserves; 

1f319  (14)  (a)  At  the  time  of  filing  return  for  the  taxable  year  1918  a tax-  2215 

payer  may  file  a claim  in  abatement  based  on  the  fact  that  he  has  sus- 
tained a substantial  Joss  (whether  or  not  actually  realized  by  sale  or 
other  disposition)  resulting  from  any  material  reduction  (not  due  to 
temporary  fluctuation)  of  the  value  of  the  inventory  for  such  taxable 
year, 

1f320  or  from  the  actual  payment  after  the  close  of  such  taxable  year  of  2216 
rebates  in  pursuance  of  contracts  entered  into  during  such  year  upon 
sales  made  during  such  year. 

1f321  In  such  case  payment  of  the  amount  of  the  tax  covered  by  such  2217 
claim  shall  not  be  required  until  the  claim  is  decided,  but  the  taxpayer 
shall  accompany  his  claim  with  a bond  in  double  the  amount  of  the 
tax  covered  by  the  claim,  with  sureties  satisfactory  to  the  Commissioner, 
conditioned  for  the  payment  of  any  part  of  such  tax  found  to  be  due, 
with  interest.  If  any  part  of  such  claim  is  disallowed  then  the  remainder 
of  the  tax  due  shall  on  notice  and  demand  by  the  collector  be  paid  by 
the  taxpayer  with  interest  at  the  rate  of  1 per  centum  per  month  from 
the  time  the  tax  would  have  been  due  had  no  such  claim  been  filed 

35 


at  If 

2171 

2248 

2254 

2265 

2267 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  ^ 

1f322  If  it  is  shown  to  the  satisfaction  of  the  Commissioner  that  such  sub-  2:^18 
stantial  loss  has  been  sustained,  then  in  computing  the  taxes  imposed 
by  this  title  and  by  Title  III  the  amount  of  such  loss  shall  be  deducted 
from  the  net  income. 

1[323  (b)  If  no  such  claim  is  filed,  but  it  is  shown  to  the  satisfaction  of  the  2219 
Commissioner  that  during  the  taxable  year  1919  the  taxpayer  has  sus- 
tained a substantial  loss  of  the  character  above  described  then  the 
amount  of  such  loss  shall  be  deducted  from  the  net  income  for  the  tax- 
able year  1918  and  the  taxes  imposed  by  this  title  and  by  Title  III  for 
such  year  shall  be  redetermined  accordingly.  Any  amount  found  to  be 
due  to  the  taxpayer  upon  the  basis  of  such  redetermination  shall  be 
credited  or  refunded  to  the  taxpayer  in  accordance  with  the  provisions 
of  section  252. 

1|324  (b)  In  the  case  of  a foreign  corporation  the  deductions  allowed  2304 

in  subdivision  (a),  except  those  allowed  in  paragraph  (2)  and  in 
clauses  (a),  (b),  and  (c)  of  paragraph  (3),  shall  be  allowed  only  if  and 
to  the  extent  that  they  are  connected  with  income  arising  from  a 
source  within  the  United  States; 

^325  and  the  proper  apportionment  and  allocation  of  the  deductions  with  2305 
respect  to  sources  of  income  within  and  without  the  United  States 
shall  be  determined  under  rules  and  regulations  prescribed  by  the 
Commissioner  with  the  approval  of  the  Secretary. 

ItemslNot  Deductible. 

T[326  Sec.  235.  That  in  computing  net  income  no  deduction  shall  in  1944 
any  case  be  allowed  in  respect  of  any  of  the  items  specified  in  section 
215. 

Credits  Allowed. 

Tf327  Sec.  236.  That  for  the  purpose  only  of  the  tax  imposed  by  section  2325 
230  there  shall  be  allowed  the  following  credits: 

lf328  (a)  The  amount  received  as  interest  upon  obligations  of  the  2326 

United  States  and  bonds  issued  by  the  War  Finance  Corporation, 
which  is  included  in  gross  income  under  section  233; 

lf329  (b)  The  amount  of  any  taxes  imposed  by  Title  III  for  the  same  2327 

taxable  year: 

11330  Provided^  That  in  the  case  of  a corporation  which  makes  return  2328 
for  a fiscal  year  beginning  in  1917  and  ending  in  1918,  in  com- 
puting the  tax  as  provided  in  subdivision  (a)  of  section  205,  the 
tax  computed  for  the  entire  period  under  Title  II  of  the  Revenue 
Act  of  1917  shall  be  credited  against  the  net  income  computed 
for  the  entire  period  under  Title  I of  the  Revenue  Act  of  1916  as 
amended  by  the  Revenue  Act  o/  1917  and  under  Title  I of  the 
Revenue  Act  of  1917,  and  the  tax  computed  for  the  entire  period 
under  Title  III  of  this  Act  at  the  rates  prescribed  for  the  calendar 
year  1918  shall  be  credited  against  the  net  income  computed  for  the 
entire  period  under  this  title;  and 

(c)  Infthe  case  of  a domestic  corporation,  $2,000. 

36 


11331 


2330 


r ' I^aw 
Paragraph 


THE  INCOME  TAX  LAW. 


Repeated 
at  If 

Payment  of  Tax  at  Source. 

1f332  Sec.  237.  That  in  the  case  of  foreign  corporations  subject  to  572 
taxation  under  this  title  not  engaged  in  trade  or  business  within 
the  United  States  and  not  having  any  office  or  place  of  business 
therein, 

• ^[333  there  shall  be  deducted  and  withheld  at  the  source  in  the  same  573 
manner  and  upon  the  same  items  of  income  as  is  provided  in  section 
221 

^334  a tax  equal  to  10  per  centum  thereof,  574 

11335  and  such  tax  shall  be  returned  and  paid  in  the  same  manner  and  575 
subject  to  the  same  conditions  as  provided  in  that  section: 

•f336  Provided;  That  in  the  case  of  interest  described  in  subdivision  610 

{b)  of  that  section  the  deduction  and  withholding  shall  be  at  the 
rate  of  2 per  centum. 

Credit  for  Taxes. 

1[337  Sec.  238.  (a)  That  in  the  case  of  a domestic  corporation  the  total  2332 
taxes  imposed  for  the  taxable  year  by  this  title  and  by  Title  III  shall 
be  credited  with  the  amount  of  any  income,  war-profits  and  excess- 
profits  taxes  paid  during  the  taxable  year 

1[338  to  any  foreign  country,  upon  income  derived  from  sources  therein,  or  2333 

1i339  to' any  possession  of  the  United  States.  2334 

1|340  If  accrued  taxes  when  paid  differ  from  the  amounts  claimed  as  2335 
credits  by  the  corporation,  or  if  any  tax  paid  is  refunded  in  whole  or  in 
part,  the  corporation  shall  at  once  notify  the  Commissioner  who  shall 
redetermine  the  amount  of  the  taxes  due  under  this  title  and  under 
Title  III  for  the  year  or  years  affected,  and  the  amount  of  taxes  due 
upon  such  redetermination,  if  any,  shall  be  paid  by  the  corporation 
upon  notice  'and  demand  by  the  collector,  or  the  amount  of  taxes  over- 
paid, if  any,  shall  be  credited  or  refunded  to  the  corporation  in  accord- 
ance with  the  provisions  of  section  252.  In  the  case  of  such  a tax 
accrued  but  not  paid,  the  Commissioner  as  a condition  precedent  to  the 
allowance  of  this  credit  may  require  the  corporation  to  give  a bond  with 
sureties  satisfactory  to  and  to  be  approved  by  him  in  such  penal  sum 
as  he  may  require,  conditioned  for  the  payment  by  the  taxpayer  of  any 
amount  of  taxes  found  due  upon  any  such  redetermination;  and  the 
bond  herein'  prescribed  shall  contain  such  further  conditions  as  the 
Commissioner  may  require. 

1|341  (b)This  credit  shallbeallowedonlyifthe  taxpayer  furnishes  evidence  2336 
satisfactory  to  the  Commissioner  showing  the  amount  of  income 
derived  from  sources  within  such  foreign  country  or  such  possession 
of  the  United  States,  as  the  case  may  be,  and  all  other  information 
necessary  for  the  computation  of  such  credit. 

•f342  (c)  If  a domestic  corporation  makes  a return  for  a fiscal  year  begin-  2337 

ning  in  1917  and  ending  in  1918,  only  that  proportion  of  this  credit  shall 
be  allowed  which  the  part  of  such  period  within  the  calendar  year  1918 
bears  to  the  entire  period. 


37 


Law 

Paragraph 


THE  INCOME  TAX  LAW. 


Repeated 
at  If 


Corporation  Returns. 

^[343  Sec.  239.  That  every  corporation  subject  to  taxation  under  this  1398 
title  and  every  personal  service  corporation  shall  make  a return,  stat- 
ing specifically  the  items  of  its  gross  income  and  the  deductions  and 
credits  allowed  by  this  title. 

^344  The  return  shall  be  sworn  to  by  the  president,  vice  president,  or  1451 
other  principal  officer  and  by  the  treasurer  or  assistant  treasurer. 

^345  If  any  foreign  corporation  has  no  office  or  place  of  business  in  the  2314 
United  States  but  has  an  agent  in  the  United  States,  the  return  shall 
be  made  by  the  agent. 

1[346  In  cases  where  receivers,  trustees  in  bankruptcy,  or  assignees  are  1429 
operating  the  property  or  business  of  corporations,  such  receivers, 
trustees,  or  assignees  shall  make  returns  for  such  corporations  in  the 
same  manner  and  form  as  corporations  are  required  to  make  returns. 

Any  tax  due  on  the  basis  of  such  returns  made  by  receivers,  trustees, 
or  assignees  shall  be  collected  in  the  same  manner  as  if  collected 
from  the  corporations  of  whose  business  or  property  they  have 
custody  and  control. 

1[347  Returns  made  under  this  section  shall  be  subject  to  the  provisions  1399 
of  sections  226  and  228. 

^348  When  return  is  made  under  section  226  the  credit  provided  in  sub-  1485 
division  (c)  of  section  236  shall  be  reduced  to  an  amount  which  bears 
the  same  ratio  to  the  full  credit  therein  provided  as  the  number  of 
months  in  the  period  for  which  such  return  is  made  bears  to  twelve 
months. 

Consolidated  Returns. 

^349  Sec.  240.  (a)  That  corporations  which  are  affiliated  within  1405 

the  meaning  of  this  section  shall,  under  regulations  to  be  prescribed 
by  the  Commissioner  with  the  approval  of  the  Secretary,  make  a 
consolidated  return  of  net  income  and  invested  capital  for  the  pur- 
poses of  this  title  and  Title  III,  and  the  taxes  thereunder  shall  be 
computed  and  determined  upon  the  basis  of  such  return: 

Tf350  Provided^  That  there  shall  he  taken  out  of  such  consolidated  net  1406 
income  and  invested  capital^  the  net  income  and  invested  capital 
of  any  such  affiliated  corporation  organized  after  August  1,  1914, 
and  not  successor  to  a then  existing  business^  50  per  centum  or 
more  of  whose  gross  income  consists  of  gains,  profits,  commis- 
sions, or  other  income,  derived  from  a Government  contract  or 
contracts  made  between  April  6,  1917,  and  November  11,  1918, 
both  dates  inclusive.  In  such  case  the  corporation  so  taken  out 
shall  be  separately  assessed  on  the  basis  of  its  own  invested  capital 
and  net  income  and  the  remainder  of  such  affiliated  group  shall  be 
assessed  on  the  basis  of  the  remaining  consolidated  invested  capi- 
tal and  net  income, 

1[351  In  any  case  in  which  a tax  is  assessed  upon  the  basis  of  a con-  1407 
solidated  return,  the  total  tax  shall  be  computed  in  the  first  instance 

38 


8-1049, 


THB  mCOMS  TAX  LAW. 


Law  Repaatad 

Paragraph  at  If 

as  a unit  and  shall  then  be  assessed  upon  the  respective  affiliated 
corporations  in  such  proportions  as  may  be  agreed  upon  among 
them,  or,  in  the  absence  of  any  such  agreement,  then  on  the  basis  of 
the  net  income  properly  assignable  to  each. 

^352  There  shall  be  allowed  in  computing  the  income  tax  only  one  specific  1408 
credit  of  $2,000  (as  provided  in  section  236);  in  computing  the  war- 
profits  credit  (as  provided  in  section  311)  only  one  specific  exemption 
of  $3,000;  and  in  computing  the  excess-profits  credit  (as  provided  in 
section  312)  only  one  specific  exemption  of  $3,000. 

^353  (b)  For  the  purpose  of  this  section  two  or  more  domestic  corpora-  1409 

tions  shall  be  deemed  to  be  affiliated 

^354  (1)  if  one  corporation  owns  directly  or  controls  through  closely  1410 
affiliated  interests  or  by  a nominee  or  nominees  substantially  all  the 
stock  of  the  other  or  others,  or 

^355  (2)  if  substantially  all  the  stock  of  two  or  more  corporations  is  1411 
owned  or  controlled  by  the  same  interests. 

^356  (c)  For  the  purposes  of  section  238  a domestic  corporation  which  1412 

owns  a majority  of  the  voting  stock  of  a foreign  corporation  shall  be 
deemed  to  have  paid  the  same  proportion  of  any  income,  war-profits 
and  excess-profits  taxes  paid  (but  not  including  taxes  accrued)  by  such 
foreign  corporation  during  the  taxable  year  to  any  foreign  country  or  to 
any  possession  of  the  United  States  upon  income  derived  from  sources 
without  the  United  States,  which  the  amount  of  any  dividends  (not 
deductible  under  section  234)  received  by  such  domestic  corporation 
from  such  foreign  corporation  during  the  taxable  year  bears  to  the  total 
taxable  income  of  such  foreign  corporation  upon  or  with  respect  to 
which  such  taxes  were  paid: 

1f357  Provided,  That  in  no  such  case  shall  the  amount  of  the  credit  for  1413 
such  taxes  exceed  the  amount  of  such  dividends  {not  deductible 
under  section  234)  received  by  such  domestic  corporation  during 
the  taxable  year. 


Time  and  Place  for  Filing  Returns, 

^358  Sec.  241.  (a)  That  returns  of  corporations  shall  be  made  at  the  1471 

same  time  as  is  provided  in  subdivision  (a)  of  section  227. 

1|359  (b)  Returns  shall  be  made  to  the  collector  of  the  district  in  which  1530 

is  located  the  principal  place  of  business  or  principal  office  or  agency  2313 
of  the  corporation,  or, 

^360  if  it  has  no  principal  place  of  business  or  principal  office  or  agency  in  1531 
the  United  States,  then  to  the  collector  at  Baltimore,  Maryland.  2315 


39 


Law 

Paragraph 


THE  INCOME  TAX  LAW, 


Repeated 
at  ^ 


PART  IV. — ^Administrative  Provisions. 

Payment  of  Taxes. 

^361  Sec.  250.  (a)  That  except  .as  otherwise  provided  in  this  section  2339 

and  sections  221  and  237  the  tax  shall  be  paid  in  four  installments, 
each  consisting  of  one-fourth  of  the  total  amount  of  the  tax. 

1[362  The  first  installment  shall  be  paid  at  the  time  fixed  by  law  for  filing  2340 
the  return,  and 

T[363  the  second  installment  shall  be  paid  on  the  fifteenth  day  of  the  third  2341 
month, 

^364  the  third  installment  on  the  fifteenth  day  of  the  sixth  month,  and  2342 

^365  the  fourth  installment  on  the  fifteenth  day  of  the  ninth  month,  2343 

lf366  after  the  time  fixed  by  law  for  filing  the  return.  2344 

lf367  Where  an  extension  of  time  for  filing  a return  is  granted  the  time  for  2345 
payment  of  the  first  installment  shall  be  postponed  until  the  date  of 
the  expiration  of  the  period  of  the  extension,  but  the  time  for  payment 
of  the  other  installments  shall  not  be  postponed  unless  the  Commis- 
sioner so  provides  in  granting  the  extension. 

11368  In  any  case  in  which  the  time  for  the  payment  of  any  installment  is  2346 
at  the  request  of  the  taxpayer  thus  postponed,  there  shall  be  added  as 
part  of  such  installment  interest  thereon  at  the  rate  of  of  1 per 
centum  per  month  from  the  time  it  would  have  been  due  if  no  extension 

had  been  granted  until  paid. 

11369  If  any  installment  is  not  paid  when  due,  the  whole  amount  of  the  tax  2347 
unpaid  shall  become  due  and  payable  upon  notice  and  demand  by  the 
collector. 

1[370  The  tax  may  at  the  option  of  the  taxpayer  be  paid  in  a single  pay-  2348 
ment  instead  of  in  installments,  in  which  case  the  total  amount  shall 
be  paid  on  or  before  the  time  fixed  by  law  for  filing  the  return,  or,  where 
an  extension  of  time  for  filing  the  return  has  been  granted,  on  or  before 
the  expiration  of  the  period  of  such  extension, 

11371  (b)  As  soon  as  practicable  after  the  return  is  filed,  the  Commissioner  2349 

shall  examine  it.  If  it  then  appears  that  the  correct  amount  of  the 
tax  is  greater  or  less  than  that  shown  in  the  return,  the  installments 
shall  be  recomputed. 

1f372  If  the  amount  already  paid  exceeds  that  which  should  have  been  paid  2352 
on  the  basis  of  the  installments  as  recomputed,  the  excess  so  paid 
shall  be  credited  against  the  subsequent  installments;  and  if  the 
amount  already  paid  exceeds  the  correct  amount  of  the  tax,  the 
excess  shall  be  credited  or  refunded  to  the  taxpayer  in  accordance 
with  the  provisions  of  section  252. 

1f373  If  the  amount  already  paid  is  less  than  that  which  should  have  2354 
been  paid,  the  difference  shall,  to  the  extent  not  covered  by  anv 

40 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at 

credits  then  due  to  the  taxpayer  under  section  252,  be  paid  upon 
notice  and  demand  by  the  collector. 

^374  In  such  case  if  the  return  is  made  in  good  faith  and  the  understate-  2356 
ment  of  the  amount  in  the  return  is  not  due  to  any  fault  of  the  tax- 
payer, there  shall  be  no  penalty  because  of  such  understatement. 

^375  If  the  understatement  is  due  to  negligence  on  the  part  of  the  tax-  2357 
payer,  but  without  intent  to  defraud,  there  shall  be  added  as  part 
of  the  tax  5 per  centum  of  the  total  amount  of  the  deficiency,  plus 
interest  at  the  rate  of  1 per  centum  per  month  on  the  amount  of  the 
deficiency  of  each  installment  from  the  time  the  installment  was  due. 

11376  If  the  understatement  is  false  or  fraudulent  with  intent  to  evade  2358 
the  tax,  then,  in  lieu  of  the  penalty  provided  by  section  3176  of  the 
Revised  Statutes,  as  amended,  for  false  or  fraudulent  returns  will- 
fully made,  but  in  addition  to  other  penalties  provided  by  law  for 
false  or  fraudulent  returns,  there  shall  be  added  as  part  of  the  tax 
50  per  centum  of  the  amount  of  the  deficiency. 

•[377  (c)  If  the  return  is  made  pursuant  to  section  3176  of  the  Revised  2359 

Statutes  as  amended,  the  amount  of  tax  determined  to  be  due  under 
such  return  shall  be  paid  upon  notice  and  demand  by  the  collector. 

11378  (d)  Except  in  the  case  of  false  or  fraudulent  returns  with  intent  to  2360 

evade  the  tax,  the  amount  of  tax  due  under  any  return  shall  be  de- 
termined and  assessed  by  the  Commissioner  within  five  years  after 
the  return  was  due  or  was  made,  and  no  suit  or  proceeding  for  the 
collection  of  any  tax  shall  be  begun  after  the  expiration  of  five  years 
after  the  date  when  the  return  was  due  or  was  made.  In  the  case  of 
such  false  or  fraudulent  returns,  the  amount  of  tax  due  may  be  deter- 
mined at  any  time  after  the  return  is  filed,  and  the  tax  may  be  col- 
lected at  any  time  after  it  becomes  due. 

1[379  (e)  If  any  tax  remains  unpaid  after  the  date  when  it  is  due,  and  for  2397 

ten  days  after  notice  and  demand  by  the  collector,  then,  except  in 
the  case  of  estates  of  insane,  deceased,  or  insolvent  persons,  there 
shall  be  added  as  part  of  the  tax  the  sum  of  5 per  centum  on  the 
amount  due  but  unpaid,  plus  interest  at  the  rate  of  1 per  centum  per 
month  upon  such  amount  from  the  time  it  became  due: 

1|380  Provided^  That  as  to  any  such  amount  which  is  the  subject  of  a 2398 
bona  fide  claim  for  abatement  such  sum  of  5 per  centum  shall 
not  be  added  and  the  interest  from  the  time  the  amount  was  due 
until  the  claim  is  decided  shall  be  at  the  rate  of  }/2  of  i per 
centum  per  month. 

11381  In  the  case  of  the  first  installment  provided  for  in  subdivision  (a)  the  2423 
instructions  printed  on  the  return  shall  be  deemed  sufficient  notice 
of  the  date  when  the  tax  is  due  and  sufficient  demand,  and  the  tax- 
payer’s computation  of  the  tax  on  the  return  shall  be  deemed  suffi- 
cient notice  of  the  amount  due. 

1(382  (f)  In  any  case  in  which  in  order  to  enforce  payment  of  a tax  it  is  2424 

necessary  for  a collector  to  cause  a warrant  of  distraint  to  be  served, 
there  shall  also  be  added  as  part  of  the  tax  the  sum  of  $5. 

41 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  If 

1[383  (g)  If  the  Commissioner  finds  that  a taxpayer  designs  quickly  to  2425 

depart  from  the  United  States  or  to  remove  his  property  therefrom, 
or  to  conceal  himself  or  his  property  therein,  or  to  do  any  other  act 
tending  to  prejudice  or  to  render  wholly  or  partly  ineffectual  pro- 
ceedings to  collect  the  tax  for  the  taxable  year  then  last  past  or  the 
taxable  year  then  current  unless  such  proceedings  be  brought  without 
delay,  the  Commissioner  shall  declare  the  taxable  period  for  such 
taxpayer  terminated  at  the  end  of  the  calendar  month  then  last  past 
and  shall  cause  notice  of  such  finding  and  declaration  to  be  given 
the  taxpayer,  together  with  a demand  for  immediate  payment  of  the 
tax  for  the  taxable  period  so  declared  terminated  and  of  the  tax  for 
the  preceding  taxable  year  or  so  much  of  said  tax  as  is  unpaid,  whether 
or  not  the  time  otherwise  allowed  by  law  for  filing  return  and  paying 
the  tax  has  expired;  and  such  taxes  shall  thereupon  become  im- 
mediately due  and  payable.  In  any  action  or  suit  brought  to  enforce 
payment  of  taxes  made  due  and  payable  by  virtue  of  the  provisions  of 
this  subdivision  the  finding  of  the  Commissioner,  made  as  herein 
provided,  whether  made  after  notice  to  the  taxpayer  or  not,  shall  be 
for  all  purposes  presumptive  evidence  of  the  taxpayer’s  design.  A 
taxpayer  who  is  not  in  default  in  making  any  return  or  paying  in- 
come, war-profits,  or  excess-profits  tax  under  any  Act  of  Congress 
may  furnish  to  the  United  States,  under  regulations  to  be  prescribed 
by  the  Commissioner  with  the  approval  of  the  Secretary,  security 
approved  by  the  Commissioner  that  he  will  duly  make  the  return 
next  thereafter  required  to  be  filed  and  pay  the  tax  next  thereafter 
required  to  be  paid.  The  Commissioner  may  approve  and  accept 
in  like  manner  security  for  return  and  payment  of  taxes  made  due 
and  payable  by  virtue  of  the  provisions  of  this  subdivision,  provided 
the  taxpayer  has  paid  in  full  all  other  income,  war-profits,  or  excess- 
profits  taxes  due  from  him  under  any  Act  of  Congress.  If  security  is 
approved  and  accepted  pursuant  to  the  provisions  of  this  subdivision 
and  such  further  or  other  security  with  respect  to  the  tax  or  taxes 
covered  thereby  is  given  as  the  Commissioner  shall  from  time  to  time 
find  necessary  and  require,  payment  of  such  taxes  shall  not  be  en- 
forced by  any  proceedings  under  the  provisions  of  this  subdivision 
prior  to  the  expiration  of  the  time  otherwise  allowed  for  paying  such 
respective  taxes. 

Receipts  for  Taxes. 

^384  Sec.  251.  That  every  collector  to  whom  any  payment  of  any  2465 
tax  is  made  under  the  provisions  of  this  title  shall  upon  request  give 
to  the  person  making  such  payment  a full  written  or  printed  receipt, 
stating  the  amount  paid  and  the  particular  account  for  which  such 
payment  was  made; 

1[385  and  whenever  any  debtor  pays  taxes  on  account  of  payments  made  2471 
or  to  be  made  by  him  to  separate  creditors  the  collector  shall,  if  re- 
quested by  such  debtor,  give  a separate  receipt  for  the  tax  paid  on 
account  of  each  creditor  in  such  form  that  the  debtor  can  conveniently 
produce  such  receipts  separately  to  his  several  creditors  in  satisfaction 
of  their  respective  demands  up  to  the  amounts  stated  in  the  receipts; 
and  such  receipt  shall  be  sufficient  evidence  in  favor  of  such  debtor 
to  justify  him  in  withholding  from  his  next  payment  to  his  creditor 
the  amount  therein  stated;  but  the  creditor  may,  upon  giving  to 

42 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  % 

his  debtor  a full  written  receipt  acknowledging  the  payment  to  him 
of  any  sum  actually  paid  and  accepting  the  amount  of  tax  paid  as 
aforesaid  (specifying  the'isame)  as  a further  satisfaction  of  the  debt 
to  that  amount,  require  the  surrender  to  him  of  such  collector’s 
receipt. 

Refunds. 

^386  Sec.  252.  That  if,  upon  examination  of  any  return  of  income  2488 
made  pursuant  to  this  Act,  the  Act  of  August  5,  1909,  entitled  “An 
Act  to  provide  revenue,  equalize  duties,  and  encourage  the  industries 
of  the  United  States,  and  for  other  purposes,”  the  Act  of  October  3, 

1913,  entitled  “An  Act  to  reduce  tariif  duties  and  to  provide  revenue 
for  the  Government,  and  for  other  purposes,”  the  Revenue  Act  of 
1916,  as  amended,  or  the  Revenue  Act  of  1917,  it  appears  that  an 
amount  of  income,  war-profits  or  excess-profits  tax  has  been  paid  in  ex- 
cess of  that  properly  due,  then,  notwithstanding  the  provisions  of 
section  3228  of  the  Revised  Statutes,  the  amount  of  the  excess  shall 
be  credited  against  any  income,  war-profits  or  excess-profits  taxes, 
or  installment  thereof,  then  due  from  the  taxpayer  under  any  other 
return,  and  any  balance  of  such  excess  shall  be  immediately  refunded 
to  the  taxpayer: 

1[387  Provided^  That  no  such  credit  or  refund  shall  he  allowed  or  2489 
made  after  five  years  from  the  date  when  the  return  was  due, 
unless  before  the  expiration  of  such  five  years  a claim  therefor  is' 
filed  by  the  taxpayer. 

Penalties. 

1[388  Sec.  253.  That  any  individual,  corporation,  or  partnership  re-  1572 
quired  under  this  title  to  pay  or  collect  any  tax,  to  make  a return  or 
to  supply  information, 

who  fails  to  pay  or  collect  such  tax,  to  make  such  return,  or  to 
supply  such  information  at  the  time  or  times  required  under  this 
title, 

shall  be  liable  to  a penalty  of  not  more  than  $1,000. 

Any  individual,  corporation,  or  partnership,  or  any  officer  or  employee 
of  any  corporation  or  member  or  employee  of  a partnership, 
who  willfully  refuses  to  pay  or  collect  such  tax,  to  make  such  return, 
or  to  supply  such  information  at  the  time  or  times  required  under  this 

' title,  or 

who  willfully  attempts  in  any  manner  to  defeat  or  evade  the  tax  im- 
posed by  this  title, 

shall  be  guilty  of  a misdemeanor  and  shall  be  fined  not  more  than 
$10,000  or  imprisoned  for  not  more  than  one  year,  or  both,  together 
with  the  costs  of  prosecution. 

Returns  of  Payments  of  Dividends. 

1[389  Sec.  254.  That  every  corporation  subject  to  the  tax  imposed  1393 
by  this  title  and  every  personal  service  corporation  shall,  when  re- 
quired by  the  Commissioner,  render  a correct  return  duly  verified 
under  oath,  of  its  payments  of  dividends,  stating  the  name  and 
address  of  each  stockholder,  the  number  of  shares  owned  by  him, 
and  the  amount  of  dividends  paid  to  him. 

43 


THE  INCOME  TAX  LAW. 

Repeated 
^ at  n 

Returns  of  .Brokers. 

1[390  Sec.  255.  That  every  individual,  corporation,  or  partnership  doing  1396 
business  as  a broker  shall,  when  required  by  the'Commis^oner*  repder 
a correct  return  duly  verified  under  oath,  under  such  rules^and  regula- 
tions as  the  Commissioner,  with  the  approval  of  the  Secretary,  may 
prescribe,  showing  the  names  of  customers  for  whom  such  individual, 
corporation,  or  partnership  has  transacted  any  business,  with  such 
details  as  to  the  profits,  losses,  or  other  information  which  the  Com- 
missioner may  require,  as  to  each  of  such  custoniers,  as  will  enable 
the  Commissioner  to  determine  whether  all  income  tax  due  on  profits 
or  gains  of  such  customers  has  been  paid. 

Information  at  Source. 

11391  Sec.  256.  That  all  individuals,  corporations,  and  partnerships,  ^in  .1314 
whatever  capacity  acting,  including  lessees  or  mortgagors  of  real  qr  ' 
personal  property,  fiduciaries,  and  employers, 

11392  making  payment  to  another  individual,  corporation,  or  ^partnership,  ,*1315 

11393  of  Interest,  rent,  salaries,  wages,  premiums,  annuities,  compensations,  1316 
remunerations,  emoluments,  or  other  fixed,  or  determinable  gains, 
profits,  and  income 

11394  (other  than  payments  described  in  sections  254  and  255),  1317 

11395  of  $1,000  or  more  in  any  taxable  year,  1318 

11396  or,  in  the  case  of  such  payments  m.ade  by  the  United  States,  the  i;3,19 
officers  or  employees  of  the  United  States  having  information  as  ^tp 
such  payments  and  required  to  make  returns  in  regard  thereto , by , the 
regulations  hereinafter  provided  for, 

11397  shall  render  a true  and  accurate  return  to  the  Commissioner,  under  1321 
such  regulations  and  in  such  form  and  manner  and  to  such  e;?tent  as 
may  be  prescribed  by  him  with  the  approval  of  the  Secretary,  setting 
forth  the  amount  of  such  gains,  profits,  and  income,  and  the  name 

and  address  of  the  recipient  of  such  payment. 

11398  Such  returns  may  be  required,  regardless  of  amounts,  (1)  in  the  1350 
case  of  payments  of  interest  upon  bonds,  mortgages,  deeds  of  trust,  or 
other  similar  obligations  of  corporations,  and 

11399  (2)  in  the  case  of  collections  of  items  (not  payable  in  the  United  1352 
States)  of  interest  upon  the  bonds  of  foreign  countries  and  interest 
upon  the  bonds  of  and  dividends  from  foreign  corporations  by  in- 
dividuals, corporations,  or  partnerships,  undertaking  as  a matter 

of  business  or  for  profit  the  collection  of  foreign  payments  of  such 
interest  or  dividends  by  means  of  coupons,  checks,  or  bills  of  exchange. 

11400  When  necessary  to  make  effective  the  provisions  of  this  section  the  1371 
name  and  address  of  the  recipient  of  income  shall  be  furnished  upon 
demand  of  the  individual,  corporation,  or  partnership  paying  the 
income. 


Law 

Paragraph 


44 


THE  INCOME  TAX  LAW. 

Law  Repeated 

Paragraph  at  t 

1f4Gl  The  provisions  of  this  section  shall  apply  to  the  calendar  year  1375 
1918  and  each  calendar  year  thereafter, 

If 402  but  shall  not  apply  to  the  payment  of  interest  on  obligations  of  the  1376 
_ United  States.  ; 

Returns  to  be  Public  Records. 

^403  ' Sec.  257.  That  returns  upon  which  the  tax  has  been  determined  1636 

by  the  Commissioner  shall  constitute  public  records; 


lf404  but  they  shall  be  open  to  inspection  only  upon  order  of  the  President  1637 
and  under  rules  and  regulations  prescribed  by  the  Secretary  and 
approved  by  the  President: 

1(405  Provided,  That  the  proper  officers  of  any  State  imposing  an  1638 

income  tax  may,  upon  the  request  of  the  governor  thereof,  have 
access  to  the  returns  of  any  corporation,  or  to  an  abstract  thereof 
showing  the  name  and  income  of  the  corporation,  at  such  times  and 
in  such  manner  as  the  Secretary  may  prescribe: 

If 406  Provided  further,  That  all  bona  fide  stockholders  of  record  1639 

owning  1 per  centum  or  more  of  the  outstanding  stock  of  any 
corporation  shall,  tipon  making  request  of  the  Commissioner,  be 
allowed  to  examine  the  annual  income  returns  of  such  corpora- 
tion and  of  its  subsidiaries . 

1(407  Any  stockholder  who  pursuant  to  the  provisions  of  this  section  1640 

is  allowed  to  examine  the  return  of  any  corporation,  and  who 
makes  known  in  any  manner  whatever  not  provided  by  law  the 
amount  or  source  of  income,  profits,  losses,  expenditures,  or  any 
particular  thereof,  set  forth  or  disclosed  in  any  such  return,  shall 
be  guilty  of  a misdemeanor  and  be  punished  by  a fine  not  exceeding 
$1,000,  or  by  imprisonment  not  exceeding  one  year,  or  both. 

1(408  The  Commissioner  shall  as  soon  as  practicable  in  each  year  1641 
cause  to  be  prepared  and  made  available  to  public  inspection  in  such 
manner  as  he  may  determine,  in  the  office  of  the  collector  in  each 
internal-revenue  district  and  in  such  other  places  as  he  may  determine, 
lists  containing  the  names  and  the  post-office  addresses  of  all  individuals 
making  income-tax  returns  in  such  district. 

Publication  of  Statistics. 

1(409  Sec.  258.  That  the  Commissioner,  with  the  approval  of  the  1661 
Secretary,  shall  prepare  and  publish  annually  statistics  reasonably 
available  w'ith  respect  to  the  operation  of  the  income,  war-profits  and 
excess-profitS;tax  laws.  Including  classifications  of  taxpayers  and  of 
income,  the  amounts  allowed  as  deductions,  exemptions,  and  credits, 
and  any  Other  facts  deemed  pertinent  and  valuable. 


Collection  of  Foreign  Items. 

1(410  Sec.  259.  That  all  individuals,  corporations,  or  partnerships  under-  1378 
taking  as  a matter  of  business  or  for  profit  the  collection  of  foreign 
payments  of  interest  or  dividends  by  means  of  coupons^  checks,  or 
bills  of  exchange  shall  obtain  a license  from  the  Commissioner  and 

45 


THE  INCOME  TAX  LAW. 


Law 

Paragraph 


Repeated 

at1 


lf411  shall  be  subject  to  such  regulations  enabling  the  Government  to  1389 
obtain  the  information  required  under  this  title  as  the  Commissioner, 
with  the  approval  of  the  Secretary,  shall  prescribe; 


1[412  and  whoever  knowingly  undertakes  to  collect  such  payments  without  1391 
having  obtained  a license  therefor,  or  without  complying  with  such 
regulations,  shall  be  guilty  of  a misdemeanor  and  shall  be  fined  not 
more  than  $5,000,  or  imprisoned  for  not  more  than  one  year,  or  both. 


Citizens  of  United  States  Possessions. 

^413  Sec.  260.  That  any  individual  who  is  a citizen  of  any  possession  509 
of  the  United  States  (but  not  otherwise  a citizen  of  the  United  States) 
and  who  is  not  a resident  of  the  United  States,  shall  be  subject  to 
taxation  under  this  title  only  as  to  income  derived  from  sources  within 
the  United  States, 

^414  and  in  such  case  the  tax  shall  be  computed  and  paid  in  the  same  510 
manner  and  subject  to  the  same  conditions  as  in  the  case  of  other 
persons  who  are  taxable  only  as  to  income  derived  from  such  sources. 


Porto  Rico  and  Philippine  Islands. 

^415  Sec.  261.  That  in  Porto  Rico  and  the  Philippine  Islands  the  511 
income  tax  shall  be  levied,  assessed,  collected,  and  paid  in  accord- 
ance with  the  provisions  of  the  Revenue  Act  of  1916  as  amended. 

1[416  Returns  shall  be  made  and  taxes  shall  be  paid  under  Title  I of  512 
such  Act  in  Porto  Rico  or  the  Philippine  Islands,  as  the  case  may  be, 
by 

^417  (1)  every  individual  who  is  a citizen  or  resident  of  Porto  Rico  or  the  513 
Philippine  Islands  or  derives  income  from  sources  therein,  and 

^418  (2)  every  corporation  created  or  organized  in  Porto  Rico  or  the  514 
Philippine  Islands  or  deriving  income  from  sources  therein. 

^419  An  individual  who  is  neither  a citizen  nor  a resident  of  Porto  Rico  or  515 
the  Philippine  Islands  but  derives  income  from  sources  therein,  shall 
be  taxed  in  Porto  Rico  or  the  Philippine  Islands  as  a nonresident 
alien  individual,  and 

^420  a corporation  created  or  organized  outside  Porto  Rico  or  the  Philippine  516 
Islands  and  deriving  income  from  sources  therein  shall  be  taxed  in 
Porto  Rico  or  the  Philippine  Islands  as  a foreign  corporation. 

^421  For  the  purposes  of  section  216  and  of  paragraph  (6)  of  subdivision  517 
(a)  of  section  234  a tax  imposed  in  Porto  Rico  or  the  Philippine  Islands 
upon  the  net  income  of  a corporation  shall  not  be  deemed  to  be  a tax 
under  this  title. 

1(422  The  Porto  Rican  or  Philippine  Legislature  shall^have'power  by  due  518 
enactment  to  amend,  alter,  modify,  or  repeal  the  income  tax  laws  in 
force  in  Porto  Rico  or  the  Philippine  Islands,  respectively. 

46 


Law 

Paragraph 


THE  INCOME  TAX  LAW. 


Repeated 
at  ^ 


TITLE  XIII. — General  Administrative  Provisions. 

(Of  the  Revenue  Act  of  1918.) 

[Advisory  Tax  Board.] 

1(423  Sec.  1301.  (Revenue  Act  of  1918.)  (a)  . (b)  . (c)  . 2652 

(d)  (1)  There  is  hereby  created  a board  to  be  known  as  the  “Advisory 
Tax  Board,”  hereinafter  called  the  Board,  and  to  be  composed  of  not 
to  exceed  six  members  to  be  appointed  by  the  Commissioner  with  the 
approval  of  the  Secretary.  The  Board  shall  cease  to  exist  at  the  expira- 
tion of  two  years  after  the  passage  of  this  Act,  or  at  such  earlier  time 
as  the  Commissioner  with  the  approval  of  the  Secretary  may  designate. 

^424  Vacancies  in  the  membership  of  the  Board  shall  be  filled  in  the  2653 
same  manner  as  an  original  appointment.  Any  member  shall  be 
subject  to  removal  by  the  Commissioner  with  the  approval  of  the 
Secretary.  The  Commissioner  with  the  approval  of  the  Secretary 
shall  designate  the  chairman  of  the  Board.  Each  member  shall  re- 
ceive an  annual  salary  of  $9,000,  payable  monthly,  together  with 
actual  necessary  expenses  when  absent  from  the  District  of  Columbia 
on  official  business. 

1(425  (2)  The  Commissioner  may,  and  on  the  request  of  any  taxpayer  2654 

directly  interested  shall,  submit  to  the  Board  any  question  relating 
to  the  interpretation  or  administration  of  the  income^  war-profits 
or  excess-profits  tax  laws,  and  the  Board  shall  report  its  findings 
and  recommendations  to  the  Commissioner. 

1(426  (3)  The  Board  shall  have  its  office  in  the  Bureau  of  Internal  Revenue  2655 

in  the  District  of  Columbia.  The  expenses  and  salaries  of  members 
of  the  Board  shall  be  audited,  allowed,  and  paid  out  of  appropriations 
for  collecting  internal  revenue,  in  the  same  manner  as  expenses  and 
salaries  of  employees  of  the  Bureau  of  Internal  Revenue  are  audited, 
allowed,  and  paid. 

1(427  (4)  The  Board  shall  have  the  power  to  summon  witnesses,  take  2656 

testimony,  administer  oaths,  and  to  require  any  person  to  produce 
books,  papers,  documents,  or  other  data  relating  to  any  matter  under 
investigation  by  the  Board.  Any  member  of  the  Board  may  sign 
subpoenas  and  members  and  employees  of  the  Bureau  of  Internal 
Revenue  designated  to  assist  the  Board,  when  authorized  by  the 
Board,  may  administer  oaths,  examine  witnesses,  take  testimony 
and  receive  evidence. 


[Leaves  of  Absence  to  Internal-Revenue  Men.] 

1(428  Sec,  1302.  (Revenue  Act  of  1918.)  That  all  internal-revenue  2657 
agents  and  inspectors  shall  be  granted  leave  of  absence  with  pay, 
which  shall  not  be  cumulative,  not  to  exceed  thirty  days  in  any 
calendar  year,  under  such  regulations  as  the  Commissioner,  with  the 
approval  of  the  Secretary,  may  prescribe. 


THE  INCOME  TAX  LAW. 


I^aw  Repeated 

Paragraph  at  H 

[RECORDS  TO  BE  KEPT;  RETURNS  TO  BE  MADE;  BOOKS  TO  BE  OPEN  TO 
INSPECTION  BY  GOVERNMENT  OFFICERS.] 

^429  Sec.  1305.  (Revenue  Act  of  1918.)  That  all  administrative,  1620 
special,  or  stamp  provisions  of  law,  including  the  law  relating  to  the 
assessment  of  taxes,  so  far  as  applicable,  are  hereby  extended  to  and 
made  a part  of  this  Act,  and  every  person  liable  to  any  tax  imposed 
by  this  Act,  or  for  the  collection  thereof,  shall  keep  such  records  and 
render,  under  oath,  such  statements  and  returns,  and  shall  comply 
with  such  regulations  as  the  Commissioner,  with  the  approval  of  the 
Secretary,  may  from  time  to  time  prescribe. 

1[430  Whenever  in  the  judgment  of  the  Commissioner  necessary  he  may  1630 
require  any  person,  by  notice  served  upon  him,  to  make  a return  or 
such  statements  as  he  deems  sufficient  to  show  whether  or  not  such 
person  is  liable  to  tax. 

^431  The  Commissioner,  for  the  purpose  of  ascertaining  the  correctness  1631 
of  any  return  or  for  the  purpose  of  making  a return  where  none  has 
been  made,  is  hereby  authorized,  by  any  revenue  agent  or  inspector 
designated  by  him  for  that  purpose,  to  examine  any  books,  papers, 
records  or  memoranda  bearing  upon  the  matters  required  to  be 
included  in  the  return,  and  may  require  the  attendance  of  the  person 
rendering  the  return  or  of  any  officer  or  employee  of  such  person,  or  the 
attendance  of  any  other  person  having  knowledge  in  the  premises,  and 
may  take  his  testimony  with  reference  to  the  matter  required  by  law  to 
be  included  in  such  return,  with  power  to  administer  oaths  to  such 
person  or  persons. 

[TAX  TO  BE  COLLECTED  AS  COMMISSIONER  MAY  PRESCRIBE  IF  NO  METHOD 

IS  SPECIFICALLY  PROVIDED.) 

1[432  Sec.  1307.  (Revenue  Act  of  1918.)  That  in  all  cases  where  the  592 
method  of  collecting  the  tax  imposed  by  this  Act  is  not  specifically  pro- 
vided in  this  Act,  the  tax  shall  be  collected  in  such  manner  as  the  Com- 
missioner, with  the  approval  of  the  Secretary,  may  prescribe.  . • ;•  . 

[THE  COMMISSIONER  AUTHORIZED  TO  MAKE  RULES  AND  REGULATIONS.] 

^433  Sec.  1309.  (Revenue  Act  of  1918.)  That  the  Commissioner,  with  2591 
the  approval  of  the  Secretary,  is  hereby  authorized  to  make  all  needful 
rules  and  regulations  for  the  enforcement  of  the  provisions  of  this 
Act.  * * * 

[FRACTIONAL  PARTS  OF  A CENT  IN  PAYMENT  OF  TAX.] 

1(434  Sec.  1313.  (Revenue  Act  of  1918.)  That  in  the  payment  of  any  2426 
tax  under  this  Act  not  payable  by  stamp  a fractional  part  of  a cent 
shall  be  disregarded  unless  it  amounts  to  one-half  cent  or  more,  in 
which  case  it  shall  be  increased  to  1 cent. 

[TREASURY  CERTIFICATES  OF  INDEBTEDNESS  AND  UNCERTIFIED  CHECKS 

IN  PAYMENT  OF  TAXES.] 

K435  Sec.  1314.  (Revenue  Act  of  1918.)  That  collectors  may  receive,  2428 
at  par  with  an  adjustment  for  accrued  interest,  certificates  of  in- 
debtedness issued  by  the  United  States  and  uncertified  checks  in  pay- 

48 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  ^ 

(1[4-35)  merit » of  income,  war-profits  and  excess-profits  taxes  and  any  other  (2428) 
taxes  payable  other  than  by  stamp,  during  such  time  and  under  such 
regulations  as  the  Commissioner,  with  the  approval  of  the  Secretary, 
shall  prescribe;  but  if  a check  so  received  is  not  paid  by  the  bank  on 
which  it  is  drawn  the  person  by  whom  such  check  has  been  tendered 
shall  remain  liable  for  the  payment  of  the  tax  and  for  all  legal  penalties 
and  additions  the  same  as  if  such  check  had  not  been  tendered. 

1 

[AMENDED  SECTIONS  OF  THE  REVISED  STATUTES.] 

[Comment;  The  following  sections  of  the  Revised  Statutes,  having 
directly  to  do  with  the  administration  of  the  Income  Tax  Law,  arc 
reprinted  here  because  of  the  fact  that  they  were  amended  by  the 
Revenue  Act  of  1918.  These  sections,  with  the  exception  of  section 
3220  and  sections  3164  and  3165,  were  carried  into  the  Income 
Tax  Title  of  the  R.evenue  Act  of  1916  as  amended  by  the  Revenue 
Act  of  1917.  They  are  no  longer  em^bodled  in  the  Income  Tax  Law. 
Section  3173,  Revised  Statutes,  heretofore  carried  In  the  Income 
Tax  Law,  was  so  amended  by  the  Revenue  Act  of  1918, (Sec.  1317), 
as  to  make  it  Inapplicable  to  the  Income  tax,  and  for  that  reason  it  is 
not  incorporated  here.] 

[REMISSION  AND  REFUNDING  OF  TAXES  AND  PENALTIES.] 

^436  Sec.  1316.  (Revenue  Act  of  1918.)  (a)  That  section  3220  of  2497 

the  Revised  Statutes  Is  hereby  amended  to  read  as  follows: 

“Sec.  3220.  The  Commissioner  of  Internal  Revenue,  subject 
to  regulations  prescribed  by  the  Secretary  of  the  Treasury,  is  author- 
ized to  remit,  refund,  and  pay  back  all  taxes  erroneously  or  Illegally 
assessed  or  collected,  all  penalties  collected  without  authority,  and  all 
taxes  that  appear  to  be  unjustly  assessed  or  excessive,  in  amount, 
or  in  any  manner  wrongfully  collected;  also  to  repay  to  any  collector 
or  deputy  collector  the  full  amount  of  such  sums  of  money  as  may  be 
recovered,  against  him  in  any  court,  for  any  Internal  revenue  taxes 
collected,  by  him,  with  the  cost  and  expenses  of  suit;  also  all 
damages  and  costs  recovered  against  any  assessor,  assistant  assessor, 
collector,  deputy  collector,  agent,  or  inspector,  in  any.  suit  brought 
against  him  Ip^  reason  of  anything  done  in  the  due  performance  of  his 
official  duty,  and  shall  make  report  to  Congress  at  the  beginning  of 
each  regular  session  of  Congress  of  all  transactions  under  this  section.” 

[BURDEN  OF  PROOF  AS  TO  FRAUD  IN  CONNECTION  WITH  SUITS  TO  RECOVER 

TAXES  ON  SECOND  ASSESSMENT.] 

11437  (b)  Section  3225  of  the  Revised  Statutes  of  the  llnitcd  States  Is  2590 

hereby  amended  to  read  as  follows: 

“Sec.  3225.  When  a second  assessment  is  made  In  case  of  any 
list,  sta,tement,  or  return,  which  In  the  opinion  of  the  collector  or 
deputy  collector  was  false  or  fraudulent,  or  contained  any  under- 
statement or  undervaluation,  such  assessment  shall  not  be  remitted, 
nor  shall  taxes  collected  under  such  assessment  be  refunded,  or  paid 
back,  or  recovered  by  any  suit,  unless  it  Is  proved  that  such  list, 
statement,  or  return  was  not  willfully  false  or  fradulcnt  and  did  not 
contain  any  willful  understatement  or  undervaluation.” 

49 


THE  INCOME  TAX  LA#. 


Law  Repeated 

Paragri  ph  at  ^ 

^438  Sec.  1317.  (Revenue  Act  of  1918.)  That  sections  3164,  3165, 

3167,  3172,  3173,  and  3176  of  the  Revised  Statutes  as  amended  are 
hereby  amended  to  read  as  follows; 

[Duty  of  Collectors  to  Report  Violations  of  Law.] 

If 439  “Sec.  3164.  It  shall  be  the  duty  of  every  collector  of  internal  2651 

revenue  having  knowledge  of  any  willful  violation  of  any  law  of  the 
United  States  relating  to  the  revenue,  within  thirty  days  after  com- 
ing into  possession  of  such  knowledge,  to  file  with  the  district  attorney 
of  the  district  in  which  any  fine,  penalty,  or  forfeiture  may  be  in- 
curred, a statement  of  all  the  facts  and  circumstances  of  the  case 
within  his  knowledge,  together  with  the  names  of  the  witnesses, 
setting  forth  the  provisions  of  law  believed  to  be  so  violated  on  which 
reliance  may  be  had  for  condemnation  or  conviction. 

[Revenue  Officers  Who  May  Administer  Oaths.] 

^440  “Sec.  3165.  Every  collector,  deputy  collector,  internal-revenue  1452 
agent,  and  internal-revenue  officer  assigned  to  duty  under  an  internal- 
revenue  agent,  is  authorized  to  administer  oaths  and  to  take  evidence 
touching  any  part  of  the  administration  of  the  internal-revenue  laws 
with  which  he  is  charged,  or  where  such  oaths  and  evidence  are 
authorized  by  law  or  regulation  authorized  by  law  to  be  taken. 

[Disclosiure  of  Information  Made  Available  to  Internal  Revenue  Officers.] 

1[441  “Sec.  3167.  It  shall  be  unlawful  for  any  collector,  deputy  col-  2645 
lector,  agent,  clerk,  or  other  officer  or  employee  of  the  United  States 
to  divulge  or  to  make  known  in  any  manner  whatever  not  provided 
by-law  to  any  person  the  operations,  style  of  work,  or  apparatus  of 
any  manufacturer  or  producer  visited  by  him  in  the  discharge  of  his 
official  duties,  or  the  amount  or  source  of  income,  profits,  losses, 
expenditures,  or  any  particular  thereof,  set  forth  or  disclosed  in  any 
income  return,  or  to  permit  any  income  return  or  copy  thereof  or  any 
book  containing  any  abstract  or  particulars  thereof  to  be  seen  or 
examined  by  any  person  except  as  provided  by  law;  and  it  shall  be 
unlawful  for  any  person  to  print  or  publish  in  any  manner  whatever 
not  provided  by  law  any  income  return,  or  any  part  thereof  or  source 
of  income,  profits,  losses,  or  expenditures  appearing  in  any  income 
return;  and  any  offense  against  the  foregoing  provision  shall  be  a mis- 
demeanor and  be  punished  by  a fine  not  exceeding  $1,000  or  by 
imprisonment  not  exceeding  one  year,  or  both,  at  the  discretion  of  the 
court;  and  if  the  offender  be  an  officer  or  employee  of  the  United 
States  he  shall  be  dismissed  from  office  or  discharged  from  employ- 
ment. 

[Canvass  of  Districts  by  Collectors.] 

1[442  “Sec.  3172.  Every  collector  shall,  from  time  to  time,  cause  his  1621 
deputies  to  proceed  through  every  part  of  his  district  and  inquire 
after  and  concerning  all  persons  therein  who  are  liable  to  pay  any 
internal-revenue  tax,  and  all  persons  owning  or  having  the  care  and 
management  of  any  objects  liable  to  pay  any  tax,  and  to  make  a list 
of  such  persons  and  enumerate  said  objects. 


“Sec.  3173. 


50 


8-10-19. 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  H 

[Penalties  for  Failure  to  Make  Return  and  for  False  Returns.] 

^443  ‘‘Sec.  3176.  If  any  person,  corporation,  company,  or  associa-  1549 
tion  fails  to  make  and  file  a return  or  list  at  the  time  prescribed  by 
law  or  by  regulation  made  under  authority  of  law,  or  makes,  will- 
fully or  otherwise,  a false  or  fraudulent  return  or  list, 

1[444  the  collector  or  deputy  collector  shall  make  the  return  or  list  from  1550 
his  own  knowledge  and  from  such  information  as  he  can  obtain 
through  testimony  or  otherwise. 

11445  In  any  such  case  the  Commissioner  may,  from  his  own  knowledge  1551 
and  from  such  information  as  he  can  obtain  through  testimony  or 
otherwise,  make  a return  or  amend  any  return  made  by  a collector  or 
deputy  collector. 

1|446  Any  return  or  list  so  made  and  subscribed  by  the  Commissioner,  or  1552 
by  a collector  or  deputy  collector  and  approved  by  the  Commis- 
sioner, shall  be  prima  facie  good  and  sufficient  for  all  legal  purposes. 

1[447  “If  the  failure  to  file  a return  or  list  is  due  to  sickness  or  absence,  1501 
the  collector  may  allow  such  further  time,  not  exceeding  thirty  days, 
for  making  and  filing  the  return  or  list  as  he  deems  proper. 

1[448  “The  Commissioner  of  Internal  Revenue  shall  determine  and  1553 
assess  all  taxes,  other  than  stamp  taxes,  as  to  which  returns  or  lists 
are  so  made  under  the  provisions  of  this  section. 

1l449  In  case  of  any  failure  to  make  and  file  a return  or  list  within  the  1554 
time  prescribed  by  law,  or  prescribed  by  the  Commissioner  of  In- 
ternal Revenue  or  the  collector  in  pursuance  of  law,  the  Commis- 
sioner of  Internal  Revenue  shall  add  to  the  tax  25  per  centum  of  its 
amount, 

1(450  except  that  when  a return  is  filed  after  such  time  and  it  is  shown  that  1555 
the  failure  to  file  it  was  due  to  a reasonable  cause  and  not  to  willful 
neglect,  no  such  addition  shall  be  made  to  the  tax. 

1(451  In  case  a false  or  fraudulent  return  or  list  is  willfully  made,  the  1556 
Commissioner  of  Internal  Revenue  shall  add  to  the  tax  50  per  centum 
of  its  amount. 

1(452  “The  amount  so  added  to  any  tax  shall  be  collected  at  the  same  1557 
time  and  in  the  same  manner  and  as  part  of  the  tax 

1(453  unless  the  tax  has  been  paid  before  the  discovery  of  the  neglect,  1558 
falsity,  or  fraud,  in  which  case  the  amount  so  added  shall  be  collected 
in  the  same  manner  as  the  tax.’’ 


[Jurisdiction  of  U.  S.  District  Courts.] 

1(454  Sec.  1318.  (Revenue  Act  of  1918.)  That  if  any  person  is  sum-  1632 
moned  under  this  Act  to  appear,  to  testify,  or  to  produce  books, 
papers  or  other  data,  the  district  court  of  the  United  States  for  the 
district  in  which  such  person  resides  shall  have  jurisdiction  by  ap- 

51 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  If 

propriate  process  to  compel  such  attendance,  testimony,  or  produc- 
tion of  books,  papers,  or  other  data. 

If 455  The  district  courts  of  the  United  States  at  the  instance  of  the  United  1633 
States  are  hereby  invested  with  such  jurisdiction  to  make  and  issue, 
both  in  actions  at  law  and  suits  in  equity,  writs  and  orders  of  injunction 
and  of  ne  exeat  republica,  orders  appointing  receivers,  and  such  other 
orders  and  process,  and  to  render  such  judgments  and  decrees,  granting 
in  proper  cases  both  legal  and  equitable  relief  together,  as  may  be 
necessary  or  appropriate  for  the  enforcement  of  the  provisions  of  this 
Act.  The  remedies  hereby  provided  are  in  addition  to  and  not  exclu- 
sive of  any  and  all  other  remedies  of  the  United  States  in  such  courts 
or  otherwise  to  enforce  such  provisions. 


[UIHTED  STATES  BONDS  IN  LIEU  OF  SECUiaTIES,  IN  CONNECTION  WITH 

“PENAL  BONDS.»]  . 

1[456  Sec.  1320.  (Revenue  Act  of  1918.)  That  wherever  by  the  laws  of  2220 
the  United  States  or  regulations  made  pursuant  thereto,  any  person  is 
required  to  furnish  any  recognizance,  stipulation,  bond,  guaranty,  or 
undertaking,  hereinafter  called  “penal  bond’’,  with  surety  or  sureties, 
such  person  may,  in  lieu  of  such  surety  or  sureties,  deposit  as  security 
with  the  official  having  authority  to  approve  such  penal  bond.  United 
States  Liberty  bonds  or  other  bonds  of  the  United  States  in  a sum 
equal  at  their  par  value  to  the  amount  of  such  penal  bond  required  to  be 
furnished,  together  with  an  agreement  authorizing  such  official  to 
collect  or  sell  such  bonds  so  deposited  in  case  of  any  default  in  the 
performance  of  any  of  the  conditions  or  stipulations  of  such  penal 
bond.  The  acceptance  of  such  United  States  bonds  in  lieu  of  surety 
or  sureties  required  by  law  shall  have  the  same  force  and  effect  as 
individual  or  corporate  sureties,  or  certified  checks,  bank  drafts, 
post-office  money  orders,  or  cash,  for  the  penalty  or  amount  of  such 
penal  bond.  The  bonds  deposited  hereunder,  and  such  other  United 
States  bonds  as  may  be  substituted  therefor  from  time  to  time  as 
such  security,  may  be  deposited  with  the  Treasurer,  or  an  Assistant 
Treasurer  of  the  United  States,  a Government  depository.  Federal 
Reserve  bank,  or  member  bank,  which  shall  issue  receipt  therefor, 
describing  such  bonds  so  deposited.  As  soon  as  security  for  the  per- 
formance of  such  penal  bond  is  no  longer  necessary,  such  bonds  so 
deposited,  shall  be  returned  to  the  depositor:  Provided^  * * * ^ 


1[457  Provided  further^  That  nothing  herein  contained  shall  affect  or  2221 

impair  the  priority  of  the  claim  of  the  U nited  States  against  the 
p -:•  ii  bonds  deposited  or  any  right  or  remedy  granted  by  said  Acts  or 
^ section  to  the  United  States  for  default  upon  any  obliga- 

^ 35: 1 tion  of  said  penal  bond: 

1f458  Provided  further^  That  all  laws  inconsistent  with  this  section  are  2222 

hereby  so  modified  as  to  conform  to  the  provisions  hereof: 

1f459  And  provided  further^  That  nothing  contained  herein  shall  affect  2223 

the  authority  of  courts  over  the  security^  where  such  bonds  are  taken 
as  security  in  judicial  proceedings,  or  the  authority  of  any 

52 


Law 

Parag^raph 


THE  INCOME  TAX  LAW. 


Repeated 
at  H 


administrative  officer  of  the  United  States  to  receive  United 
States  bonds  for  security  in  cases  authorized  by  existing  laws, 

1f460  The  Secretary  may  prescribe  rules  and  regulations  necessary  and  2224 
proper  for  carrying  this  section  into  effect. 

TITLE  XIV.— GENERAL  PROVISIONS. 

(Of  the  Revenue  Act  of  1918.) 

[Repeal  of  Prior  Laws.] 

^461  Sec.  1400.  (Revenue  Act  of  1918.)  (a)  That  the  following  2361 

parts  of  Acts  are  hereby  repealed,  subject  to  the  limitations  provided 
in  subdivision  (b): 

(1)  The  following  titles  of  the  Revenue  Act  of  1916: 

Title  I (called  “Income  Tax”); 

(2)  The  following  parts  of  the  Act  entitled  “An  Act  to  provide 
increased  revenue  to  defray  the  expenses  of  the  increased  appropria- 
tions for  the  Army  and  Navy  and  the  extensions  of  fortifications, 
and  for  other  purposes,”  approved  March  3,  1917: 

Section  402  (called  “Returns  of  Dividends”). 

(3)  The  following  titles  of  the  Revenue  Act  of  1917: 

Title  I (called  “War  Income  Tax”); 

Title  X (called  “Administrative  Provisions”) ; 

Title  XII  (called  “Income-Tax  Amendments”). 

1[462  (b)  Such  parts  of  Acts  shall  remain  in  force  for  the  assessment  2362 

and  collection  of  all  taxes  which  have  accrued  thereunder,  and  for 
the  imposition  and  collection  of  all  penalties  or  forfeitures  which  have 
accrued  and  may  accrue  in  relation  to  any  such  taxes,  and  except  that 
the  unexpended  balance  of  any  appropriation  heretofore  made  and 
now  available  for  the  administration  of  any  such  part  of  an  Act  shall 
be  available  for  the  administration  of  this  Act  or  the  corresponding 
provision  thereof:  Provided^  That,  except  as  otherwise  provided  in 
this  Act,  no  taxes  shall  be  collected  under  Title  I of  the  Revenue  Act 
of  1916  as  amended  by  the  Revenue  Act  of  1917,  or  Title  I or  II  of 
the  Revenue  Act  of  1917,  in  respect  to  any  period  after  December  31, 

1917:  ******** 

^463  In  the  case  of  any  tax  imposed  by  any  part  of  an  Act  herein  re-  2363 
pealed,  if  there  is  a tax  imposed  by  this  Act  in  lieu  thereof,  the  pro- 
vision imposing  such  tax  shall  remain  in  force  until  the  corresponding 
tax  under  this  Act  takes  effect  under  the  provisions  of  this  Act. 

^464  Title  I of  the  Revenue  Act  of  1916  as  amended  by  the  Revenue  519 
Act  of  1917  shall  remain  in  force  for  the  assessment  and  collection  of  the 
income  tax  in  Porto  Rico  and  the  Philippine  Islands,  except  as  may  be 
otherwise  provided  by  their  respective  legislatures. 

53 


Law 

Paragraph 


THE  INCOME  TAX  LAW. 


Repeated 
at  ^ 


[Invalidating  Clause.] 

1f465  Sec.  1402.  (Revenue  Act  of  1918.)  That  if  any  clause,  sen-  2667 
fence,  paragraph,  or  part  of  this  Act  shall  for  any  reason  be  adjudged 
by  any  court  of  competent  jurisdiction  to  be  invalid,  such  judgment 
shall  not  affect,  impair,  or  invalidate  the  remainder  of  this  Act,  but 
shall  be  confined  in  its  operation  to  the  clause,  sentence,  paragraph, 
or  part  thereof  directly  involved  in  the  controversy  in  which  such 
judgment  has  been  rendered. 

[Short  Titles.] 

If466  Sec.  1403.  (Revenue  Act  of  1918.)  That  the  Revenue  Act  of  481 

1916  is  hereby  amended  by  adding  at  the  end  thereof  a section  to 

read  as  follows: 

“Sec.  903.  That  this  Act  may  be  cited  as  the  ‘Revenue  Act  of 
1916’.” 

1f467  Sec.  1404.  (Revenue  Act  of  1918.)  That  the  Revenue  Act  of  483 

1917  is  hereby  amended  by  adding  at  the  end  thereof  a section  to 

read  as  follows: 

“Sec.  1303.  That  this  Act  may  be  cited  as  the  ‘Revenue  Act  of 
1917’.” 

^468  Sec.  1405.  (Revenue  Act  of  1918.)  That  this  Act  may  be  cited  484 
as  the  “Revenue  Act  of  1918.” 

[Effective  Date.] 

^469  Sec.  1409.  Revenue  Act  of  1918.)  That  unless  otherwise  2823 
herein  specially  porvided,  this  Act  shall  take  effect  on  the  day  fol- 
lowing its  passage. 

Comment. — [The  provisions  of  Title  XIII  and  Title  XIV,  so  far 
as  reproduced  above,  there  being  no  specific  provision  to  the  con- 
trary, became  effective  on  the  day  following  “the  passage”  o;f  the 
Act,  that  is  on  February  25,  1919,  the  day  after  approval  by  the 
President.] 

Approved  by  the  President,  February  24.  1919,  at  6.55  P.  M. 


^470  For  11470  see  page  55, 


54 


THE  INCOME  TAX  LAW. 


Law 

Paragraph 


administrative  officer  of  the  United  States  to  receive  United 
States  bonds  for  security  in  cases  authorized  by  existing  laws. 


Repeated 

at 


Tf460  The  Secretary  may  prescribe  rules  and  regulations  necessary  and  2224 
proper  for  carrying  this  section  into  effect. 

TITLE  XIV.— GENERAL  PROVISIONS. 

(Of  the  Revenue  Act  of  1918.) 

[Repeal  of  Prior  Laws.] 

•|461  Sec.  1400.  (Revenue  Act  of  1918.)  (a)  That  the  following  2361 

parts  of  Acts  are  hereby  repealed,  subject  to  the  limitations  provided 
in  subdivision  (b) : 

(1)  The  following  titles  of  the  Revenue  Act  of  1916; 

Title  I (called  “Income  Tax”); 


(2)  The  following  parts  of  the  Act  entitled  “An  Act  to  provide 
increased  revenue  to  defray  the  expenses  of  the  increased  appropria- 
tions for  the  Army  and  Navy  and  the  extensions  of  fortifications, 
and  for  other  purposes,”  approved  March  3,  1917: 


Section  402  (called  “Returns  of  Dividends”). 

(3)  The  following  titles  of  the  Revenue  Act  of  1917: 

Title  I (called  “War  Income  Tax”); 

He***  ***** 

Title  X (called  “Administrative  Provisions”); 

Title  XII  (called  “Income-Tax  Amendments”). 

^462  (b)  Such  parts  of  Acts  shall  remain  in  force  for  the  assessment  2362 

and  collection  of  all  taxes  which  have  accrued  thereunder,  and  for 
the  imposition  and  collection  of  all  penalties  or  forfeitures  which  have 
accrued  and  may  accrue  in  relation  to  any  such  taxes,  and  except  that 
the  unexpended  balance  of  any  appropriation  heretofore  made  and 
now  available  for  the  administration  of  any  such  part  of  an  Act  shall 
be  available  for  the  administration  of  this  Act  or  the  corresponding 
provision  thereof:  Provided^  That,  except  as  otherwise  provided  in 
this  Act,  no  taxes  shall  be  collected  under  Title  I of  the  Revenue  Act 
of  1916  as  amended  by  the  Revenue  Act  of  1917,  or  Title  I or  II  of 
the  Revenue  Act  of  1917,  in  respect  to  any  period  after  December  31, 

* * * * * * He  * 

1f463  In  the  case  of  any  tax  imposed  by  any  part  of  an  Act  herein  re- 2363 
pealed,  if  there  is  a tax  imposed  by  this  Act  in  lieu  thereof,  the  pro- 
vision imposing  such  tax  shall  remain  in  force  until  the  corresponding 
tax  under  this  Act  takes  effect  under  the  provisions  of  this  Act. 


1(464  Title  I of  the  Revenue  Act  of  1916  as  amended  by  the  Revenue 
Act  of  1917  shall  remain  in  force  for  the  assessment  and  collection  of  the 
income  tax  in  Porto  Rico  and  the  Philippine  Islands,  except  as  may  be 
otherwise  provided  by  their  respective  legislatures. 

53 


519 


I>aw 

Paragraph 


THE  INCOME  TAXfLAW. 


Repeated 

at 


[Invalidating  Clause.] 

^465  Sec.  1402.  (Revenue  Act  of  1918.)  That  if  any  clause,  sen-  2667 
t-ence,  paragraph,  or  part  of  this  Act  shall  for  any  reason  be  adjudged 
by  any  court  of  competent  jurisdiction  to  be  invalid,  such  judgment 
shall  not  affect,  impair,  or  invalidate  the  remainder  of  this  Act,  but 
shall  be  confined  in  its  operation  to  the  clause,  sentence,  paragraph, 
or  part  thereof  directly  involved  in  the  controversy  in  which  such 
judgment  has  been  rendered. 

[Short  Titles.] 

^466  Sec.  1403.  (Revenue  Act  of  1918.)  That  the  Revenue  Act  of  481 

1916  is  hereby  amended  by  adding  at  the  end  thereof  a section  to 
read  as  follows: 

“Sec.  903.  That  this  Act  may  be  cited  as  the  ‘Revenue  Act  of 
1916’.”  - 

^467  Sec.  1404.  (Revenue  Act  of  1918.)  That  the  Revenue  Act  of  483 

1917  is.  hereby  amended  by  adding  at  the  end  thereof  a section  to 
read  as  follows: 

“Sec.  1303.  That  this  Act  may  be  cited  as  the  ‘Revenue  Act  of 
1917’.” 

^468  Sec.  1405.  (Revenue  Act  of  1918.)  That  this  Act  may  be  cited  484 
as  the  “Revenue  Act  of  1918.” 

[Effective  Date.] 

^469  Sec.  1409.  Revenue  Act  of  1918.)  That  unless  otherwise  2823 
herein  specially  porvided,  this  Act  shall  take  effect  on  the  day  fol- 
lowing its  passage. 

Comment. — [The  p rovisions  of  Title  XIII  and  Title  XIV,  so  far 
as  reproduced  above,  there  being  no  specific  provision  to  the  con- 
trary, became  effective  on  the  day  following  “the  passage”  of  the 
Act,  that  is  on  February  , 1919,  the  day  after  approval  by  the 
President.] 

Approved  by  the  President,  February  , 1919. 

^470  For  ^470  see  page  55. 


54 


INCOME  TAX  LAW 
AND 

REGULATIONS. 


INDIVIDUALS. 

470  Persons  Paying  Income  Taxes  to  Other  Countries. — American  citizens,  whether 
residing  at  home  or  abroad,  resident  aliens,  and  non-resident  aliens  receiving  income 

from  property  owned  and  from  business,  trade,  or  profession  carried  on  within  the  United 
States,  all  of  whom  are  subject  to  the  income-tax  law  of  October  3,  1913,  are  not  relieved 
from  tax  liability  under  that  act  by  reason  of  the  fact  that  they  are  also  subject  to  the  in- 
come-tax laws  of  other  countries.  [See  credit  for  such  taxes  at  ^1059.]  (T.  D.  2152, 

February  12,  1915.) 

471  Law  ^75.  Normal  Tax. — “Sec.  210.  That,  in  lieu  of  the  taxes  imposed  by  sub- 
division (a)  of  section  1 [Normal  tax  on  individuals]  of  the  Revenue  Act  of  1916 

and  by  section  1 [War-normal  tax  on  individuals]  of  the  Revenue  Act  of  1917,  there  shall 
be  levied,  collected,  and  paid  for  each  taxable  year  upon  the  net  income  [for  “net  losses” 
read  at  1[1913]  of  every  individual  a normal  tax  at  the  following  rates:”  [Read  at  ^282S] 

472  Law  ^76.  Rates  for  1918. — “(a)  For  the  calendar  year  1918,  12  per  centum  of  the 
amount  of  the  net  income  in  excess  of  the  credits  provided  in  section  216  [^[1124]:” 

473  Law  ^77.  Special  1918  Rate  for  Citizens  and  Residents. — ''Provided,  That  in  the 
case  of  a citizen  or  resident  of  the  United  States  the  rate  upon  the  first  $^,000 

of  such  excess  amount  shall  be  6 per  centum;” 

Application  of  Rates  for  Fiscal  Year  Embracing  Parts  of  Calendar  Years  with  Dif- 
fering Rates. — [Read  at  ^1678.] 

474  Law  ^78.  Rates  for  1919. — “(b)  For  each  calendar  year  thereafter,  8 per  centum 
of  the  amount  of  the  net  income  in  excess  of  the  credits  provided  in  section  216 

[111124]:” 

475  Law  1|79.  Special  1919  Rate  for  Citizens  and  Residents. — "Provided,  That  in 
the  case  of  a citizen  or  resident  of  the  United  States  the  rate  upon  the  first  $4,000 

of  such  excess  amount  shall  be  4 per  centum.” 

476  Law  1fl7.  “Taxable  Year”  Defined.—“Sec.  200.  That  when  used  In  this  title — ” 

477  Law  1[18.  “The  term  “taxable  year”  means  the  calendar  year,  or  the  fiscal'year 

ending  during  such  calendar  year,  upon  the  basis  of  which  the  net  income  is  com- 
puted under  section  212  [individuals,  1[754]  or  section  232  [corporations,  1[1787].” 

478  Law  ^19.  “Fiscal  Year”  Defined. — “The  term  “fiscal  year”  means  an  accounting 
period  of  twelve  months  ending  on  the  last  day  of  any  month  other  than  December.” 

479  Law  1[20.  The  Taxable  Year  1918. — “The  first  taxable  year,  to  be  called  the  tax- 
able year  1918,  shall  be  the  calendar  year  1918  or  any  fiscal  year  ending  during 

the  calendar  year  1918;” 

480  Law  UlO.  “Revenue  Act  of  1916”  Identified. — “The  term’/Revenue  Act  of  1916’ 
means  the  Act  entitled  ‘An  Act  to  increase  the  revenue,  and  for  other  purposes,' 

approved  September  8,  1916;” 

481  Law  1f466.  “Sec.  1403.  That  the  Revenue  Act  of  1916  is  hereby  amended  by 
adding  at  the  end  thereof  a section  to  read  as  follows;” 

“Sec.  903.  That  this  Act  may  be  cited  as  the  ‘Revenue  Act  of  1916’.” 

482  Law  1111.  “Revenue  Act  of  1917”  Identified. — “The  term  ‘Revenue  Act  of  1917* 
means  the  Act  entitled  ‘An  Act  to  provide  revenue  to  defray  war  expenses,  and  for 

other  purposes,’  approved  October  3,  1917;” 

483  Law  ^467.  “Sec.  1404.  That  the  Revenue  Act  of  1917  is  hereby  amended  by 
adding  at  the  end  thereof  a section  to  read  as  follows;” 

“Sec.  1303.  That  this  Act  may  be  cited  as  the  ‘Revenue  Act  of  1917’.” 


INC. 


55 


TAX 


INDIVIDUALS. 


484  Law  U468.  “Revenue  Act  of  1918”  Identified. — “Sec.  1405.  That  this  Act  may  be 
cited  as  the  ‘Revenue  Act  of  1918’.” 

485  Citizenship. — Determination  by  State  Department  of  right  to  registry  is  not  con- 
clusive upon  the  Treasury  in  fixing  citizenship  for  income  tax  purposes.  Held  that 

native  and  naturalized  status  remains  unless  changed  by  affirmative  action  or  forfeited 
by  overt'act.  (T.  D.  2135,  January  23,  1915.) 

486  Non-Resident  Citizens  Against  Whom  the  Presumption  of  Expatriation  Has 
Arisen. — The  Department  has  received  several  inquiries  concerning  the  payment 

of  the  income  tax  under  the  provision  of  Section  2 of  the  Act  of  October  3,  1913,  by  persons 
residing  abroad  who  claim  American  Citizenship.  These  inquiries  involve  particularly 
two  questions:  (1)  Whether  a naturalized  American  citizen  who  has  brought  upon  him- 
self the  presumption  of  expatriation,  under  the  provision  of  the  second  paragraph  of  Section 
2 of  the  Act  of  March  2,  1907,  by  protracted  residence  abroad,  and  has  failed  to  overcome 
such  presumption  under  the  established  rules  is  required  to  pay  the  Income  tax  as  an 
American  citizen,  and  (2)  whether  a naturalized  American  citizen  residing  abroad  can  over- 
come the  presumption  of  expatriation  by  payment  of  the  income  tax. 

487  The  question  as  to  the  liability  of  a particular  person  to  pay  the  income  tax  must 
be  determined  not  by  this  Department  but  by  the  Treasury  Department,  under 

which  the  income  tax  law  is  administered.  Persons  making  inquiry  concerning  this  point 
should,  therefore,  be  advised  to  apply  to  the  Treasury  Department  for  information. 

488  With  reference  to  the  second  inquiry  mentioned  above  your  attention  is  called  to 
the  fact  that  naturalized  citizens  of  the  United  States  who  have  brought  upon  them- 
selves the  presumption  of  expatriation,  under  the  provision  of  the  second  paragraph  of 
Section  2 of  the  Act  of  March  2,  1907,  by  protracted  residence  abroad,  may  overcome  such 
presumption  only  upon  presenting  “satisfactory  evidence  to  a diplomatic  or  consular  officer 
of  the  United  States,  under  such  rules  and  regulations  as  the  Department  of  State  may 
prescribe.”  The  Department  has  not  prescribed  a rule  that  the  presumption  of  expatriation 
arising  under  the  law  mentioned  may  be  overcome  by  showing  that  the  person  concerned 
has  paid,  or  is  ready  to  pay,  the  income  tax  of  the  United  States.  However,  if  a person 
against  whom  the  presumption  of  expatriation  has  arisen  presents,  in  connection  with  an 
application  for  a passport,  or  for  registration  in  a consulate  or  for  actual  protection,  evidence 
that  he  has  paid  the  income  tax,  this  fact  will  receive  due  consideration  in  connection  with 
other  evidence  submitted  to  overcome  the  presumption  of  expatriation  under  the  established 
rules,  and  particularly  with  regard  to  the  question  of  the  intent  to  return  to  this  country 
to  reside.  The  payment  of  the  income  tax  will  also  be  duly  considered  in  deciding  the 
question  of  the  right  to  the  continued  protection  of  this  Government  In  cases  of  native 
American  citizens  who  have  resided  abroad  for  a period  so  long  that  the  natural  presumption 
may  be  held  to  have  arisen  that  they  have  abandoned  this  country.  (Letter  to  the  Ameri- 
can Diplomatic  and  Consular  Officers,  signed  by  W.  J.  Bryan,  Secretary  of  State,  and  dated 
March  18,  1914.) 

489  Resident  Aliens. — “Residence,”  as  used  in  Subdivision  1,  Paragraph  A of  the  Act 

of  October  3,  1913  * * * , is  held  to  be — 

“That  place  where  a man  has  his  true,  fixed  and  permanent  home  and  principal  estab- 
lishment, and  to  which  whenever  he  is  absent,  he  has  the  intention  of  returning;  and  indi- 
cates permanency  of  occupation  as  distinct  from  lodging  or  boarding,  or  temporary  occu- 
pation.’* 

490  For  the  purposes  of  the  income  tax, — it  is  held  that  where  for  business  purposes 
or  otherwise,  an  alien  is  permanently  located  in  the  United  States;  has  there  his 

principal  business  establishment  and  Is  there  permanently  occupied  or  employed,  even  though 
his  domicile  may  be  without  the  United  States  he  will  be  held  to  be  within  the  definition  of — 
“Every  person  residing  in  the  United  States,  though  not  a citizen  thereof  ♦ * ♦ ” 

(T.  D.  2242,  September  17,  1915.) 

491  Aliens  Coming  to  the  United  States  with  the  Intention  of  Becoming  Permanent 
Residents  Thereof. — Aliens  coming  to  the  United  States  with  the  intention  of 

becoming  residents  thereof  within  the  meaning  and  intent  of  the  income  tax  statute,  may 
establish  that  fact  and  have  the  privilege  of  resident  aliens  under  the  statute  by  filing 
with  withholding  agents  a certificate  in  the  following  form  [Form  1078]  under  oath,  and 
which  certificate  shall  be  filed  by  said  withholding  agents  with  Collectors  of  Internal 
Revenue  as  justification  for  withholding  on  the  basis  of  “residence”  in  the  United  States. 
,(T.  D.  2242,  September  J7,  1915.) 

[Read  at  ^[2828  and  112973.1 


INC. 


56 


TAX 


NONRESIDENT  ALIEN  INDIVIDUALS. 


492  American  Wife  of  a Nonresident  Alien. — An  American  woman  who  marries  a for- 
eigner takes  the  nationality  of  her  husband  * ♦ * . (t.  D.  2090,  December 

14,  1914.) 

493  Aliens  Temporarily  Living  in  the  United  States. — “Residence,”  as  used  in  Sub- 
division 1,  Paragraph  A of  the  Act  of  October  3,  1913,  is  held  to  be — 

“That  place  where  a man  has  his  true,  fixed  and  permanent  home  and  principal  estab- 
lishment, and  to  which  whenever  he  is  absent,  he  has  the  intention  of  returning;  and  indi- 
cates permanency  of  occupation  as  distinct  from  lodging  or  boarding,  or  temporary  occu- 
pation.” 

494  For  the  purposes  of  the  income  tax, — it  is  held  that  * * * aliens  who  are  physi- 

cally present  in  the  United  States,  but  only  temporarily  resident  or  employed 

therein  (as  for  a season  or  other  similarly  definite  term,  and  with  the  expectation  or  intention 
of  leaving  the  United  States  upon  the  termination  of  employment  or  accomplishment  of 
the  purpose  which  necessitated  presence  in  the  United  States),  are  within  the  class  of — 
“Persons  residing  elsewhere  * ♦ * [Read  1[490.]  (T.  D.  2242,  September 

.17,  1915.) 

495  Liability  of  Nonresident  Aliens  Under  the  Law. — Income  derived  by  nonresident 
aliens  from  sources  in  the  United  States  Is  subject  to  the  normal  or  additional 

tax,  or  both,  as  the  case  may  be  * * * . (Art.  32,  1[219,  Reg.  33,  Rev.,  January 

2,  1918.) 

496  Nonresident  aliens  are  held  to  be  subject  to  the  liabilities  and  requirements  of  all 
administrative,  special,  and  general  provisions  of  law  in  relation  to  the  assessment, 

remission,  collection,  and  refund  of  the  income  tax  imposed  by  the  act  of  October  3,  1913, 
and  collectors  of  internal  revenue  will  make  collection  of  the  tax  by  distraint,  garnishment, 
execution,  or  other  appropriate  process  provided  by  law.  (T.  D.  2313,  March  21,  1916.) 

497  Law  ^75.  Normal  Tax  on  Nonresident  Aliens. — “Sec.  210.  That,  in  lieu  of  the 
taxes  imposed  by  subdivision  (a)  of  section  1 of  the  Revenue  Act  of  1916  [Normal 

income  tax  on  individuals]  and  by  section  1 of  the  Revenue  Act  of  1917  [War-normal 
tax  on  individuals:  did  not  apply  to  nonresident  aliens],  there  shall  be  levied,  collected, 
and  paid  for  each  taxable  year  upon  the  net  income  of  every  individual  a normal  tax 
at  the  following  rates:” 

498  Law  ^76.  For  the  Calendar  Year  1918. — “(a)  For  the  calendar  year  1918,  12  per 
centum  of  the  amount  of  the  net  income  in  excess  of  the  credits  provided  in  section 

216  [111124]:” 

499  Law  1[78.  For  Calendar  Years  Subsequent  to  1918. — “(b)  For  each  calendar  year 
thereafter,  8 per  centum  of  the  amount  of  the  net  income  in  excess  of  the  credits 

provided  in  section  216  [1[1124]:” 

500  Law  1f80.  Surtax  on  Nonresident  Aliens. — “Sec.  211.  (a)  That,  In  lieu  of  the 

taxes  imposed  by  subdivision  (b)  of  section  1 of  the  Revenue  Act  of  1916  [Surtax 

on  individuals]  and  by  section  2 of  the  Revenue  Act  of  1917  [Surtax  on  Individuals], 
but  in  addition  to  the  normal  tax  imposed  by  section  210  [1[497]  of  this  Act,  there  shall  be 
levied,  collected,  and  paid  for  each  taxable  year  upon  the  net  Income  of  every  individual, 
a surtax  equal  to  the  sum  of  the  following:  [Rates  same  as  for  citizens  and  residents,  for 
which  see  1[737.]” 

501  Law  1[83.  Net  Income  of  Nonresident  Aliens  Defined. — “Sec.  212.  (a)  That 

in  the  case  of  an  individual  the  term  “net  Income”  means  the  gross  income  as  defined 

in  section  213  [11763],  less  the  deductions  allowed  by  section  214  [1[1019].” 

502  Law  1184.  Annual  Accounting  Period  for  Nonresident  Aliens  (Fiscal  Year  or 

Calendar  Year  as  the  Case  May  Be). — Sec.  212.  (b).  [Same  as  for  citizens  and 

residents  for  which  see  11754.] 

503  Law  1[  109.  Gross  Income  of  Nonresident  Aliens. — Sec.  213.  (a),  (b).  [Sameas 

for  citizens  and  residents  for  which  see  11763,  except  that] — “(c)  In  the  case  of  non- 
resident alien  individuals,  gross  income  includes  only  the  gross  income  from  sources  within 
the  United  States,” 

504  Royalties  Received  by  Nonresident  Aliens. — Royalties  paid  to  nonresident  alien 
under  an  agreement  of  purchase  of  certain  patent  rights,  the  payment  bein^  based 

upon  the  quantity  of  goods  produced  by  the  use  of  such  patents,  are  held  to  be  income 

57 


INC. 


TAX 


NONRESIDENT  ALIENS. 


accruing  to  nonresident  aliens  by  reason  of  property  ov/ned  or  business  carried  on  within 
the  United  States;  and  * * * ^ (X.  D.  2137,  January  30,  1915.) 

605  Law  If  110.  Interest  on  Domestic  Securities  and  Dividends  on  Domestic  Stock  as 
Gross  Income  of  Nonresident  Aliens. — “including  interest  on  bonds,  notes,  or  other 
interest-bearing  obligations  of  residents,  corporate  or  otherwise,  dividends  from  resident 
corporations,  and” 

506  Under  the  decision  of  the  Supreme  Court  of  the  United  States  in  the  case  of  Brush- 
aber  v.  Union  Pacific  Railway  Co.,  decided  January  24,  1916  [^2685],  it  is  hereby  held 

that  income  accruing  to  nonresident  aliens  in  the  form  of  interest  from  the  bonds  and  divi- 
dends on  the  stock  of  domestic  corporations  is  subject  to  the  income  tax  imposed  by  the 
Act  of  October  3,  1913  [which  provided  in  the  case  of  nonresident  aliens  that  the  income  tax 
was  to  be  assessed  “upon  the  entire  net  income  from  all  property  owned  and  of  every 
business,  trade,  or  profession  carried  on  in  the  United  States”].  (T.  D.  2313,  March  21, 
1916.] 

507  The  individual  liability  of  nonresident  aliens  for  tax  on  interest  from  bonds  and  divi- 
dends on  stock  of  domestic  corporations,  and  for  return  and  payment  thereof  to 

the  Government  under  Section  2 of  the  Act  of  October  3,  1913,  will  be  held  effective  as 
of  January  1,  1916.  (T.  D.  2317,  April  4,  1916.) 

508  Lawful.  Profits  on  the  Manufacture  and  Disposition  of  Goods  Within  the 
United  States  as  Gross  Income  of  Nonresident  Aliens. — “including  all  amounts 

received  (although  paid  under  a contract  for  the  sale  of  goods  or  otherwise)  representing 
profits  on  the  manufacture  and  disposition  of  goods  within  the  United  States.”  [^2876] 

509  Law  1f413.  The  Income  of  a Citizen  of  Any  Possession  of  the  United  States  Who 
Is  Not  a Resident  of  the  United  States,  is  Taxed  Under  This  Title  on  Income 

Derived  From  United  States  Sources  Only,  the  Tax  Being  Computed  and  Paid  in  the 
Same  Manner  and  Subject  to  the  Same  Conditions  as  in  the  Case  of  Other  Persons  Liable 
on  Such  Income  Only. — “Sec.  260.  That  any  individual  who  is  a citizen  of  any  possession 
of  the  United  States  (but  not  otherwise  a citizen  of  the  United  States)  and  who  is  not  a 
resident  of  the  United  States,  shall  be  subject  to  taxation  under  this  title  only  as  to  incom.e 
derived  from  sources  within  the  United  States,”  [^3069.] 

510  Law  1f414.  “and  in  such  case  the  tax  shall  be  computed  and  paid  in  the  same 
manner  and  subject  to  the  same  conditions  as  in  the  case  of  other  persons  who  are 

taxable  only  as  to  income  derived  from  such  sources.” 

511  Law  1[415.  Income  Taxes  in  Porto  Rico  and  the  Philippine  Islands. — “Sec.  261. 
That  in  Porto  Rico  and  the  Philippine  Islands  the  income  tax  shall  be  levied,  as- 
sessed, collected,  and  paid  in  accordance  with  the  provisions  of  the  Revenue  Act  of  1916 
as  amended.”  [^3070.] 

612  Law  ^416.  “Returns  shall  be  made  and  taxes  shall  be  paid  under  Title  I of  such 
Act  in  Porto  Rico  or  the  Philippine  Islands,  as  the  case  may  be,  by” 

513  Law  1f417.  “(1)  every  individual  who  is  a citizen  or  resident  of  Porto  Rico  or  the 

Philippine  Islands  or  derives  income  from  sources  therein,  and” 

514  Law  ^418.  “(2)  every  corporation  created  or  organized  in  Porto  Rico  or  the 

Philippine  Islands  or  deriving  income  from  sources  therein.” 

515  Law  ^419.  “An  individual  who  is  neither  a citizen  nor  a resident  of  Porto  Rico  or  the 
Philippine  Islands  but  derives  income  from  sources  therein,  shall  be  taxed  in  Porto 

Rico  or  the  Philippine  Islands  as  a nonresident  alien  individual,” 

516  I .aw  ^420.  “and  a corporation  created  or  organized  outside  Porto  Rico  or  the 
Philippine  Islands  and  deriving  income  from  sources  therein  shall  be  taxed  in  Porto 

Rico  or  the  Philippine  Islands  as  a foreign  corporation.” 

517  Law  ^421.  “For  the  purposes  of  section  216(^1125]  and  of  paragraph  (6)  [^2102] 
of  subdivision  (a)  of  section  234  a tax  imposed  in  Porto  Rico  or  the  Philippine  Islands 
upon  the  net  income  of  a corporation  shall  not  be  deemed  to  be  a tax  under  this  title.” 

518  Law  ^422.  “The  Porto  Rican  or  Philippine  Legislature  shall  have  power  by  due 
enactm.ent  to  amend,  alter,  modify,  or  repeal  the  income  tax  laws  in  force  in  Porto 

Rico  or  the  Philippine  Islands,  respectively.” 

58 


INC. 


TAX 


NONRESIDENT  ALIENS. 


619  Law  1[464.  “Title  I of  the  Revenue  Act  of  1916  as  amended  by  the  Revenue 
Act  of  1917  shall  remain  in  force  for  the  assessment  and  collection  of  the  income 
tax  in  Porto  Rico  and  the  Philippine  Islands,  except  as  may  be  otherwise  provided  by  their 
respective  legislatures.” 

520  Sale  of  Stock. — When  a nonresident  alien  who  owns  stock  in  an  American  corpora- 
tion disposes  of  same  by  sale,  the  sale  and  delivery  being  made  within  the  United 

States,  the  profit  will  be  held  to  have  been  derived  from  sources  within  the  United  States 
and  is  to  be  included  for  the  purposes  of  income  tax.  (Art.  4,  ^62,  Reg.  33,  Rev.,  Jan. 
2,  1918.) 

521  Income  From  United  States  Sources  Received  through  Foreign  Partnership. — • 
The  income  received  by  a nonresident  alien  partnership  from  sources  within  the 

United  States  does  not  lose  its  identity  as  to  source  when  distributed  to  a nonresident  alien 
member  of  the  firm.  Therefore,  the  nonresident  alien  member  will  be  required  to  file 
a return  on  Form  1040  or  1040A,  as  the  case  may  be,  and  shall  include  therein  his  distribu- 
tive share  of  the  taxable  profits  from  sources  within  the  United  States.  (Part  of  letter  to 
The  Corporation  Trust  Company,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated 
October  1,  1918.) 

522  Profits  Accruing  to  Nonresident  Alien  Partnerships  on  Sale  of  Stock  Negotiated 
Through  Domestic  Bankers. — This  office  has  before  it  your  letter  of  October  28, 

1916.  It  appearing  from  paragraph  (f)  of  your  letter  that  the  foreign  banking  house 
referred  to  is  a copartnership,  the  following  answers  are  returned  to  your  several  inquiries: 

“A  foreign  banking  house  buys  through  a domestic  banking  house  1,000 

523  shares  of  stock  and  sells  the  stock  with  a profit  of  $30,000.  {a)  Is  this  profit 

taxable?  (Answer)  Yes. 

524  (b)  Should  the  domestic  firm  retain  the  normal  tax?  (Answer)  No. 

(c)  How  can  a foreign  firm  be  made  to  render  a tax  return  and  pay  the  tax, 

525  it  being  assumed  that  the  domestic  firm  or  agent  holds  no  property  for  account  ] 
of  the  foreign  firm  after  the  transaction  is  completed?  (Answer)  The  Govern- 
ment will  proceed,  under  the  general  provisions  of  the  law,  to  take  all  steps  necessary 
to  secure  a required  return,  or  to  itself  prepare  one,  and  a collection  of  the  amount  of 
tax  assessed  against  that  return. 

(d)  If  the  foreign  firm  does  not  render  a return,  will  the  domestic  firm  be  held  ' 

526  responsible  for  the  tax  and  supertax,  if  any?  (Answer)  The  foreign  firm  itself  j 
is  not  required  [under  the  law  as  it  then  was]  to  render  an  income  tax  return 

covering  its  own  net  income  unless  specifically  requested  to  do  so  by  the  Commissioner 
of  Internal  Revenue  or  a.  Collector  of  Internal  Revenue.  Whether  or  not  the  domestic 
firm  which  has  acted  as  agent  for  the  foreign  firm  would  be  required  to  render  a return 
in  the  event  that  the  latter  refused  to  do  so,  would  be  determined  by  the  facts  in  the 
case. 

(e)  The  foreign  firm  has  several  partners.  Is  the  $30,000  to  be  considered 

527  an  entity  for  the  purpose  of  supertax  or  may  the  several  partners  declare  their 
proportionate  shares  in  the  amount?”  (Answer)  Income  Tax  is  not  computed 

upon  the  amount  of  net  income  derived  by  a foreign  partnership  from  sources  within  the 
United  States,  but  upon  the  individual  share  of  each  member  in  such  net  income.  (Letter 
to  The  Corporation  Trust  Company,  signed  by  Commissioner  W.  H.  Osborn,  and  dated 
Dec.  6,  1916.) 

528  Exempt  Income. — Nonresident  aliens  will  not  be  required  to  make  return  of  any 
of  the  classes  of  income  specified  by  section  4,  act  of  September  8,  1916,  as  amended, 

and  received  by  them  from  sources  in  the  United  States.  (Art.  32,  11220,  Reg.  33,  Rev., 
Jan.  2,  1918.)  [1[2877.] 

629  Lav/ 1[  149.  Deductions  Allowed  to  Nonresident  Aliens. — “Sec.  214.  (b)  In  the 

case  of  a nonresident  alien  Individual  the  deductions  allowed  in  paragraphs  (1) 

nfl020|,  (4)  nfl066],  (7)  1[1088],  (8)  [1fl089],  (9)  [1fl093l,  (10)  [1[1096],  02)  [1[1119],  and 
clause  (e)  of  paragraph  (3)  [1[533],  of  subdivision  (a)  shall  be  allowed  only  if  and  to  the  extent 
that  they  are  connected  with  income  arising  from  a source  within  the  United  States;” 

630  I ^aw  If  150.  Apportionment  and  Allocation  of  Deductions. — “and  the  proper  appor- 
tionment and  allocation  of  the  deductions  with  respect  to  sources  of  income  within 

and  without  the  United  States  shall  be  determined  under  rules  and  regulations  prescribed 
by  the  Commissioner  with  the  approval  of  the  Secretary.”  [1f2964.] 

531  Law  lfll8.  Interest  Deductible  by  a Nonresident  Alien. — “Sec.  214.  (a)  (2) 

[1fI049] — or,  in  the  case  of  a nonresident  alien  individual,  the  proportion  of  such 
interest  which  the  amount  of  his  gross  income  from  sources  within  the  United  States 

59 


INC. 


TAX 


NONRESroENT  ALIENS. 


bears  to  the  amount  of  his  gross  income  from  all  sources  within  and  without  the  United 
States;” 

Second.  The  proportion  of  interest  paid  by  him  within  the  year  applicable  in 

632  . ascertaining  his  net  income  from  all  sources  within  the  United  States,  ascertained 
^ in  accordance  with  rule  prescribed  in  this  paragraph  (except  interest  on  indebted- 
ness incurred  for  purchase  of  obligations  or  securities,  the  interest  on  which  is  exempt 
from  income  tax),  viz.:  Multiply  interest  paid  on  entire  indebtedness  from  all  sources 
by  quoient  arising  from  dividing  gross  income  from  sources  within  the  United  States 
by  gross  income  from  all  sources  within  and  without  the  United  States,  but  this  deduction 
shall  be  allowed  only  if  such  person  shall  include  in  his  return  all  the  information  necessary 
for  its  calculation.  (Art.  10,  11131,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

633  Law  1[125.  Taxes  Deductible  by  a Nonresident  Alien. — “Sec.  214.  (a)  (3) 

[Taxes  set  forth  in  1[1053,  1[1054,  and  1[1055,  and  in  addition  thereto]  (e)  in  the  case 

of  a nonresident  alien  individual,  by  the  authority  of  any  foreign  country  (except  income, 
war-profits  and  excess-profits  taxes,  and  taxes  assessed  against  local  benefits  of  a kind 
tending  to  increase  the  value  of  the  property  assessed),  upon  property  or  business;” 

634  Law  1]128.  Losses  Incurred  in  Transactions  Entered  Into  for  Profit  Outside  of 
Business  Deductible  by  Nonresident  Aliens. — “Sec.  214  (5)  [1]1084] — but  in  the 

case  of  a nonresident  alien  individual  only  as  to  such  transactions  within  the  United  States;” 

636  Law  ^130.  Property"  Losses  Outside  of  Business  Deductible  by  Nonresident 
I jg  Aliens. — “Sec.214(a)(6)  [If  1085] — (but  in  the  case  of  a nonresident  alien  individual 
only  property  within  the  United  States)” 

636  Law  If  143.  Contributions  to  Religious,  Charitable,  Educational,  etc..  Activities  are 
Deductible  to  a Limited  Amount. — “Sec.214(b)(l  1)  [1fll02] — In  the  case  of  a non- 
resident alien  individual  this  deduction  shall  be  allowed  only  as  to  contributions  or  gifts 
made  to  domestic  corporations,  or  to  such  vocational  rehabilitation  fund;” 

637  Law  If  164.  Specific  Exemption  Allowed  to  Nonresident  Aliens. — “Sec.  216  (e) — 
In  the  case  of  a nonresident  alien  individual  who  is  a citizen  or  subject  of  a country 

which  imposes  an  income  tax,  the  credits  allowed  in  subdivisions  (c)  [1f]1128  and  (d)  [1fll38] 
shall  be  allowed  only  if  such  country  allows  a similar  credit  to  citizens  of  the  United 
States  not  residing  in  such  country.”  [1f2972.] 

638  Law  If  165.  Deductions  and  Credits  Allowed  Conditionally. — “Sec.  217.  That 
a nonresident  alien  individual  shall  receive  the  benefit  of  the  deductions  and  credits 

allowed  in  this  title  only  by  filing  or  causing  to  be  filed  with  the  collector  a true  and  accurate 
return  of  his  total  income  received  from  all  sources  corporate  or  otherwise  in  the  United 
States,  in  the  manner  prescribed  by  this  title,  including  therein  all  the  information  which 
the  Commissioner  may  deem  necessary  for  the  calculation  of  such  deductions  and  credits;” 

[Read  at  1f2973.] 

6391^  A nonresident  alien  may  have  the  benefit  of  the  deductions  and  credits  above  pro- 
, vided  only  by  filing  or  causing  to  be  filed  with  the  collector  of  internal  revenue  a 
true  and  accurate  return  of  his  total  income  received  from  all  sources,  corporate  or  other- 
wise, in  the  United  States.  In  case  of  failure  to  file  return  the  tax  is  to  be  collected  on 
the  gross  income  from  all  sources  in  the  United  States.  (Art.  12,  If  141,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

640  Returns  should  be  rendered  to  the  collector  of  internal  revenue  for  the  district 
in  which  a nonresident  alien  carries  on  his  principal  business  within  the  United 

States  or,  in  the  absence  of  a principal  business  within  the  United  States  and  in  all  cases 
of  doubt,  to  the  collector  of  internal  revenue  at  Baltimore,  Md.,  in  whose  district  Wash- 
ington is  situated.  (T.  D.  2313,  Mar.  21,  1916.) 

641  Law  If  166.  Specific  Exemption  May  be  Claimed  at  the  Source. — ''Provided,  That 
the  benefit  of  the  credits  allowed  in  subdivisions  (c)  [If  1128]  and  (d)  [1[1138]  of 

section  216  may,  in  the  discretion  of  the  Commissioner,  and  except  as  otherwise  provided 
in  subdivision  (e)  [1f537]  of  that  section,  be  received  by  filing  a claim  therefor  with  the 
withholding  agent.”  [Privilege  not  granted,  see  1f2977.] 

642  Law  If  167.  Propel^  of  Nonresident  Alien  Subject  to  Distraint  for  the  Tax.  “Sec. 
217. — In  case  of  failure  to  file  a return,  the  collector  shall  collect  the  tax  on  such 

income,  and  all  property  belonging  to  such  nonresident  alien  individual  shall  be  liable  to 
distraint  for  the  tax.” 


INC. 


60 


TAX 


NONRESIDENT  ALIENS. 


543  When  all  Income  tax  to  which  income  of  a nonresident  alien  Is  subject  is  not  wlth- 
[held  at  the  source,  a return  of  income  will  be  required  to  be  filed  by  or  on  behalf 

of  ? said  nonresident  alien,  and  penalty  for  failure  to  make  return  in  time 
will  attach.  All  property  in  the  United  States  of  a nonresident  alien  will  be  subject  to 
distraint  for  collection  of  tax  and  penalty.  (Art.  13,  1[142,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

544  Nonresident  Alien  Beneficiary. — Where  a fiduciary  In  the  United  Stateslis  the 
recipient  of  trust  income  for  which  there  is  but  one  beneficiary  and  that  beneficiary 
a nonresident  alien,  the  fiduciary  will  be  required  to  make  full  and  complete  return 

on  Income  Tax  Form  1040  or  1040  A,  as  the  case  may  be,  for  this  trust  income  on  behalf 
of  the  nonresident  alien  and  pay  any  and  all  tax  found  by  such  return  to  be  due.  Where 
there  are  two  or  more  beneficiaries,  one  or  all  of  whom  are  nonresident  aliens,  the  fiduciary 
shall  render  a return  on  Form  1041,  and  a personal  return  on  Form  1040  or  1040  A for  each 
nonresident  alien  beneficiary.  (Art.  29,  1(200,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

545  Where  the  beneficiary  is  a nonresident  alien  individual  the  tax  imposed  by  the 
act  of  Sept.  8,  1916,  as  amended,  and  the  act  of  Oct.  3,  1917,  is  to  be  accounted 

for  by  such  fiduciary  on  a return  of  income  for  such  nonresident  alien  beneficiary  on  Income 
Tax  Form  1040  or  1040  A,  as  the  case  may  be.  (Art.  28,  Kl87,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

546  Liability  of  Foreign  Fiduciaries  for  Non-Resident  Alien  Beneficiaries  in  Connection 
iiwith  Income  Received  from  Sources  Within  the  United  States. — Receipt  is  ac- 
knowledged of  your  letter  of  December  1,  1916,  reading  as  follows; 

“A  trust  company  In  Canada  holds  certain  bonds  of  American  corporations  for  estates, 
trusteeships,  etc.  Is  it  necessary  for  the  corporation  to  file  the  annual  return  Form  No. 
1041,  Revised?  If  so,  what  deductions  will  it  be  allowed  against  income  received  from 
the  United  States  * * *?  What  form  of  ownership  certificates  shall  such  corporation 

file  in  order  to  obtain  exemption  from  deduction  at  the  source  if  it  stipulates  and  agrees 
to  file  the  annual  return  and  account  for  the  tax  annually  on  payments  made  to 
beneficiaries?” 

In  reply  you  are  advised  that  if  the  foreign  trust  company  has  charge  of  an  estate 

547  or  trust,  the  net  income  of  which  is  distributed  annually  or  periodically  among 
nonresident  alien  beneficiaries,  the  fiduciary  should  execute  a return  on  Form  1041, 

Revised,  covering  the  total  income  of  the  estate  or  trust  derived  from  sources  within  the 
United  States,  and  a personal  return  on  Form  1040  ( * * * * ) in  behalf  of  each  non- 
resident alien  beneficiary,  * ♦ ♦ , 

If  the  fiduciary  has  charge  of  an  estate  in  process  of  administration  or  settlement, 

548  or  an  estate  or  trust  the  net  income  of  which  is  held  in  trust  for  the  benefit  of  unborn 
or  unascertained  persons,  or  for  future  distribution  under  the  terms  of  a will  or 

trust,  the  estate  or  trust  will  be  considered  a taxable  entity  and  the  fiduciary  required  to 
render  a return  on  Form  1040  ( ♦ ♦ ♦ ) covering  so  much  of  its  total  income  as  is 
derived  from  sources  within  the  United  States,  * * ♦ 

Whether  the  return  of  the  total  income  derived  by  the  estate  or  trust  from  sources 

549  within  the  United  States  is  made  on  Form  1040  ( * * * ) or  1041,  Revised, 

the  benefit  of  such  of  the  deductions  enumerated  in  Section  6 of  the  Act  of  Sept. 

8,  1916,  as  the  estate  or  trust  is  entitled  to  may  be  claimed. 

No  form  of  exemption  certificate  has  been  prescribed  for  the  use  of  a foreign 
650  fiduciary,  as  it  is  not  permitted,  under  the  law,  that  such  a fiduciary  may  assume 
liability  for  payment  of  the  income  tax  found  to  be  due  on  income  derived  by 
the  estate  or  trust  from  sources  within  the  United  States  and  subject  to  withholding  of 
normal  tax  at  the  source.  Interest  coupons  detached  from  domestic  bonds  should  be 
accompanied  by  ownership  certificates.  Form  [1000],  Revised,  when  presented  for  pay- 
ment or  collection  by  a fo  cign  fiduciary,  and  the  interest  paid  on  such  coupons  will  be 
subject  to  withholding  of  normal  tax  at  the  source,  * * * . (Letter  to  The  Cor- 

poration Trust  Company,  signed  by  Commissioner  W.  H.  Osborn,  and  dated  Dec.  28,  1916.) 

When  a Broker  is  not  the  Agent,  for  Income  Tax  Purposes,  of  a Nonresident  Alien 
551  Client. — This  office  Is  in  receipt  of  your  letter  of  Mar.  7,  1918,  in  which  you  ask 

what  constitutes  an  agent  or  representative  in  this  country  in  charge  of  property 
of  a nonresident  alien,  and  by  way  of  illustration  you  submit  the  following  statement; 
“I  have  in  mind  the  ordinary  relation  of  broker  and  client.  The  non-resident  alien  client 
maintains  an  account  with  a broker,  occasionally  buying  some  securities  on  margin  and 
selling  some  from  time  to  time;  interest  is  charged  on  balances  due  and  dividends  as  paid 
on  the  stocks  carried  are  credited  to  the  account.  All  dealings  are  in  response  to  direction 
from  the  customer.  Is  the  broker  in  such  case,  agent  or  representative  of  the  alien  so 
that  he  must  make  a return  in  behalf  of  the  customer  and  become  responsible  for  normal 
taxes  and  sur-taxes  on  all  income  and  profits  passing  through  his  hands?”  Kin  reply 
you  are  advised  that  the  facts  set  forth  in  this  statement  do  not  constitute  the  relationship 
of  agency  between  these  parties  to  an  extent  which  will  make  the  broker  responsible  for 
filing  the  return  for  the  non-resident  client.  The  broker  in  such  case,  however,  for  the 

61 


INC. 


TAX 


PAYMENT  OF  TAX  AT  SOURCE. 


purposes  of  the  income  tax  is  considered  the  withholding  agent  and  should  withhold  the 
2%  [8%]  normal  tax  and  the  nonresident  alien  should  file  a return  on  Form  1040  B, 
including  all  income  received  from  sources  in  the  United  States.  (Letter  to  Henry  W. 
Beal,  Boston,  Mass.,  signed  by  Deputy  Commissioner  L.  F.  Speer,  and  dated  April  17, 
1918.) 

Maimer  of  Payment  of  Tax  by  Nonresident  Aliens. — [For  payment  by  uncertified 
552  checks  and  Treasury  Certificates  of  Indebtedness,  see  ^2428].  Your  letter  of  the 
28th  instant  has  been  received,  in  which  you  ask  whether  the  Collector  at  Baltimore 
in  the  case  of  nonresident  aliens  having  no  agents  or  representatives  in  the  United  States, 
is  authorized 

(a)  To  accept  drafts  of  foreign  banks  on  banks  in  Baltimore, 

(b)  To  accept  drafts  on  national  banks  only,  and  not  on  state  or  private  institutions. 

(c)  To  accept  drafts  of  foreign  banks  on  national  banks  of  New  York  City. 

(d)  To  accept  drafts  of  New  York  City  national  banks  on  national  banks  in  Baltimore. 

(e)  To  accept  cashiers’  checks  to  his  order  issued  by  New  York  City  national  banks. 

In  reply  you  are  advised  that  this  office  can  not  authorize  any  departure  fro  n the  require- 
ments of  the  law,  which^are  that  internal-revenue  taxes  are  payable  in  cash,  certified 
checks  drawn  in  favor  of  collectors  on  national  or  State  banks  or  trust  companies  located 
in  cities  where  the  respective  collectors  deposit  their  collections,  or  such  “out-of-town” 
certified  checks  as  can  be  cashed  without  expense  to  the  Government.  * * * ♦ There 

would  be  no  objection  to  the  collector’s  accepting  such  drafts  and  checks  if  the  depositaries 
will  accept  them  “without  recourse”  and  issue  therefor  regular  certificates  of  deposit  on 
Form  15,  as  the  responsibility  would  then  appear  to  be  shifted  from  the  collector  to  the 
depositary;  and  there  would  be  no  objection  to  the  collector’s  accepting  them  for  collection 
only — that  is,  he  would  issue  no  receipt  for  the  payment  of  taxes  until  such  drafts  and 
checks  had  been  paid  and  he  had  been  notified  thereof.  * * * * ^ copy  of  this  letter 

is  being  sent  to  Collector  Miles,  District  of  Maryland,  for  his  information.  (Letter  to 
The  Corporation  Trust  Company,  signed  by  Deputy  Commissioner  G.  E.  Fletcher,  and 
dated  Mar.  31,  1917.) 

653  Law  ^201.  Payment  of  Tax  at  the  Source  on  Account  of  Nonresident  Aliens. — 

“Sec.  221.  (a)  That  all  individuals,  corporations  and  partnerships,  in  whatever 

capacity  acting,  including  lessees  or  mortgagors  of  real  or  personal  property,  fiduciaries, 
employers,  and  all  officers  and  employees  of  the  United  States,”  [^2996.] 

654  Law  lf202.  “having  the  control,  receipt,  custody,  disposal,  or  payment,  of  interest,* 
rent,  salaries,  wages,  premiums,  annuities,  compensations,  remunerations,  emolu- 
ments, or  other  fixed  or  determinable  annual  or  periodical  gains,  profits,  and  income,” 

♦ Payment  at  the  source,  of  tax  on  interest  on  corporate  obligations. — [Read  at  ^601.] 

556  Law  ^203.  “of  any  nonresident  alien  individual” 

556  Law  ^204.  “(other  than  income  received  as  dividends  from  a corporation  which 
is  taxable  under  this  title  upon  its  net  income)” 

557  Law  1[205.  “shall  (except  in  the  cases  provided  for  in  subdivision  (b)  [1[604] 
and  except  as  otherwise  provided  in  regulations  prescribed  by  the  Commissioner 

under  section  217  l1[541])” 

558  Law  1[206.  “deduct  and  withhold  from  such  annual  or  periodical  gains,  profits, 
and  income” 

559  Law  ^207.  “a  tax  equal  to  8 per  centum  thereof:” 

560  No  Deduction  at  the  Source  on  Dividends. — This  office  is  in  receipt  of  your  letter  of 
April  8,  1916.  You  state  a case  as  follows: 

“Banks  and  bankers  in  the  United  States  hold  as  depositary  shares  of  stock  of  cor- 
porations organized  in  the  United  States  and  which  shares  are  owned  by  nonresident 
foreign  banks  and  bankers,  and  in  many  cases  it  so  happens  that  the  shares  of  stock  held 
by  the  United  States  bankers  for  the  account  of  foreign  banks  and  bankers  are  owned  by  a 
third  nonresident  party. 

You  ask: 

“Will  it  be  necessary  for  the  American  banker  to  withhold  the  tax  on  these  dividends 
and  will  it  be  necessary  for  the  United  States  bankers  to  render  a return  for  the  fiscal  year 
in  which  these  disbursements  are  made?” 

* * * Dividends  paid  from  the  net  earnings  of  corporations,  joint  stock  coni- 

561  panics  or  associations  and  insurance  companies  taxable  upon  their  net  income,  as 
provided  in  the  Income  Tax  Law  are  taxable  to  individuals  only  for  the  “additional 

tax.”  It,  therefore,  follows* 


INC. 


62 


TAX 


PAYIylENT  OF  TAX  AT  SOURCE. 


(1)  Dividends,  such  is  above  described,  are  not  subject  to  the  withholding  provisions 
of  the  Income  Tax  Law  ♦ ♦ ♦ , 

* * * The  nonresident  alien  individual  * * * owning  the  stock  aforesaid 

562  will  be  chargeable  with  such  tax  as  may  be  assessable  upon  the  dividends  on  said 
stock.  They  will  be  subject  to  all  the  provisions  of  the  law  and  regulations  for 

making  return  and  paying  tax  and  for  failure  to  comply  with  the  requirements  of  the  law  and 
regulations,  the  stock  and  any  other  property  they  may  have  in  the  United  States  will  be 
subject  to  distraint,  garnishment,  execution  or  other  appropriate  process  provided  by  law. 
(Letter  to  The  Corporation  Trust  Company,  signed  by  Acting  Commissioner  David  A. 
Gates,  and  dated  April  10,  1916.) 

563  No  Deduction  at  Source  on  Salaries  for  Service  Rendered  Abroad  or  on  Rent 
on  Property  Located  Abroad. — It  is  held  that  salaries,  wages,  commissions, 

and  rents  paid  by  domestic  corporations,  resident  individuals,  or  partnerships  to  non- 
resident alien  employees  for  services  rendered  entirely  in  a foreign  country  and  for  property 
located  in  a foreign  country  are  not  subject  to  deduction  and  withholding  of  the  normal 
tax  and  such  payments  of  incomm  will  not  be  subject  to  the  income  tax  in  the  hands  of  the 
recipient  as  from  a source  within  the  United  States.  (Art.  32,  ^[221,  Reg.  33,  Rev.,  Jan. 
2,  1918.)  11|2877.] 

5641.  Other  Items  Upon  V/hich  Tax  Is  Not  To  Be  Withheld  at  the  Source. — [The  tax 
shall  not  be  withheld  at  the  source  on  the]  Proceeds  of  life  insurance  policies 
paid  upon  the  death  of  the  person  insured,  or  payments  made  by  or  credited  to  the  insured, 
on  life  insurance,  endowment,  or  annuity  contracts,  upon  the  return  thereof  to  the  insured 
at  the  maturity  of  the  term  mentioned  in  the  contract,  or  upon  the  surrender  of  contract — 
all  of  which  shall  not  be  included  as  income  under  this  law — but  this  shall  not  be  construed 
to  exempt  said  insurance  companies  from  withholding  and  paying  the  normal  tax  of  1 
[8]  per  cent  on  interest  income  paid  by  insurace  companies  to  beneficiaries  of  policies 
* * * . (T.  D.  1890,  Oct.  31,  1913.) 

565j.  Income  of  an  individual  which  is  not  fixed  or  certain  and  not  payable  at  stated 
periods,  or  is  indefinite  or  irregular  as  to  amount  or  time  of  accrual,  shall  not  be 
withheld  at  the  source,  but  shall  be  listed  in  the  annual  return  of  the  individual,  and  the  tax 
shall  be  paid  thereon  by  him.  (T.  D.  1890,  Oct.  31,  1913.) 

566  Agents  compensated  on  the  commission  basis,  lawyers,  doctors,  authors,  inventors, 
and  other  professional  persons  whose  income  is  irregular  and  indefinite.  (Art.  32, 

Reg.  33,  Jan.  5,  1914.) 

567  When  indefinite  as  to  amount  and  time  of  accrual,  they  [commissions  to  salesmen] 
are  not  subject  to  withholding.  (T.  D.  2090,  Dec.  14,  1914.) 

668  The  value  of  property  acquired  by  gift,  bequest,  devise,  or  descent. 

Interest  upon  the  obligations  of  a State  or  any  political  subdivision  thereof,  and 

569  upon  the  obligations  of  the  United  States  or  its  possessions;  * * * ^ 

1890,  Oct.  31,  1913.) 

570  Payments  in  connection  with  (1)  quarters,  (2)  heat  and  light,  (3)  mileage,  (4)  re- 
imbursement for  actual  expenses,  and  (5)  per  diem  allowances  in  lieu  of  subsistence 

while  traveling  under  orders  are  indefinite  and  irregular  as  to  right  of  possession,  amount, 
and  time  of  accrual;  and  are  not,  therefore,  subject  to  withholding  as  “fixed  or  determinable 
annual  or  periodical  gains,  profits,  and  income”  under  the  requirements  of  the  Income 
Tax  Law.  (T.  D.  2079,  Nov.  24,  1914.) 

57  1 Receipt  is  acknowledged  of  your  letter  of  March  2,  1916,  and  in  reply  you  are  advised 
that  the  office  holds  that  in  all  cases  where  rental  or  royalties  accrue  under  the  terms 
of  a lease  or  agreement  which  grants  to  the  lessee  the  use  of  certain  lands  and  a right  to 
mine  or  produce  and  remove  therefrom  any  natural  deposit,  upon  payment  of  rental  fixed 
and  determinable  as  to  amount  and  time  of  payment,  or  of  royalties  based  on  a certain 
fixed  sum,  or  certain  fixed  percentage  of  value,  per  ton,  barrel,  or  other  unit  of  measure, 
payments  of  such  rental  or  royalties,  when  they,  in  part,  represent  a partial  return  of  the 
capital  originally  invested  in  the  lands,  will  not  be  subject  to  withholding  of  the  normal 
tax  at  the  source.  (Letter  to  The  Corporation  Trust  Company,  signed  by  Commissioner 
W.  11.  Osborn,  and  dated  Mar.  10,  1916.) 

672  Law  ^332.  Payment  of  Tax  at  the  Source  on  Account  of  Certain  Foreign  Corpo- 
rations.— “Sec.  237.  That  in  the  case  of  foreign  corporations  subject  to  taxation 
under  this  title  not  engaged  in  trade  or  business  within  the  United  States  and  not  having  any 
office  or  place  of  business  therein,”  [Read  at  ^2996.] 

63 


INC. 


TAX 


PAYMENT  OF  TAXIAT  SOURCE. 


673  Law  ^[333,  “there  shall  be  deducted  and  withheld  at  the  source  in  the  same  manner 

^ and  upon  the  same  items  of  income*  as  is  provided  in  section  221  [11553]”  ^ 

574  Law  1[334.  “a  tax  equal  to  10  per  centum  thereof,” 

575  Law  1[335.  “and  such  tax  shall  be  returned  and  paid  in  the  same  manner  and  subject 
to  the  same  conditions  as  provided  in  that  section:” 

♦Payment  at  the  Source  of  Tax,  on  Interest  on  Corporate  Obligations. — [Read  at  11601.] 

576  Foreign  Corporations  Engaged  in  Business  in  the  United  States  to  file  Certificate 
Establishing  That  Fact. — [In  the  case  of  bond  interest,  see  11651.  The  following  is 

included  here  because  of  its  possible  application  in  connection  with  the  withholding  of  the 
tax  on  miscellaneous  income  payments  to  foreign  corporations.] 

Under  the  Act  of  September  8,  1916,  the  normal  Income  tax  is  to  be  withheld  at 

577  sources  of  income  in  the  United  States,  from  the  income  of  [foreign]  corporations, 

“not  engaged  in  trade  or  business  within  the  United  States  and  not  having  any 

office  or  place  of  business  therein.” 

[One  form  of]  income  of  such  nonresident  alien  corporations,  etc.,  which  Is  subject 

578  to  the  withholding  provisions  of  the  law  is  that  derived  from  “interest  on  bonds  | 

and  mortgages  or  deeds  of  trust  or  similar  obligations  of  domestic  or  other  resident 

corporations,  joint  stock  companies  or  associations,  and  Insurance  companies,”  regardless 
of  amount. 

To  enable  debtor  corporations,  etc.,  in  the  United  States  to  distinguish  between 

579  nonresident  alien  corporations,  etc.,  which  have  and  those  which  do  not  have 
“any  office  or  place  of  business”  in  the  United  States  and  also  to  enable  such  non- 
resident alien  corporations,  etc.,  as  have  an  “office  or  place  of  business”  in  the  United  States, 
to  claim  exemption  from  withholding  of  the  normal  income  tax  at  the  source  on  their 
income  from  sources  within  the  United  States  as  specified  by  the  statute,  a certificate  will 
be  provided  in  the  following  form:  (Form  1086.)  [Form  1001  has  been  used  for  making 
this  disclosure  in  connection  with  bond  interest,  1[658.] 

The  certificate  herein  provided  for  shall  be  printed  on  yellow  paper  and  shall  be  in 

580  size  8 by  33^  inches,  and  shall  be  printed  to  read  from  left  to  right  along  the  8-Inch 

dimension.  (( 

58lliThe  paper  upon  which  the  certificate  is  to  be  printed  shall  correspond  in  weight 
and  texture  to  white  writing  paper  21  by  32,  about  40  pounds  to  the  ream  of  500 

sheets. 

Individuals  or  organizations  desiring  to  print  their  own  certificates  may  do  so, 

582  but  certificates  so  printed  must  conform  in  size  and  be  printed  in  similar  type 
and  upon  the  same  color,  shade  and  weight  of  paper  as  used  by  the  Government. 

♦ **♦♦♦**♦** 

583  The  normal  income  tax  on  the  character  of  income  herein  specified  and  payable  to 

nonresident  ♦ * * corporations,  etc.,  will  be  deducted,  withheld  and  paid  to 

the  proper  officer  of  the  United  States  Government  authorized  to  receive  it,  unless  the  corpo- 
ration, etc.,  entitled  to  the  payment  shall  file  a certificate  (under  penalty  for  false  claim), 
in  form  and  as  herein  provided,  and  only  those  nonresident  * * * corporations,  etc., 
which  have  an  “office  or  place  of  business”  in  the  United  States  can  use  the  certificate 
herein  provided  to  be  used.  The  corporations,  etc.,  which  are  permitted  to  use  the  cer- 
tificate herein  provided,  are  required  to  make  and  render  a return  of  income  to  the  Collector 
of  Internal  Revenue  for  the  district  in  which  they  have  their  office  or  place  of  business,  as 
provided  by  the  Act  of  September  8,  1916.  (T.  D.  2374,  Sept.  28,  1916.) 

584  Law  1f22.  Definition  of  the  Term  “Withholding  Agent.” — “The  term  "withholding 
agent’  means  any  person  required  to  deduct  and  withhold  any  tax  under  the  provis- 
ions of  section  221  [11553]  or  section  237  [1[572];” 

585  Guardians,  trustees,  executors,  administrators,  receivers,  conservators,  and  all 
persons,  corporations,  or  associations  acting  in  any  fiduciary  capacity  hereinafter 

referred  to  as  fiduciary  agents,  who  hold  in  trust  an  estate  of  another  person  or  persons, 
shall  be  designated  the  “source”  for  the  purpose  of  collecting  the  income  tax.  (T.  D. 

2231,  July  16,  1915.) 

586  An  effort  has  been  made  to  meet  the  views  of  certain  departments  that  withholding 
should  occur  from  the  aggregate  amounts  received  by  an  individual  from  the  various 

disbursing  officers  within  a department;  but,  after  further  and  careful  consideration  of 
both  the  law  and  the  administrative  features  involved,  it  has  been  determined  that  each 
disbursing  officer  must  be  governed  by  the  amounts  paid  by  him  alone,  and  that  it  is  not 
incumbent  upon  him  to  ascertain  and  take  into  consideration  amounts  that  may  have  been 
paid  by  other  disbursing  officers. 


INC. 


64 


TAX 


PAYMENT  OF  TAX  AT  SOURCE. 


This  view  is  in  full  accord  with  the  provision  of  the  income-tax  law  which  makes 
687  “all  officers  and  employees  of  the  United  States  having  the  control,  receipt,  custody, 
disposal,  or  payment,”  etc.,  personally  liable  for  the  normal  tax  of  1 [8]  per  cent 
on  amounts  passing  through  their  hands,  subject  to  the  character  and  amount  of  income  and 
the  exemptions  fixed  by  law. 

All  rulings  heretofore  made  on  the  subject,  by  letter  or  otherwise,  thaUare  in  con- 

588  flict  herewith,  are  hereby  overruled  and  superseded.  (T.  D.  2135,  Jan.  23,  1915.) 

589  All  persons,  firms,  etc.,  mentioned  above  are  referred  to  in  these  regulations  as 
“debtors”  or  “withholding  agents,”  and  the  word  “source”  is  to  apply  to  the 

place  where  the  income  originated  and  is  payable.  (Art.  31,  Reg.  33,  Jan.  5,  1914.) 

590  Tax-Exempt  Corporations  Required  to  Withhold. — While  the  organizations 
enumerated  in  section  11  of  this  title  are  themselves  exempt  from  the  tax  on  any 

income  received  by  them,  they  are  not  exempt  from  the  requirements  of  the  title  with  respect 
to  the  withholding  of  the  normal  tax  on  bond  interest  * * * paid  to  foreign  corpora- 

tions or  bond  interest  paid  to  individuals  on  bonds  having  a tax  free  covenant  or  from 
furnishing  information  in  accordance  wdth  the  provisions  of  this  title  as  amended  by  section 
1205  of  Title  XII  of  the  act  of  October  3,  1917.  (Art.  81,  ^336,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

591  Intent  of  the  Law.  [The  provision  of  the  1916-1917  Act  of  which  the  first  and  last 
sentences  of  the  herein  following  paragraph  are  quotations,  practically,  is  not 

carried  into  the  present  law.  To  what  extend  the  “intent  and  purpose”  of  the  present 
law  will  be  considered  to  be  similar  to  the  “intent  and  purpose”  of  the  old  law  will  un- 
doubtedly be  a matter  of  regulation.]  The  intent  and  purpose  of  the  income-tax  law  is 
that  all  gains,  profits,  and  income  of  a taxable  class  shall  be  charged  and  assessed  with 
the  corresponding  income  tax,  normal  and  additional,  and  such  tax  shall  be  paid  by  the 
owner  of  such  income  or  the  proper  representative  thereof  having  the  receipt,  custody, 
control,  or  disposal  of  the  same.  In  any  case  where  the  conditions  which  obtain  do  not 
appear  to  fall  within  the  law  and  regulations  for  the  assessment  and  collection  of  the  income 
tax,  the  proper  tax  shall  be  assessed  in  the  particular  case  by  the  Commissioner  of  Internal 
Revenue  upon  his  findings  concerning  the  same.  Ownership  of  income  and  liability  for 
tax  thereon  shall  be  determined  as  of  the  year  for  which  the  return  is  required  to  be  rendered. 
(Art.  49,  p77,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

592  Law  ^432.  “Sec.  1307.  That  in  all  cases  where  the  method  of  collecting  the  tax 
imposed  by  this  Act  is  not  specifically  pro/ided  in  this  Act,  the  tax  shall  be  collected 

in  such  manner  as  the  Commissioner,  with  the  approval  of  the  Secretary,  may  prescribe.” 

593  Record  to  be  Kept. — Every  individual,  partnership,  corporation,  or  association 
liable  to  any  tax  imposed  under  the  internal  revenue  laws  of  the  United  States  or 

for  the  collection  thereof  shall  keep  such  records  and  render  such  statements  and  returns, 
under  oath,  as  shall  be  prescribed  by  the  Commissioner  of  Internal  Revenue.  (Art.  50, 
^278,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

594  Miscellaneous  Income  Defined, — [For  interest  on  corporate  obligations  read  at 
^601,  et  seq.J — The  above  [1[554]  includes  all  income  derived  from  salaries,  wages, 

rents,  royalties,  interest,  taxable  annuities,  emoluments,  or  other  fixed  and  determinable 
annual  gains,  profits,  and  income  of  another  person — such  as  the  payment  of  interest 
upon  the  obligations  of  individuals.  (T.  D.  2135,  Jan.  23,  1915.) 

595  The  person,  firm,  company,  co-partnership,  corporation,  joint  stock  company 
or  association,  and  insurance  company  in  the  United  States,  citizen  or  resident  alien, 

in  whatever  capacity  acting,  having  the  control,  receipt,  disposal,  or  payment  of  fixed  or 
determinable  annual  or  periodic  gains,  profits,  and  income  of  whatever  kind,  to  a nonresident 
alien,  under  any  contract  or  otherwise,  which  payment  shall  represent  [taxable]  income  of 
a nonresident  alien  ♦ ♦ ♦ [or  foreign  corporation,  subject  to  taxation  under  the  Act, 

not  engaged  in  trade  or  business  within  the  United  States  and  not  having  any  office  or 
place  of  business  therein]  shall  deduct  and  withhold  from  such  annual  or  periodic  gains, 
profits,  and  income,  regardless  of  amount  and  pay  to  the  officer  of  the  United  States  Govern- 
ment authorized  to  receive  the  same  such  sum  as  will  be  sufficient  to  pay  the  normal  tax  of 
[8  or  10]  per  cent  imposed  by  law,  and  shall  make  an  annual  return  on  Form  1042.  (T.  D. 

2109,  Dec.  28,  1914.)  (T.  D.  2313,  Mar.  21,  1916.) 

598  Withholding  on  Salaries  Based  on  Calendar  Year. — The  salary  of  an  individual 
is  subject  to  withholding  at  the  source  only  on  the  basis  of  the  calendar  year. 
Corporations  which  have  a fiscal  year  other  than  the  calendar  year  * * * ^ ^JH 

required  to  withhold  on  the  basis  of  the  calendar  year.  (T.  D.  2090,  Dec.  14,  1914.) 

597  Notes  Given  in  Lieu  of  Cash  Payments- — Where  notes  are  given  in  payment  of  rent, 
the  lessee’s  obligation  to  withhold  is  not  altered.  The  lessee’s  obligation  is  the 

INC.  65  TAX 


PAYMENT  OF  TAX  AT  SOURCE. 


same  as  in  the  case  of  cash  rental,  withholding  occurring  at  the  time  the  notes  are  given, 
and  not  at  maturity.  Real  estate  agents  are  not  required  to  deduct  and  withhold  the  normal 
tax  from  rents  collected.  * * * * agent  stands  in  the  place  of  the  landlord  and 

receives  money  from  tenants  in  exactly  the  same  capacity  as  the  landlord  would  receive 
such  moneys  and  should  be  treated  as  such.  A real  estate  agent  does  not  act  as  an  agent 
of  the  debtor.  Therefore  the  duty  of  withholding  the  tax  can  not  be  transferred  from  the 
debtor  to  such  agent,  because  such  transfer  would  simply  be  transferring  the  duty  of  v/ith- 
holdlng  to  the  landlord  himself.  (T.  D.  2090,  Dec.  14,  1914.) 

598  Interest  on  Bank  Deposits. — Nonresident  alien  individuals  and  corporations  'are 
required  to  pay  tax  on  all  income  received  in  the  calendar  year  from  sources  within 

the  United  States,  except  exempt  sources.  Interest  received  from  deposits  in  banks  located 
within  the  United  States  constitutes  income  received  from  sources  within  the  United  States 
and  is  subject  to  the  withholding  provisions  of  the  Act  of  September  8,  1916,  as  amended 
by  the  Act  of  October  3,  1917.  Banks  are  therefore  required  to  withhold  the  normal  tax 
of  [8]  per  cent  upon  interest  paid  to  nonresident  alien  individuals  and  the  normal  tax  of 
[iO]  per  cent  * * upon  interest  paid  to  a nonresident  alien  corporation  “not  engaged 

in  business  or  trade  within  the  United  States  and  not  having  any  office  or  place  of  business 
therein.”  (T.  D.  2623,  Dec.  28,  1917.) 

599  Interest  received  from  deposits  in  banks  located  within  the  United  States  constitutes 
income  received  from  sources  within  the  United  States  and  is  subject  to  the  with- 
holding provisions  of  the  Act  of  September  8,  1916,  as  amended  by  the  Act  of  October  3, 
1917,  as  to  nonresident  alien  Individuals.  Banks  are,  therefore,  required  to  withheld  the 
normartax  of  [8]  per  cent  on  such  interest  paid  to  nonresident  alien  individuals. 

Though  nonresident  alien  corporations  are  liable  to  incomm  tax  on  interest  received 

600  from  deposits  in  banks  located  within  the  United  States,  that  portion  of  Treasury 
Decision  2623  authorizing  withholding  of  such  tax  against  such  corporations  is 

hereby  revoked.  [The  law  under  which  this  T.  D.  was  issued  made  no  provision  for  with- 
holding the  tax  against  miscellaneous  income  paid  to  certain  foreign  corporations,  as  does 
the  present  law,  11572.]  (T.  D.  2652,  Feb.  6,  1918.) 

Return  of  Taxes  Withheld. — [Read  at  1l698.] 

Payment  of  the  Taxes  Withheld.  [Read  at  11720.] 


TAX  TO  BE  DEDUCTED  AT  THE  SOURCE  ON  INCOME  FROM  INTEREST  ON 

DOMESTIC  OBLIGATIONS. 


601  Tax  Withheld  in  Case  of  Interest  on  Obligations  Not  Containing  Tax-Free 
Covenants. — [Applies  only  to  nonresident  alien  individual  owners  (Law  provision 

at  11553)  and  to  foreign  corporations  not  engaged  in  trade  or  business  within  the  United 
States  and  not  having  any  office  or  place  of  business  therein  (Law  provision  at  1[572). 
The  regulations  follow.] 

602  Law  11208.  Owner  to  be  Known  to  Withholding  Agent  or  Tax  is  Withheld  in  Any 
Case. — ’‘^Provided,  That  the  Commissioner  may  authorize  such  tax  [8%,  1[559, 

although  the  rate  of  tax  against  corporations  Is  10%,  1[574.?  Read1[2996.]  to  be  deducted 

and  withheld  from  the  interest  upon  any  securities  the  owners  of  which  are  not  knowm  to 
the  withholding  agent.” 

603  No  Withholding  Against  Known  Citizens  or  Residents  in  the  Case  of  Interest  on 
Corporate  Obligations  Not  Containing  Tax-Free  Covenants. — Income  paid  to  citizens 

or  residents  of  the  United  States  is  subject  to  withholding  of  normal  tax  at  the  source  only 
when  derived  from  interest  on  bonds  and  mortgages,  or  deeds  of  trust,  or  other  similar 
obligations  of  corporations,  joint  stock  companies,  etc.,  containing  a so-called  “tax-free” 
or  “no  deduction”  clause.  (Mimeograph  letter  to  Collectors,  No.  1663,  Nov.  1,  1917.) 

Information  Relative  to  Ownership  to  be  Disclosed  by  Means  of  Ownership  Certificates 
in  the  Case  of  Coupon  Interest. — [Read  at  1[651.] 

604  Law  11209.  Tax  Withheld  in  Case  of  Interest  on  Obligations  Containing  Tax-Free 
Covenants. — “(b)  In  any  case  where  bonds,  mortgages,  or  deeds  of  trust,  or  other 

similar  obligations  of  a corporation  contain  a contract  or  provision  by  which  the  obligor 
agrees  [1[2996]’? 


INC. 


66 


TAX 


PAYMENT  OF  TAX  AT  SOURCE. 


605  Law  11210.  “to  pay  any  portion  of  the  tax  imposed  by  this  title  upon  the  obligee,  or” 

606  Law  1f211.  “to  reimburse  the  obligee  for  any  portion  of  the  tax,  or” 

607  Law  1f212.  “to  pay  the  interest  without  deduction  for  any  tax  which  the  obligor 
may  be  required  or  permitted  to  pay  thereon  or  to  retain  therefrom  under  any  law 

of  the  United  States,” 

608  Law  11213.  2%  to  be  Withheld  in  Case  of  Interest  on  Tax-Free  Covenant  Obli- 
gations.— “the  obligor  shall  deduct  and  withhold  a tax  equal  tj  2 per  centum  of 

the  interest  upon  such  bonds,  mortgages,  deeds  of  trust,  or  other  obligations,  whether  such 
interest  is  payable  annually  or  at  shorter  or  longer  periods  and” 

609  Law  1[214.  Withholding  of  2%  in  Case  of  Interest  on  Tax-Free  Covenant  Obli- 
gations Applies  Against  Nonresident  Alien  Individuals,  Citizens  and  Residents, 

and  Partnerships. — “whether  payable  to  a nonresident  alien  individual  or  to  an  individual 
citizen  or  resident  of  the  United  States  or  to  a partnership:” 

610  Law  1[336.  Withholding  of  2%  in  Case  of  Interest  on  Tax-Free  Covenant  Obliga- 
tions Applies  Against  Foreign  Corporations  Not  Engaged  in  Trade  or  Business 

Within  the  United  States  and  Not  Having  Any  Office  or  Place  of  Business  Therein. — 
Sec.  237  [11572]:  Provided^  That  in  the  case  of  interest  described  in  subdivision  (b) 

[1f604]  of  that  section  the  deduction  and  withholding  shall  be  at  the  rate  of  2 per  centum.” 

611  Liability  of  Debtor  Corporation,  When  No  Exemption  is  Claimed,  in  Case  of  Bond 
Bearing  Covenant  to  Pay  Old  1%  Rate  Only. — Sec.  9-C,  Act  of  September  8,  1916, 

as  amended  [11604  and  1[609  above],  provides  that  normal  tax  of  2%  shall  be  deducted  and 
withheld  from  interest  payments  upon  bonds  owned  by  citizens  or  residents  of  United 
States,  if  such  bonds  contain  contract  or  provision  whereby  obligor  agrees  to  pay  any  portion 
of  tax  imposed  by  that  title  upon  obligee.  Debtor  corporation  will,  in  such  cases,  be  held 
liable  for  2%  tax,  although  the  portion  of  tax  guaranteed  is  only  1%.  (Telegram  to  S.  W. 
Straus  & Co.,  New  York,  N.  Y.,  dated  Feb.  18,  1918,  and  signed  by  Commissioner  Daniel 
C.  Roper.) 

612  Law  1[215.  Owner  to  be  Known  to  Withholding  Agent  or  Tax  is  Withheld  in  Any 
Case. — Provided,  That  the  Commissioner  may  authorize  such  tax  [2%,  1[608]  to 

be  deducted  and  withheld  in  the  case  of  interest  upon  any  such  bonds,  mortgages,  deeds  of 
trust  or  other  obligations,  the  owners  of  which  are  not  known  to  the  withholding  agent.” 

Information  Relative  to  Ownership  to  be  Disclosed  by  Means  of  Ownership  Certi- 
ficates in  the  Case  of  Coupon  Interest. — [Read  at  11651.] 

613  Coupon  Interest  Accruing  Prior  to  Incidence  of  Tax. — Where  coupons  bear  a date 
prior  to  March  1,  1913,  but  have  not  been  presented  for  payment  until  1915,  al- 
though funds  have  been  on  hand  to  meet  them  since  maturity,  no  withholding  is  required 
for  the  reason  that  such  coupons  represent  income  that  was  due  and  payable  and  could  have 
been  reduced  to  possession,  on  demand,  prior  to  the  incidence  of  the  income  tax. 

Where  coupons  were  due  and  payable  in  1911,  and  have  been  in  default  since  that 

614  year,  funds  to  meet  them  having  been  deposited  with  the  withholding  agent  since 
January  1,  1915,  it  Is  held  that  the  income  represented  by  such  coupons  accrued  to 

the  owners  of  the  bonds  prior  to  the  incidence  of  the  tax,  and  hence  does  not  constitute 
taxable  and  returnable  income.  (Extract  from  letter  to  the  Central  Trust  and  Safe 
Deposit  Company  of  Cincinnati  embodying  a decision  by  Commissioner  W.  H.  Osborn, 
signed  by  Collector  A.  C.  Gilligan,  and  dated  Mar.  16,  1915.) 

615  Obligations  of  Corporations  Defined. — Obligations  of  corporations  similar  to  bonds, 
mortgages,  deeds  of  trust,  etc,,  for  income-tax  purposes  are  held  to  be  those  obliga- 
tions of  corporations  which,  though  not  bonds,  mortgages,  or  deeds  of  trust,  arc  similar 
in  form,  purpose,  or  in  being  extended  beyond  the  time  of  ordinary,  bankable,  commercial 
paper.  (T.  D.  2090,  Dec.  14,  1914.) 

616  Equipment  Trust  Notes. — Equipment  trust  notes  secured  by  mortgage  issued  by  a 
corporation  are  subject  to  withholding.  Temporary  receipts  issued  pending  prep- 
aration and  issue  of  the  notes  themselves  stand  in  the  place  of  the  notes,  and  where  an 
interest  period  intervenes  and  receipts  are  to  be  presented  for  indorsement  thereon  of  a pay- 
ment of  interest,  requisite  certificates  of  ownership  claiming  or  not  claiming  of  exemption 
should  be  filed,  (T.  D.  2090,  Dec.  14,  1914.) 

617  Investment  Certificates. — Investment  securities  issued  by  a corporation  for  a term 
of  years  are  corporate  obligations  within  the  meaning  of  the  income-tax  law.  (T.  D. 

2090,  Dec.  14,  1914.) 


INC. 


67 


TAX 


PAYMENT  OF  TAX  AT  SOURCE. 


618  Scrip. — [See  ^928.]  Scrip  certificates  issued  by  a corporation  to  its  stockholders 
in  lieu  of  dividends,  such  scrip  certificates  bearing  interest  and  redeemable  at  a 

specified  time  not  longer  than  one  year  from  date  of  issue,  are  not  corporate  obligations  ^ 

similar  to  bonds,  mortgages,  or  deeds  of  trust  * * * ^ Payment  in  scrip  is  held  to  be 

equivalent  to  payment  in  cash.  * * * ^ P)^  2090,  as  amended  by  T.  D.  2152, 

Feb.  12,  1915.) 

619  Interest  on  Obligations  of  United  States  or  of  State  or  Political  Subdivision  Thereof 
is  Exempt  from  the  Withholding  Provisions. — Income  derived  from  the  interest 

upon  the  obligations  of  a State,  county,  city,  or  any  other  political  subdivision  thereof, 
and  upon  the  obligations  of  the  United  States  or  its  possessions,  is  not  subject  to  the  income 
tax,  and  certificates  of  ownership  in  connection  with  coupons  or  registered  interest  orders 
for  such  interest  will  not  be  required.  (Art.  37,  Reg.  33,  Jan.  5,  1914.) 

620  Where  a municipality  purchases  a public  utility  subject  to  a mortgage,  the  mortgage 
retains  its  original  character,  even  though  the  municipality  assumes  the  mortgage 

indebtedness  and  pays  the  interest  thereon.  Therefore,  the  indebtedness  secured  by  such 
mortgage  is  not  an  obligation  of  the  municipality  within  the  meaning  of  Paragraph  B 
[^963]  of  the  income-tax  law.  (T.  D.  2090,  Dec.  14,  1914.) 

621  One  Form  of  a Qualified  Tax-Free  Covenant  which  Relieves  the  Debtor  from  i 

Withholding  the  Amount  of  the  Normal  Tax  from  Bond  Interest  Payments  to 

Citizens  and  Residents. — With  further  reference  to  your  letter  of  Oct.  27,  1917,  herein 
quoted,  “Please  advise  us  at  the  earliest  possible  moment  whether  bonds  bearing  the 
covenant  that 

‘Both  principal  and  interest  of  this  bond  are  payable  without  deductions  for 
any  taxes,  assessments  or  other  governmental  charges  which  the  company  may 
be  required  to  pay  thereon  or  authorized  to  retain  therefrom  under  any  present 
or  future  law  or  requirement  of  the  United  States  of  America  (except  any  Federal 
Income  Tax)  or  any  State,  county,  municipality  or  other  governmental  sub- 
division thereof,’ 

come  within  the  provisions  of  subsection  (c)  of  Section  9 of  the  Federal  Income  Tax 
Law  requiring  the  debtor  corporation  to  withhold  the  amount  of  the  normal  tax  at 
the  source.”  ^ / 

you  are  advised  that  interest  from  bonds  containing  the  covenant  quoted  will  not  be  ^ 

subject  to  withholding  as  provided  in  subsection  (c),  [1f604]  Section  9 of  the  Act  of  Sept. 

8,  1916,  as  amended  by  Section  1205  of  the  War  Revenue  Act  of  Oct.  3,  1917.  (Letter  to 
Simpson,  Thatcher  & Bartlett,  New  York,  N.  Y.,  signed  by  Deputy  Commissioner  L.  F. 

Speer,  and  dated  Nov.  21,  1917.) 

622  Federal  Income  Tax  being  a Tax  on  Income  and  not  a Tax  on  the  Interest  on  a 
Bond,  per  se,  a Tax-Free  Covenant  in  a Bond  does  not  Obligate  the  Debtor  to 

Pay  the  Interest  Free  of  Income  Tax.  [This  was  the  decision  (April  2,  1917)  of  the 
Supreme  Court  of  Arkansas  in  the  Urquhart  v.  Marion  Hotel  Company  case  (194  S.  W.  1).] 

623  The  Term  “Debtor”  Defined. — The  term  “debtor,”  as  hereinafter  used  [in  con- 
nection with  bond  interest]  shall  apply  to  all  corporations,  joint-stock  companies 

or  associations,  and  insurance  companies.  (Art.  38,  Reg.  33,  Jan.  5,  1914.)  ^ 

624  Withholding  and  Paying  Agents  may  be  Appointed  by  Debtors. — [and]  Such 
“debtor”  may  appoint  withholding  and  paying  agents  to  act  for  it  in  matters 

pertaining  to  the  collection  of  this  tax,  upon  filing  with  the  collector  of  internal  revenue 
for  the  district  a proper  notice  of  the  appointment  of  such  agent  or  agents.  (Art.  38,  Reg. 

33,  Jan.  5,  1914.) 

625  Filing  Notice  of  Appointment  of  Paying  Agent. — This  notice  of  appointment  should 

be  placed  on  file  in  the  office  of  the  collector  of  internal  revenue  for  the  district  ^ 

in  which  the  debtor  corporation  is  located  or  has  its  principal  place  of  business,  and  the 
said  collector  should  notify  the  collector  of  internal  revenue  for  the  district  in  which  the 
duly  authorized  withholding  agent  is  located.  (T.  D.  2135,  Jan.  23,  1915.) 

626  Where  Returns  and  Certificates  are  to  be  Filed  by  Paying  Agents  Appointed  by 

Debtors. — Where  such  withholding  agent  is  so  authorized  by  the  debtor  corpora- 
tion, he  may  file  with  the  collector  of  his  district  the  required  returns  and  accompanying 
certificates  in  which  case  the  assessment  of  the  tax  withheld  by  him  will  be  made  in  that  - 

district.  Unless  such  authority  be  given,  such  reports,  etc.,  will  be  furnished  by  the 
debtor  corporation  to  the  collector  of  its  district  (i.  e.,  the  district  in  which  its  principal 
financial  or  business  office  is  located),  where,  in  such  case,  assessment  will  be  made.  (Art. 

38,  Reg.  33,  Jan.  5,  1914.) 


INC. 


68 


TAX 


PAYMENT  OF  TAX  AT  SOURCE. 


627  The  duly  authorized  withholding  agent  is  required  to  file  its  return  with  the  col- 
lector of  internal  revenue  for  the  district  in  which  the  said  withholding  agent  is 

located,  and  is  not  required  to  file  a return  with  the  collector  for  the  district  in  which  the 
debtor  corporation  is  located.  (T.  D.  2135,  Jan,  23,  1915.) 

628  The  Debtor  Corporation  only  Deducts  the  Tax,  if  Any. — In  reply  you  are  advised 
that  this  office  holds  that  the  normal  tax,  to  be  withheld  under  the  Act  of  Sept. 

8,  1916,  as  amended  by  Section  1205,  subdivision  (c).  Act  of  Oct.  3,  1917,  is  required  to  be 
deducted  only  by  the  debtor  corporation  and  should  not  be  withheld  by  the  bank  by  whose 
agency  collection  is  made.  (Letter  to  Sackett,  Chapman  & Stevens,  New  York,  N.  Y., 
signed  by  Deputy  Commissioner  L.  F.  Speer,  and  dated  Nov.  13,  1917.) 

629  Substitute  Certificates. — Collecting  agents,  responsible  banks  and  bankers  receiv- 
ing coupons  for  collection  with  ownership  certificates  attached  may  present  the 

coupons  W'ith  the  original  certificates  to  the  debtor  corporation  or  its  duly  authorized 
withholding  agent  for  collection  or  the  original  certificates  may  be  detached  and  forwarded 
direct  to  the  Commissioner  of  Internal  Revenue,  provided  such  collecting  agent  shall 
substitute  for  such  certificate  its  own  certificate  [Form  1058  exemption  claimed  and  Form 
1059  exemption  not  claimed]  and  shall  keep  a complete  record  of  each  transaction  showing — 
1.  Serial  number  of  item,  received. 

630  2.  Date  received. 

3.  Name  and  address  of  person  from  whom  received. 

4.  Name  of  debtor  corporation. 

5.  Class  of  bonds  from  v/hich  coupons  were  cut. 

6.  Face  amount  of  coupons. 

For  the  purpose  of  identification  the  substitute  certificates  shall  be  numbered 

63 1 consecutively  and  corresponding  numbers  given  the  original  certificates  of  ownership. 
Substitute  certificates  by  collecting  agents,  banks,  and  bankers,  in  lieu  of  original 

632  certificates  of  ownership  accompanying  coupons  presented  for  collection  shall  be 
discontinued  with  respect  to  ownership  certificates  presented  with  coupons  for 

collection  by  nonresident  alien  individuals,  firms,  corporations,  organizations,  etc. 

In  all  such  cases  the  original  certificates  of  ownership  shall  be  forwarded  to  the 

633  debtor  corporation  without  substitution.  (Art.  43,  *[[265-269,  Reg.  33,  Rev., 
Jan.  2,  1918.)  [^[3001.] 

634  No  License  Required  of  Collecting  Agents  for  Substituting  Their  Own  Certificates 
for  Ownership  Certificates. — Until  the  further  ruling  by  this  department,  the 

banks,  bankers,  and  other  collecting  agents  who  may  substitute  their  certificates  of  owners 
under  the  foregoing  plan  will  not  be  required  to  secure  a license  from  the  Treasury  Depart- 
ment for  being  permitted  to  make  such  substitutions  of  their  own  certificate  for  those  of  the 
owners,  provided  these  regulations  are  strictly  complied  with.  (T.  D.  1903,  Nov.  28,  1913.) 

635  Permission  to  Substitute  Own  Certificates  for  Ownership  Certificates  Extended 
to  Collecting  Agents  in  Foreign  Countries. — The  permission  here  granted  [para- 
graph 629]  will  extend  to  responsible  banks,  bankers,  and  collecting  agents  in  foreign 
countries,  through  whom  collection  of  such  interest  coupons  is  made.  [Privilege  dis- 
continued in  certain  cases,  ^[633.]  (Art.  40,  Reg.  33,  Jan.  5,  1914.) 

636  Endorsement  by  Collecting  Agent  Required  on  Certificates  of  Ownership  for 
Which  Own  Certificate  is  Substituted. — The  certificate  of  the  owner,  for  which 

the  foregoing  certificate  of  the  collecting  agent  may  be  thus  substituted  by  the  collecting 
agent  first  receiving  said  coupons  for  collection  must  be  given  the  following  indorsement 
by  the  collecting  agents  and  should  be  made  preferably  with  a rubber  stamp. 

Owner’s  certificate  No 


(Name  of  collecting  agency.) 

191-. 

(Give  date  of  certificate.) 

The  counterpart  of  the  within  certificate  bearing  like  number 
was  attached  to  the  coupons  within  mentioned  for  delivery  to 
the  debtor  or  withholding  agent,  by  whom  the  coupons  are 
payable. 

(T.  D.  1903,  Nov.  28,  1913.) 

637  Fac-simile  Signature  May  be  Used  by  Collecting  Agents  in  Signing  Their  Own 
Certificates  Substituted  for  Ownership  Certificates. — You  are  advised  that  as  a 
convenience  to  banks  and  collecting  agents  who  desire  to  substitute  their  certificates 
Form  1058  and  1059  for  the  owner’s  certificate  accompanying  the  coupons  deposited  for 
collection,  it  is  hereby  provided  that  the  name  of  the  bank  or  collecting  agent  may  be 

INC.  69 


TAX 


PAYMENT  OF  TAX  AT  SOURCE. 


printed  or  stamped,  and  that  a fac-simlle  of  the  signature  of  the  person  authorized  to 
sign  the  substitute  certificate  for  the  bank  or  collecting  agent  may  also  be  printed  or 
stamped  on  the  certificate:  Provided,  that  in  all  cases  the  bank  shall  first  file  with  the 
Commissioner  of  Internal  Revenue  a certificate  of  its  authorization  in  substantially  the 
form  following: 


(City)  (Date) 

The  Commissioner  of  Internal  Revenue: 

Washington,  D.  C. 

The  undersigned  hereby  authorizes  the  use  of  the  fac-simile  signature  shown  below 
upon  all  substitute  income  tax  certificates  issued  in  its  name  until  this  authorization  is 
revoked  by  written  notice  to  you. 


(Name  of  bank  or  collecting  agent.) 

By ; 

(Signature  of  person  authorized  to  sign.) 


(Fac-simile  signature  of  person  (Official  position.) 

authorized  to  sign.)  (T.  D.  1986,  May  29,  1914.) 

638  Law  ^[216.  Tax  of  Two  Per  Cent  Not  to  be  Withheld  Apinst  Citizens  and  Residents 
in  the  Case  of  Interest  on  Tax-Free  Covenant  Obligations  if  Personal  Specific 

Exemption  be  Claimed. — “Such  deduction  and  v/ithholding  shall  not  be  required  in  the 
case  of  a citizen  or  resident  entitled  to  receive  such  interest,  if  he  files  with  the  withholding 
agent  on  or  before  February  1,  a signed  notice  in  writing  claiming  the  benefit  of  the  credits 
provided  in  subdi\isions  (c)  [^1128]  and  (d)  [^1138]  of  section  216;” 

639  The  withholding  provisions  of  the  income-tax  law  apply — 

(b)  To  the  normal  income  tax  of  citizens  and  resident  aliens,  only  when  derived 
from  interest  on  bonds  and  mortgages,  deeds  of  trust,  or  other  similar  obligations  of  cor- 
porations, associations,  etc.,  which  have  a “tax-free”  covenant  clause  (i,  e.,  a contract  or 
provision  by  which  the  obligor  agrees  to  pay  any  portion  of  the  tax  imposed  by  this  title 
upon  the  obligee  or  to  reimburse  the  obligee  in  any  portion  of  the  tax  or  to  pay  the  interest 
without  deduction  for  any  tax  which  the  obligor  may  be  required  or  permitted  to  pay 
thereon  or  to  retain  therefrom  under  any  law  of  the  United  States),  regardless  of  the  amount 
and  period  of  payment. 

The  amount  to  be  withheld  is  2 [8]  per  cent  on  the  amount  of  payment,  unless 

640  the  person  entitled  to  receive  such  interest  shall  file  v/ith  the  withholding  agent, 
on  or  before  Feb.  1,  a signed  notice  in  writing  claiming  the  benefit  of  an  allowable 

exemption  under  section  7,  act  of  September  8,  1916,  as  amended.  (Art.  43,  ^254,  256-257, 
Reg.  33,  Rev.,  Jan.  2,  1918.) 

641  Law  1[217.  Tax  of  Two  Per  Cent  Not  to  be  Withheld  Against  Nonresident  Aliens 
in  the  Case  of  Interest  on  Tax-Free  Covenant  Obligations,  if  Claim  for  Personal 

Specific  Exemption  at  the  Source  has  been  Authorized  by  Regulations,  and  such  Claim  be 
made. — “nor  in  the  case  of  a nonresident  alien  individual  if  so  provided  for  in  regulations 
prescribed  by  the  Commissioner  under  section  217  [*[[541].”  [^2997.] 

Claiming  Exemption  at  Source  by  Citizens  or  Residents  on  Interest  on  Tax-Free 

642  Covenant  Bonds. — How  may  a citizen  or  resident  of  the  United  States 
secure  the  benefit  of  personal  exemption  to  which  he  is  entitled  when 

receiving  a payment  of  interest  on  bonds  containing  a so-called  “Tax-Free”  or 
“No  Deduction”  clause?  (Answ^er.)  By  attaching  to  the  interest  coupons  an  income  tax 
exemption  certificate  and  claiming  thereon  the  amount  of  exemption  desired.  The  amount 
of  personal  exemption  claimed  on  such  certifiptes  during  any  one  calendar  year  is  not  to 
exceed  the  total  amount  of  personal  exemption  to  which  he  is  entitled.  (Question  104, 
1918  Income  Tax  Primer.) 

643  Ownership  Certificates. — The  owners  of  bonds  of  domstic  and  resident  corporations 
shall,  when  presenting  interest  coupons  for  payment,  file  a certificate  of  ownership 

for  each  issue  of  bonds,  showing  the  name  and  address  of  the  debtor  corporation,  the  name 
and  address  of  the  owner  of  the  bonds,  whether  the  payee  is  m.arried  or  the  head  of  a 
family,  and  the  amount  of  interest.  (Art,  43,  *lf261,  Reg.  33,  Rev.,  Jan.  2,  1918.)  [For 
list  and  copies  of  forms  see  back  of  book.]  [^2998.] 

644  This  office  has  received  several  letters  with  reference  to  a letter  addressed  to  the 
Old  Colony  Trust  Company  of  Boston,  Massachusetts,  under  date  of  May  10, 

1915,  in  which  the  office  acquiesced  in  the  contention  of  various  debtor  corporations  that 
the  actual  facts  of  the  relation  of  firms,  organizations  and  fiduciaries  to  the  withholding 

70 


INC. 


TAX 


PAYMENT  OF  TAX  AT  SOURCE. 


provisions  of  the  Income  Tax  Law,  once  established  to  their  satisfaction,  may  be  accepted 
by  this  office  upon  the  proper  showing  of  debtor  corporations  and  withholding  agents,  for 
their  own  convenience,  the  interest  of  the  Government  being  safeguarded  by  the  personal 
liabilities  imposed  upon  them  by  law.  In  view,  however,  of  the  confusion  created  in  the 
matter  of  the  certificates  required  to  be  furnished  with  coupons  or  interest  orders  showing 
ownership  of  bonds  and  the  exemption  claimed,  you  are  advised  that  the  office  holds  that 
certificates  of  this  character  must  be  obtained  by  debtor  corporations  and  withholding 
agents  in  all  cases  as  required  by  the  Regulations.  (Mimeograph  letter  No.  1242  to  Col- 
lectors, July  8,  1915.) 

645  Registered  Interest  on  Registered  Bonds. — Certificates  of  ownership  are  not  re- 
quired to  accompany  interest  orders  of  checks  in  payment  of  interest  on  fully 

registered  bonds,  as  information  as  to  ownership  of  bonds  will  be  furnished  by  debtor 
organizations  on  monthly  list  returns,  Form  1012;  but  claim  for  exemption  [if  exemption 
may  be  claimed]  must  be  filed  with  debtors,  or  the  tax  must  be  withheld;  and  the  form  of 
certificate  provided  for  use  of  owners  of  coupon  bonds,  may  be  used  by  owners  of  registered 
bonds  for  the  purpose  of  claiming  this  exemption.  (T.  D.  1974,  April  21,  1914.) 

646  Where  such  certificates  are  so  filed,  the  said  debtors  shall  stamp  or  write  on  the  inter- 
est orders  or  checks,  as  the  case  may  be,  Exemption  claimed  by  Certificate  filled  with 

debtor r (T.  D.  1974,  April  21,  1914.) 

647  Where  prescribed  certificates  are  not  so  filed,  said  debtor  shall  deduct  and  withhold 
the  normal  tax  of  one  [two]  per  cent  from  the  amount  of  such  payment,  and  shall 

stamp  or  write  on  the  interest  order  or  check,  as  the  case  may  be,  'income  tax  withheld  by 
debtor:*  (T.  D.  1974,  April  21,  1914.) 

648  Responsible  banks,  bankers,  or  collecting  agents  receiving  for  collection  interest 
orders  or  checks  bearing  the  aforesaid  endorsements,  may  present  said  interest 

orders  or  checks  for  collection  without  requiring  that  certificates  of  ownership  be  filed 
therewith.  (T.  D.  1974,  April  21,  1914.) 

649  Where  because  of  failure  to  file  certificates  claiming  exemption,  in  compliance  with 
above  regulations,  a part  of  the  income  from  interest  on  registered  bonds  has  been 

withheld  for  the  payment  of  the  normal  income  tax,  debtors  may,  upon  the  filing  of  the 
proper  certificates  as  provided  in  Article  42,  Income  Tax  Regulations,  to  the  extent  of  exemp- 
tion claimed,  release  and  pay  to  the  persons  entitled  thereto  the  amount  of  such  income  so 
withheld.  (T.  D.  1974,  April  21,  1914.) 

650  Comment. — [It  should  be  remembered  that  the  law  under  which  the  following 
regulations  on  the  use  of  ownership  certificates  were  promulgated,  nonresident 

aliens  were  not  privileged  to  make  claim  for  specific  exemption,  under  any  circumstances, 
and  further  that  there  was  no  withholding  against  partnerships  in  any  case.  Now,  non- 
resident alien  individuals  may  have  the  benefit  of  the  personal  specific  exemption  and  the 
Commissioner  is  authorized  ('^641),  In  his  discretion,  to  grant  to  nonresident  alien  indivldu- 
als^the  privilege  of  claiming  such  exemption  at  the  source.  If  permission  is  granted  then, 
presumably.  Form  1000  (or  some  similar  form)  will  be  used  if  no  exemption  is  claimed, 
and  Form  1001  (or  some  similar  form)  will  be  used  if  exemption  is  claimed.  Now,  a tax 
of  2%  is  to  be  withheld  at  the  source  on  payments  of  interest  on  tax-free-covenant  obliga- 
tions to  partnerships,  whether  foreign  or  domestic.  No  tax  is  to  be  withheld  at  the 
source  on  any  other  character  of  income  payments  to  partnerships,  including  interest  on 
corporate  obligations  not  having  tax-free  covenants.  Naturally,  no  provision  is  made 
for  claiming  personal  specific  exemption  in  the  case  of  partnerships.  Therefore,  presum- 
ably, Form  1000  will  be  used  by  partnerships  when  presenting  coupons  from  tax-free-cov- 
enant bonds,  whereas  in  presenting  coupons  from  bonds  not  carrying  the  covenant.  Form 
1001  will  continue  to  be  used.]  [Read  at  ^2996  and  at  ^2977.] 

651  Form  1000  to  be  Used  Whea  Tax  is  to  be  Paid  at  the  Source  [read  ^650  above]. — 
Form  1000,  revised,  shall  be  used  (a)  when  no  personal  exemption  is  claimed  against 

interest  on  bonds  containing  a “tax-free”  covenant  by  citizens  or  residents  of  the  United 
States  [read  1[638];  (b)  by  nonresident  alien  individuals,  foreign  corporations  having  no 
office  or  place  of  business  in  the  United  States  whether  or  not  such  bonds  contain  a “tax- 
free”  covenant;  and 

[When  Status  of  Bondholder  is  Unknown]  (c)  in  the  case  where  coupons  are  received  not 
accompanied  by  certificates  of  ownership.  The  first  bank  receiving  coupons  not  accompa- 
nied by  ownership  certificates  will  make  a certificate  crossing  out  “owner”  and  inserting 
“payee”  and  will  enter  the  amount  of  interest  on  line  4.  (Art.  43,  ^262,  Reg.  33.  Rev., 
Jan.  2,  1918.) 


INC. 


71 


TAX 


PAYMENT  OF  TAX  AT  SOURCE. 


662  This  office  has  before  it  your  letter  dated  January  7,  1918,  in  which  you  request 
to  be  informed  as  to  the  rate  of  tax  which  should  be  withheld  when  coupons  from 
bonds  of  American  corporations,  owned  by  nonresident  aliens  are  presented  for  payment 
in  the  United  States,  accompanied  by  income  tax  certificate  form  1002  and  no  information 
as  to  the  owner  can  be  obtained.  ^In  reply  you  are  advised  that  if  it  is  impossible  to  as- 
certain the  information  necessary  to  determine  whether  the  tax  should  be  withheld,  and  the 
rate  which  applies,  tax  should  be  withheld  at  the  rate  of  6%  [8%,  unless  tax-free-covenant 
bond  and  then  2%  as  that  is  the  maximum  to  be  deducted  in  any  event  in  such  cases}. 
If  an  excess  amount  of  tax  should  be  paid  to  the  Government,  the  matter  may  be  adjusted 
later  through  a claim  for  refund.  (Letter  to  Lee,  Higginson  & Co.,  Boston,  Mass.,  signed 
by  Commissioner  Daniel  C.  Roper,  and  dated  Jan.  30,  1918.) 

653  Form  Ten  Hundred  Two  now  obsolete.  If  coupons  are  not  accompanied  by  certi- 
ficates disclosing  ownership,  Form  One  Thousand  revised  January,  1918,  must  be 

made  by  first  bank  which  will  enter  amount  of  interest  on  line  four  and  debtor  corporation 
will  withhold  tax  from  that  amount.  (Telegram  to  Lee,  Higginson  & Co.,  Boston,  Mass., 
signed  by  Commissioner  Daniel  C.  Roper,  and  dated  Jan.  28,  1918.) 

654  Form  1001  to  be  Used  When  Tax  is  Not  to  be  Paid  at  the  Source  [read  1f650  above]. — 
Form  1001,  revised,  shall  be  used  (a)  when  personal  exemption  is  claimed  against 

interest  on  bonds  containing  a “tax-free”  covenant  by  citizens  or  residents  of  the  United 
States  [read  1[638],  also  when  presenting  coupons  from  bonds  not  containing  a “tax-free” 
covenant;  (b)  by  domestic  partnerships,  corporations,  or  associations;  (c)  by  nonresident 
alien  partnerships;  and  (d)  by  foreign  corporations  having  an  office  or  place  of  business 
in  the  United  States,  whether  or  not  such  bonds  contain  a “tax-free”  covenant.  (Art.  43, 
1[263,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

655  Where  bonds  of  foreign  countries,  or  bonds  or  stocks  of  foreign  corporations,  are 
owned  by  citizens  or  residents  of  the  United  States,  individual  or  fiduciary,  or  by 

domestic  or  resident  corporations,  joint  stock  companies,  associations,  insurance  companies 
or  partnerships,  ownership  certificate  1001 A shall  be  executed  by  the  actual  owner,  or  by 
his  duly  authorized  agent,  when  presenting  the  item  for  collection,  whether  such  item  is  a 
dividend  or  an  interest  payment,  except  in  the  case  of  a foreign  country  or  a foreign  corpo- 
ration having  a paying  agent  in  this  country  and  issuing  bonds  which  contain  a ‘tax-free* 
covenant  clause.  In  such  cases  the  paying  agent  is  required  to  withhold  the  normal  tax 
upon  the  interest  on  such  bonds;  and  ownership  certificate.  Form  1000,  properly  modified 
to  show  that  the  debtor  has  a paying  agent  in  this  country,  should  be  used,  unless  the  owner 
desires  to  claim  exemption;  in  which  case  Form  lOOlA  should  be  filed.  ^ 

Where  bonds  of  foreign  countries,  or  bonds  or  stock  of  foreign  corporation8,*'are 

656  owned  by  nonresident  alien  individuals,  or  foreign  corporations,  associations  or 
partnerships,  ownership  certificate.  Form  1071,  Revised,  shall  be  used  for  andjon 

behalf  of  such  owners  by  any  responsible  bank  or  banker,  either  foreign  or  domestic. 
(Part  of  Art.  35,  Ree.  33,  Rev.,  Jan.  2,  1918,  as  amended  by  T.  D.  2759,  Oct.  2,  1918. )i^^ 

667  In  case  a citizen  or  resident  individual  receives  interest  on  bonds  containing  a "tax- 
free”  covenant  in  excess  of  the  amount  of  personal  exemption  which  the  individual 
may  claim,  any  such  excess  must  be  reported  on  Form  1000,  revised.  (Art.  43,  ^264, 
Reg.  33,  Rev.,  Jan.  2,  1918.) 

658  ♦ ♦ ♦ Interest  on  bonds  of  domestic  corporations,  joint  stock  companies’^or 

associations,  and  insurance  companies,  payable  to  nonresident  alien  corporations. 

Is  subject  to  deduction  of  tax  at  the  source  at  the  rate  of  [8]  per  cent.  Foreign  corporations 
will  file  ownership  certificate  Form  1000  in  presenting  coupons  for  payment.  If  a foreign 
cor  poration  has  an  office,  agent,  or  place  of  business  in  the  United  States,  certificate  Form 
1001  shall  be  filed  establishing  such  fact  and  relieving  the  corporation  for  deduction  of  the 
tax  at  the  source.  (Art.  202,  ^603,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

659  Certificates  of  Ownership  for  Each  Separate  Issue  of  Bonds  of  Each  Debtor. — 
These  certificates  shall  be  made  on  the  prescribed  forms  and  shall  be  made  out  by 

each  owner  of  bonds  for  the  coupons  or  interest  orders  for  each  separate  issue  of  bonds  or 
obligations  of  each  debtor.  (Art.  39,  Reg.  33,  Jan.  5,  1914.) 

660  One  Certificate  of  Ownership  may  be  Used  with  Coupons  of  More  Than  One 
Maturity  of  the  Same  Issue  of  Bonds. — Also  that  coupons  of  more  than  one  maturity 

from  the  same  issue  of  bonds  may  be  covered  by  one  ownership  certificate.  (Letter  to  the 
Columbia  Trust  Company,  New  York,  N.  Y.,  signed  by  Deputy  Commissioner  L.  F.  Speer, 
and  dated  Mar.  26,  1918.) 

661  One  Ownership  Certificate  Will  Suffice  in  Case  of  Joint  Owners. — 1.  Where 
fiduciaries  have  the  control  and  custody  of  more  than  one  estate  or  trust,  and  said 

estates  and  trusts  have  as  assets  bonds  of  corporations,  etc.,  this  office  will  hereafter  require 

72 


INC. 


TAX 


PAYMENT  OF  TAX  AT  SOURCE. 


that  a certificate  of  ownership  be  executed  for  each  estate  or  trust  regardless  of  the  fact  that 
the  bonds  are  of  the  same  issue.  When  bonds  are  owned  jointly  by  several  persons,' one 
of  thebwners  may  execute  an  ownership  certificate  in  behalf  of  the  other  owners  and  endorse 
on  the  back  thereof  their  names  and  addresses,  and  proportion  of  ownership  of  each, 

2.  Treasury  Decision  1987,  dated  May  29,  1914,  and  instructions  on  ownership 

662  certificates  Forms  1000,  and  1001,  Revised,  which  provide  for  the  filing  of  a separate 
certificate  by  each  joint  owner,  are  hereby  superseded’and^repealed.  (T.  D.  2709.. 

May  2,  1918.)  * 

663  Numbers  of  Bonds;  Waiver  of  Requirement  for  Filling  in  on  Certificates.— Notice 
is  hereby  given  that  Regulation  requiring  the  filling  in  on^  certificates  of  numbers 

of  bonds,  or  other  like  obligations  of  corporations,  etc.,  from  which  Interest  coupons  are 
detached  or  upon  which  registered  Interest  is  to  be  paid — which  was  extended  to  Oct^ 
31,  1914,  by  T.  D.  1985,  issued  May  28,  1914— is  hereby  waived  until  further  notice. 
(T,  D.  2022,  Oct.  3,  1914.) 

664  Full  Post  Office  Address  on  Certificates. — Replying  to  your  letter  of  April  15,  1914, 
relative  to  street  address  on  certificates  you  are  advised  that  banks  should 

care  in  securing  full  post  office  address  on  certificates.  Where  no  street  address  is  given,  ^i^ 
office  will  assume  that  same  is  not  necessary  in  addressing  mail,  and  certificates  will  NOT 
be  returned  for  correction.  (Letter  to  National  Park  Bank,  signed  by  Deputy  Commis- 
sioner L.  F.  Speer,  and  dated  April  23,  1914.) 

666  Address  may  be  Omitted  from  Certificates  in  Certain  Cases.^ — Address  may  be 
omitted  from  ownership  certificates  in  case  prominent  corporation  and  in  its  place 
description  bond  issue  inserted.  (Telegram  to  Lee,  Higginson  & Co.,  Boston,  Mass.;^ 
signed  by  Commissioner  Daniel  C.  Roper,  dated  Feb.  11,  1918.) 

666  Banks  and  Trust  Companies  May  Use  Facsimile  Signatures.^ — You  are  advised''. 

that  as  a convenience  to  Banks  and  Trust  Companies  having  a large  number  of 
ownership  certificates  to  execute  in  the  collection  of  interest  on  bonds,  it  is  hereby  provided 
that  the  name  of  the  Bank  or  Trust  Company  may  be  printed  or  stamped,  and  the  fac- 
simile of  the  signature  of  the  person  authorized  to  sign  for  the  Bank  or  Trust  Company 
in  executing  the  said  ownership  certificates  may  be  printed  or  stamped  on  the  certificate:: 
Provided,  that  in  all  cases  the  Bank  or  Trust  Co.npany  shall  first  file  with  the  Comrnis- 
sioner  of  Internal  Revenue  a certificate  of  its  authorization  in  substantially  the  following 
form: 


The  Commissioner  of  Internal  Revenue, 
Washington,  D.  C. 


fCity) 


(Date) 


The  undersigned  hereby  authorizes  the  use  of  the  facsimile  signature  shown  befovr 
upon  all  income  tax  ownership  certificates  issued  in  its  name  until  this  authorization  ia- 
rsvoked  by  written  notice  to  you. 


(Name  of  Bank  or  Trust  Co.) 
By 

(Signature  of  person  authorized  to  sign) 


(Official  position.) 


Facsimile  signature  of  person 
authorized  to  sign.) 


(T.  D.  2258,  Nov.  1,  1915.) 


667  Use  of  Initials  on  Certificates  Authorized. — Replying  to  your  telegram  of  the  6tb 
instant,  you  are  advised  that  in  writing  the  name  at  top  of  certificate  initials  may 
be  used.* 


668  Married  Woman  in  Executing  Certificate  Should  Use  Her  Own  Christian  Name. — 
A married  woman  should  sign  her  own  Christian  name  and  not  the  name  of  her 
husband.* 


*[Comment:  The  answers  embodied  in  paragraphs  above,  are  reproduced,  by 

courtesy,  from  a letter  to  the  Central  Trust  Company  of  New  York,  dated  Jan.  7,  1914, 
signed  by  Deputy  Commissioner  L.  F.  Speer.  These  are  printed  now  as  there  still  seem* 
to  be  confusion  on  the  points  covered.] 


INC. 


73 


TAX 


PAYMENT  OF  TAX  AT  SOURCE. 


669  Ownership  Certificates  Should  not  be  Accepted  unless  All  Information  Called  fof 
Thereon  is  Shown. — Can  certificates  one  thousand  and  one  thousand  otje  be 

accepted  if  questions  regarding  marital  status  and  head  of  family  are  not  answered?  Wire 
collect.  (Answer.)  Certificates  should  not  be  accepted  unless  all  information  called 
for  thereon  is  shown.  (Telegram  from  M.  F.  Frej^  Guaranty  Trust  Co.,  New  York,  N.  Y., 
the  reply  thereto  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  Feb.  28,  1918.) 

670  The  Marital  Status  Interrogatory  on  Ownership  Certificates. — Your  inquiry  fts  to 
whether  “an  income  tax  certificate  of  the  new  form,  executed  by  the  owner,  must 

indicate  whether  he  is  married  and  the  head  of  a family”  is  answered  in  the  affirmative. 
(Letter  to  the  Columbia  Trust  Company,  New  York,  N.  Y.,  signed  by  Deputy  Com- 
missioner L.  F.  Speer,  and  dated  Mar.  26,  1918.) 

671  Refer  letter  March  twenty-sixth  IT:PA-CEK  [1[670].  If  bondholder  answers 
“yes”  to  first  question  on  revised  Forms  1000  or  1001  must  second  question  be 

answered?  Wire  collect.  (Answer.)  If  bondholder  married  and  answer  to  question 
relative  marital  status  is  “yes”  then  not  necessary  to  answer  question  as  to  whether  or  not 
head  of  family.  (Telegram  of  inquiry  from  the  Columbia  Trust  Company,  New  York, 
N.  Y.,  and  the  reply  thereto  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  March 
30,1918.) 

672  Interrogatories  as  to  marital  status  on  ownership  certificates  need  not  be  answered 
when  certificates  are  executed  by  nonresident  alien  individuals.  (Telegram  to 

The  Corporation  Trust  Company,  signed  by  Commissioner  Daniel  C.  Roper  and  dated 
May  23,  1918.) 

673  Total  Exemption  Allowed  may  be  Prorated  Beftween  Husband  and  Wife.— You 

are  advised  that  the  specific  exemption  of  * * * from  the  aggregate  income  of  husband 

and  wife,  allowed  by  * * * the  Income  Tax  Law,  may  be  claimed  by  either,  or  may  be 

prorated  between  them,  in  any  proportion  that  may  be  agreed  upon. 

Under  these  circumstances,  certificate  Form  [1001],  showing  the  amount  of  exemp- 

674  tion  claimed,  as  agreed  upon  between  husband  and  wife,  should  be  accepted  by 
debtor  corporations.  (Part  of  letter  to  The  National  Bank  of  Commerce  in  St. 

Louis,  signed  by  Deputy  Commissioner  L.  F.  Speer,  and  dated  April  7,  1915.) 

675  Stamp  Indicating  “Satisfied  as  to  Identity  of  Agent”  not  Required.— Receipt  is 
acknowledged  of  your  letter  of  February  20,  1918,  and  in  reply  you  are  advised 

that  it  is  not  necessary  for  the  first  collecting  agent  receiving  coupons  accompanied  by  an 
ownership  certificate  which  was  executed  by  an  agent  on  behalf  of  the  owner  to  affix  a 
stamp  containing  the  words  “Satisfied  as  to  identity  and  responsibility  of  agent.”  (Letter 
to  the  Columbia  Trust  Company,  New  York,  N.  Y.,  signed  by  Deputy  Commissioner 
L.  F.  Speer,  and  dated  March  26,  1918.) 

67  6 Person  First  Receiving  Coupons  or  Interest  Orders  for  Collection  Need  not  Endorse 
on  the  Back  of  the  Certificate. — This  office  is  in  receipt  of  your  letter  of  September 
18,  1914,  inquiring  whether  the  provision  in  T.  D.  1887,  October  25,  1913,  requiring 
that,  “the  person  or  corporation  first  receiving  coupons  or  interest  orders  for  collection 
shall  write  or  stamp  his  or  its  name  and  address  and  date  on  the  back  of  said  certificates,” 
is  still  in  force. 

You  are  advised  that  this  requirement  appearing  in  the  first  draft  of  the  Regulations- 

677  was  omitted  in  the  subsequent  draft  of  the  Regulations,  and  as  they  now  appear  in 
permanent  form  in  Regulations  No.  33  adopted  January  5,  1914. 

The  foregoing  endorsement  is  not  now  required.  (Letter  to  The  Corporation 

678  Trust  Company,  signed  by  Deputy  Commissioner  L.  F.  Speer,  and  dated  September 
18,1914.) 

679  “You  are  advised  that  the  endorsement  provided  in  Treasury  Decision  1887,  dated 
October  25,  1913,  it  no  longer  required^  (Extract  from  a letter  to  the  National 

Park  Bank,  signed  by  Internal  Revenue  Collector  Anderson,  New  York,  and  dated  Decem- 
ber 23,  1914.) 

680  Proper  Ownership  Certificates  to  be  Used  by  Fiduciaries,  Whether  Corporate  or 
Individual. — Should  a corporate  fiduciary  acting  for  ar  individual  beneficiary 

use  form  of  ownership  certificate  and  line  thereon  designated  for  a corporation  or  that 
designated  for  an  individual?  In  general  are  discriminations  between  the  form  of  owner- 
ship certificates  and  line  thereon  to  be  used  by  fiduciaries  to  be  based  upon  the  status, 
corporate  or  individual,  of  the  fiduciary,  or  on  the  status,  corporate  or  individual,  of  the 
beneficiary?  IfFiduciary,  whether  corporate  or  individual,  must  use  lines  on  ownership 
certificates  provided  for  use  of  fiduciary.  Citizens  or  resident  fiduciary  should  use  Form 
1000,  line  1;  and  Form  1001,  line  1 or  line  2.  Nonresident  alien  fiduciary  should  use  Form 

74 


INC. 


TAX 


PAYMENT  OF  TAX  AT  SOURCE. 


1000,  line  2.  (Telegram  of  inquiry  from  the  First  National  Bank,  Cleveland,  Ohio,  and 
the  reply  thereto  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  May  20,  1918.) 

681  Exchange  of  Interest  Coupons  for  Funding  Bonds. — The  exchange  of  interest 
coupons  for  funding  bonds  is  a payment  of  interest  on  the  bonds  and  the  income 

tax  should  be  imposed  and  paid  upon  such  interest  as  income  for  the  year  in  which  il 
matures  and  such  payment  is  made,  and  in  the  absence  of  proper  claim  for  exemption  the 
tax  should  be  deducted  and  withheld  on  the  amount  represented  bv  the  coupons.  (T.  D. 
2090,  Dec.  14,  1914.) 

682  Advance  Retirement  of  Bonds  within  an  Interest  Period. — Where  bonds,  under 
contract  provisions  in  the  bonds,  are  retired  within  an  interest  period  and  prior 

to  the  expiration  of  the  full  term  of  the  bond,  ownership  certificates  will  be  required  and 
should  cover  that  part  of  the  interest  period  affected  between  the  beginning  of  such  period 
and  the  date  of  the  retirement  of  the  bonds.  (T.  D.  2090,  Dec.  14,  1914.) 

683  Receipt  is  acknowledged  of  your  letter  of  March  17,  1916,  wherein  you  make  reference 
to  certain  rulings  of  the  office  relative  to  the  filing  of  certificates  of  ownership  in 

cases  where  bonds  are  purchased  by  the  debtor  corporation  and  retired  between  interest 
dates.  In  reply  you  are  advised  that  after  a careful  consideration  of  the  matter  the  ruling 
contained  in  office  letter  of  January  5,  1916,  addressed  to  Messrs.  White  & Case,  14  Wall 
Street,  New  York  City,  has  been  annulled,  and  it  is  now  required  that  in  a case  wdierein 
the  corporation  which  issued  the  bond,  or  its  receiver  or  trustee,  is  the  purchaser,  and  the 
bond  is  retired  and  all  its  coupons  cancelled,  the  seller  of  the  bond  shall  execute  a certi- 
ficate of  ownership,  claiming  or  not  claiming  exemption,  to  cover  such  coupons  as  are  due 
and  payable  at  date  of  sale,  but  are  still  attached  to  the  bond,  and  the  coupon  covering 
the  interest  which  had  accrued  from  last  interest  date  to  date  of  sale.  In  short,  in  all 
cases  where  bonds  are  retired  within  an  interest  period  and  prior  to  the  expiration  of  the 
full  term  of  the  bond,  whether  under  contract  or  not,  ownership  certificates  will  be  required, 
which  certificates  should  cover  that  part  of  the  interest  period  affectedbetween  the  beginning 
of  such  period  and  the  date  of  the  retirement  of  the  bonds.  (Letter  to  one  of  our  sub- 
scribers, signed  by  Deputy  Commissioner  L.  F.  Speer,  and  dated  April  11,  1916.) 

684  Purchase  and  Sale  of  Bonds  Between  Interest  Dates. — This  office  acknowledges 
receipt  of  your  letter  of  December  20,  1915,  and  in  reply  you  are  advised  that,  as 

stated  in  office  letter  of  December  18,  1915,  it  is  held  that  where  a bond  Is  purchased  be- 
tween interest-bearing  dates,  the  seller  is  not  required  to  execute,  for  Federal  Income 
Tax  purposes,  an  ownership  certificate  to  accompany  the  interest  coupon  which  is  not  due 
and  payable  and  is  not  detached  from  the  bond,  but  such  a certificate  will  be  required  from 
the  purchaser  of  the  bond,  when,  at  a later  date,  the  coupon  is  detached  and  presented 
for  payment  or  collection.  (Letter  to  White  & Case,  New  York,  N.  Y.,  signed  by  Deputy 
Commissioner  L.  F.  Speer,  and  dated  Jan.  5,  1916.) 

685  Usufruct  of  Foreign-Owned  Bonds  Belonging  to  an  American  Citizen  or  Resident. — 
This  office  is  in  receipt  of  your  letter  dated  November  9,  1914,  stating  that  you  had 

received  a letter  from  one  of  your  foreign  correspondents  containing  the  following  inquiry: 
“We  have  on  our  accounts  certain  American  bonds  which  are  the  property  of 
Swiss  citizens,  but  the  usufruct  of  which  belongs  to  an  American  citizen;  when 
collecting  the  coupons  of  these  bonds,  can  we  sign  the  ownership  certificates  on  behalf 
of  the  Swiss  owners,  or  is  it  necessary  to  state  thereon  the  name  of  the  American 
beneficiary?” 

In  reply  to  your  request  for  a ruling  based  on  the  facts  given  above,  you  are  advised 

686  that  the  coupons  should  be  accompanied  by  a certificate  of  ownership  signed  by, 
or  in  behalf  of,  the  person  entitled  to  receive  the  income  from  the  bonds.  The 

revised  form  of  certificates  of  ownership  should  be  altered  to  show  that  such  person  is 
entitled  to  receive  the  interest  on  the  bonds.  For  example,  if  Form  1000,  Revised,  is  used, 
there  should  be  inserted  in  the  first  line  of  the  declaration  on  the  certificate  the  words 
“interest  on  the”  between  the  words  “the”  and  the  word  “above-described,”  so  that  the 
certificate  will  read,  “I  do  solemnly  declare  that  I am  a citizen  or  resident  of  the  Upited 
States  and  am  the  owner  of  the  interest  on  the  above-described  bonds,  etc.”  (Special  letter 
of  Nov.  23,  1914.) 

687  When  Coupons  from  Foreign-Owned  Bonds  Belong  to  Domestic  Corporations. — 
This  office  is  in  receipt  of  your  letter  of  April  5,  1916,  in  which  you  ask,  “A  bank  in 

New  York  purchased,  since  January  1,  a number  of  coupons  in  Paris  and  London.  These 
coupons  are  now  in  transit  and  will  be  presented  for  payment  when  they  arrive.  The 
bank  cannot  certify  that  it  is  the  owner  of  the  bonds,  although  it  is  the  owner  of  the 
coupons  for  which  it  paid  in  full.  Will  the  amount  of  such  coupons  be  subject  to  taxation? 
If  so,  what  recourse  will  the  bank  have  to  obtain  a refund  of  the  amount?”  [Answer.] 


INC. 


75 


TAX 


PAYMENT  OF  TAX  ATiSOURCE., 

The  case  should  be  handled  in  accordance  with  existing  regulations,  viz.,  the  bank  should 
use  Form  1001  and  strike  out  in  line  2,  of  the  certificate,  the  words  “bonds  from  which 
were  detached  the  accompanying  * * * or,”  so  that  the  declaration  will  be  for 
ownership  of  the  coupons.  (Letter  to  The  Corporation  Trust  Company,  signed  by 
Acting  Commissioner  David  A.  Gates,  and  dated  April  5,  1916.)  • 

688  Bonds  Purchased  by  Trustee  Under  the  Mortgage  Deed  of  Trust  But  Not  Retired.— 
With  reference  to  the  ruling  contained  in  office  letter  of  November  18,  1916,  wherein 

it  was  held,  in  a case  where  corporate  bonds  are  purchased  “by  the  trustee  under  the  mort- 
gage deed  of  trust  out  of  the  money  from  a sinking  fund  when  the  bonds  are  not  retired  or 
cancelled  but  held  alive  by  the  trustee  and  interest  is  continued  on  the  coupons,  the  interest 
80  paid  to  the  trustee  being  held  for  the  account  of  the  corporation  issuing  the  bond”' 
that  the  trustee  merely  acts  as  agent  for  the  debtor  corporation  and  that  the  corporation 
itself,  or  the  trustee  if  duly  authorized  to  act  as  agent  for  the  corporation,  should  execute 
income  tax  certificates,  Form  1001,  Revised,  to  accompany  the  interest  coupons  detached 
from  the  bonds  so  purchased  and  held  when  such  cbupons  are  presented  for  payment  or 
collection,  you  are  advised  as  follows: 

The  office  now  holds  that  if  legal  title  to  the  bonds  rests  with  the  trustee,  he  should 
execute  * * * certificates  * * * to  accompany  the  coupons  detached  from  the 

bonds  when  they  are  presented  for  payment  or  collection.  (Letter  to  The  Corporation 
Trust  Company,  signed  by  Commissioner  W.  H.  Osborn,  and  dated  Dec.  6,  1916.) 

689  Size,  Color,  etc.,  of  Certificates. — All  certificates  shall  be,  in  size,  8 by  inches, 
and  shall  be  printed  to  read  from  left  to  right  along  the  8-inch  dimension. 

690  All  paper  upon  which  certificates  shall  be  printed  shall  correspond  in  weight  and 
texture  to  white  writing  paper  21  by  32,  about  40  pounds  to  the  ream  of  500  sheets. 

691  Certificates  will  be  printed  by  the  Government  and  furnished  without  cost  for  the 
use  of  bond  owners. 

692  Individuals  or  organizations  desiring  to  print  their  own  certificates  may  do  so,  but 
certificates  so  printed  must  conform  in  size  and  be  printed  in  similar  type,  upon  the 

same  color,  shape,  and  weight  of  paper  as  used  by  the  Government. 

693  Sample  certificates  showing  size  of  type  and  color  of  paper  can  be  secured  from  col- 
lectors of  internal  revenue  in  their  several  districts  or  from  the  Commissioner  of 

Internal  Revenue  at  Washington,  D.  C.  (T.  D.  1976,  May  2,  1914.) 

694  The  department  will  furnish  blank  forms  of  certificates  to  be  used  in  connection  with 
the  collection  of  the  income  tax  by  such  parties  as  may  make  application  for  the 

same.  Private  corporations  and  others  desiring  to  have  these  certificates  printed  for  them- 
selve.s  may  do  so  if  they  will  strictly  observe  the  requirements  of  the  department  as  to  size, 
print,  form,  color,  and  contents.  (T.  D.  1939.)  (T.  D.  2090,  Dec.  14,  1914.) 

695  Ownership  Certifica?tes  for  Use  by  Foreigners  May  Be  Printed  in  Two  Languages. — 
Certificates  of  ownership  required  to  be  filed  with  interest  coupons  or  orders  for 

registered  interest  by  non-resident  foreigners  * * * and  by  foreign  organizations,  shall 

be  printed,  as  prescribed  by  regulations,  in  the  English  language,  and  directly  under  each 
line  of  the  English  text,  on  each  of  the  above-mentioned  certificates,  there  may  be  printed 
the  text  of  said  certificate  in  a foreign  language. 

696  la  executing  these  certificates,  however,  all  blanks  to  be  filled  in,  with  amounts, 
shall  be  filled  in  using  United  States  dollar  values. 

697  These  certificates  shall  be  of  the  same  size  as  prescribed  by  regulations  for  all 
certificates  of  ownership.  (T.  D.  1926,  Dec.  30,  1913.) 

698  Law  ^218.  Returns  of  Taxes  Withheld  at  the  Source.— “(c)  Every  individual, 
corporation,  or  partnership  required  to  deduct  and  withhold  any  tax  under  this 

section  shall  make  return  thereof  on  or  before  March  first  of  each  year  and  [shall  pay,  ^720]” 

699  Return  is  to  be  made  for  the  tax  withheld  in  manner  and  on  a form  to  be  prescribed 
by  the  Commissioner  of  Internal  Revenue  with  the  approval  of  the  Secretary  of  the 

Treasury.  This  return  is  to  be  made  after  February  1 and  on  or  before  March  1 annually. 
The  return  shall  show  the  nameand  address  of  the  withholding  agent,  character  of  income, 
and  the  name  and  address  of  the  recipient  or  his  agent,  amount  of  income,  exemption 
claimed,  and  the  amount  of  tax  ♦ * * withheld  thereon.  (Art.  46,  ^273,  Reg.  33, 

Rev.,  Jan.  2,  1918.) 

700  Return  of  Taxes  Withheld  on  Miscellaneous  Income. — Tax  withheld  from  income 
other  than  bond  interest  will  be  accounted  for  on  income-tax  Form  1042,  and  separ- 
ate reports  of  the  payments  entered  on  Form  1042  will  be  made  on  Form  1098.  (Art  43, 
^260,  Reg.  33,  Rev.,  Jan.  2,  1918.) 


INC. 


76 


TAX 


PAYMENT  OF  TAX  AT  SOURCE. 

Withholding  agents  shall  make  an  annual  list  return  (Form  1042)  in  duplicate, 

701  to  the  collector  of  internal  revenue  for  the  district  in  which  the  withholding  agent 
• resides  or  has  his  principal  place  of  business — which  should  be  filed  with  the  collector 

of- internal  revenue  for  the  district  in  which  the  debtor  or  withholding  agent  is  located, 
(T.  D.  2135)  on  or  before  the  1st  day  of  March  in  each  year,  showing  the  names  and  addre^ 
of  persons  who  have  received  incomes  *-  '*  * , on  which  the  normal  tax' of  1 [8  or  10] 

per  cent  has  been  deducted  and  withheld  during  the  preceding  year.'  (Art.  69,  Reg.  3'3, 
Jan.  5,  1914.)  ; ' ' ....  . 

702  Return  of  Taxes  Withheld  on  Bond  Interest — Tax  withheld  from  bond  interest 
will  be  accounted  for  monthly  on  income-tax  Form  1012,  and  an  annual  summary 

of'these  will  be  made  on  income-tax  Form  1013.  The  annual  return  only  will  be  verified. 
(Art.  43,  11260,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

703  Where  a debtor  corporation,  or  its  duly  authorized  withholding  agent  has  made  ho 
payments  of  interest  to  non-resident  alien  individuals,  or  foreign  corporations,  having 

no  office  or  place  of  business  in  the  United  States,  or  has  withheld  no  tax  from  citizens 
or  residents  of  the  United  States,  whether  or  not  the  bonds  upon  which  such  interest  accrued 
contain  a tax  free  covenant  clause,  the  exemption  certificates  filed  in  connection  with  such 
interest  payments  shall  not  hereafter  be  forwarded  to  Collectors  of  Internal  Revenue, 
accompanied  by  a return  on  Form  1012,  Revised,  but  shall  be  transmitted  direct  to  the 
Commissioner  of  Internal  Revenue,  (Sorting  Division),  Washington,  D.  C.,  accompanied 
by  a return  on  Form  1096.  When  used  in  this  connection.  Form  1096  shall  be  filed  monthly, 
and  in  such  cases,  this  office  will  not  require  that  the  return  be  sworn  to.  The  number  of 
exemption  certificates  thus  transmitted,  and  the  total  amount  of  interest  paid  shall  be 
entered  on  line  1 of  the  return. 

In  all  cases,  however,  where  a debtor  corporation  or  its  duly  authorized  withholding 

704  agent  has  withheld  the  tax  and  is  therefore  required  to  render  a return  on  Form  1012, 
Revised,  all  certificates  received  shall  be  accounted  for  on  such  monthly  return,  as 

directed  by  the  instructions  thereon.^ 

705  All  instructions  issued  by  this  office  in  conflict  herewith,  are  hereby  superseded 
and  repealed.  (T.  D.  2687,  April  1,  1918.) 

706  Income  tax  Forms  1012,  1012A,  1012B,  1012C,  and  1012D,  as  provided  by  T.  D.  1914 
of  December  9,  1913  [Art.  50,  Reg.  33],  and  as  required  to  be  used  prior  to  the  date 

of  this  regulation,  are  hereby  superseded  and  from  and  after  the  date  of  this  regulation 
the  monthly  list  return  of  normal  income  tax  withheld  from  interest  paid  on  bonds  and 
mortgages  or  deeds  of  trust  or  other  similar  obligations  of  corporations,  etc.,  shall  be  in 
the  following  form  (Form  1012  Revised); 

While  certificates  are  required  to  be  listed  alphabetically  where  the  volume  of  busi- 

707  ness  is  sufficiently  large  to  require  or  make  advisable  a dally  listing  of  certificates, 
in  all  such  cases  alphabetical  listing  will  not  be  insisted  upon,  but  all  certificates 

must  be  packed  and  forwarded  to  this  office  in  the  order  in  which  listed. 

708  Where  an  extension  sheet  is  required  it  shall  be  in  the  following  form: 


United  States  Internal  Revenue. 
CONTINUATION  SHEET  FORM  1012A  (revised) 


Name  of  payee. 

Address  in  full 

Amount  of  in- 
come on  which 
withholding 
agent  is  liable 
for  tax. 

Amount  of  tax 
liability. 

Totals  brought  forward.  . . 

$ 

$ 

Totals  carried  forward.  . . . 

Return  on  this  form  shall  be  made  monthly  on  or  before  the  20th  day  of  the  month 

709  for  income  tax  withheld  in  the  preceding  month. 

710  The  use  of  Forms  1012  A,  1012B,  1012C,  and  1012D  are  discontinued. 

A summary  of  monthly  list  returns  as  herein  provided  and  made  during  a calendar 

711  year  will  be  listed  on  income-tax  Form  1013,  and  this  annual  list  will  be  filed  with 
the  collector  of  internal  revenue  on  or  before  March  1 of  each  year  and  will  consti- 
tute the  annual  withholding  return  of  debtor  corporations  or  their  withholding  agents 
for  normal  income  tax  withheld  from  interest  paid  on  bonds  and  mortgages  or  deeds  of 
trust  or  other  similar  obligations  of  corporations,  etc. 

77 


INC. 


TAX 


PAYMENT  OF  TAX  AT  SOURCE. 


This  return  shall  be  printed  on  white  paper,  on  sheets  in  size  16  by  lOj/^  inches  and 

712  shall  be  printed  to  read  along  the  103^-Inch  dimension,  with  horizontal  and  column 
lines  and  headings  as  shown  by  the  form  herein  provided.  These  forms  will  be 

furnished  by  the  Government. 

Monthly  list  returns  made  on  forms  In  use  prior  to  the  date  of  this  regulation  will  be 

713  accepted  by  the  Government  up  to  and  including  April  20,  1917,  but  all  monthly 
list  returns  for  April  and  subsequent  months  shall  be  made  on  the  form  here  prc- 

cribed.  (T.  D.  2468,  Mar.  26,  1917.) 

714  Withholding  agents  who  are  required  to  make  monthly  returns  will,  on  or  before 
the  20th  day  of  each  month,  file  with  the  collector  for  their  respective  districts 

such  returns  for  the  preceding  month.  (Art.  35,  Reg.  33,  Jan.  5,  1914.) 

716  Such  reports,  etc.,  will  be  furnished  by  the  debtor  corporation  to  the  collector  of 
its  district  (i.  e.,  the  district  in  which  its  principal  financial  or  business  office  is 
located),  where,  in  such  case,  assessment  will  be  made.  (Art.  38,  Reg.  33,  Jan.  5 1914.) 

716  The  return  should  be  filed  with  the  collector  of  internal  revenue  for  the  district 
in  which  the  debtor  corporation  is  located  or  has  its  principal  place  of  business. 

provided  the  said  debtor  corporation  has  not  filed  with  the  said  collector  of  interna!  revenue 
a notice  of  the  appointment  of  a duly  authorized  withholding  agent  in  which  case  the 
debtor  corporation  is  not  required  to  file  a monthly  list  return.  Form  1012,  or  the  corre- 
sponding annual  list  return.  Form  1013.  (T.  D.  2135,  Jan.  23,  1915.) 

717  [Monthly  list  returns  shall  be]  accompanied  by  all  certificates  relating  thereto,  and 
there  shall  also  accompany  said  returns  all  certificates  claiming  exemptions  * * ♦ 

which  are  not  required  to  be  listed  thereon.  (Art.  35,  Reg.  33,  Jan.  5,  1914.) 

718  How  to  Enter  Substitute  Certificates  of  Collecting  Agents  on  Monthly  List  Returns. 
— [For  substitute  certificates  read  at  11629.]  All  substitute  certificates  of  collecting 

agents,  authorized  by  regulations  that  are  received  by  debtors  or  withholding  agents  will 
be  considered  the  same  as  certificates  of  owners,  and  in  entering  same  in  making  monthly 
list  returns  debtors  or  withholding  agents  will  enter  the  name  and  address  of  the  collecting 
agent  and  the  number  of  the  substitute  certificate  issued  In  lieu  of  the  original  certificate 
containing  the  name  and  address  of  the  owner  of  the  bonds.  (Art.  51,  Reg.  33,  Jan.  5, 
1914.) 

719  Notice  of  Failure  to  File  Return  Served  on  Withholding  Agent. — Where  the  required 
returns  are  not  filed  within  the  prescribed  time,  either  by  individuals  or  corporations, 

notice  on  Form  1045  should  in  each  case  be  sent  to  the  delinquent.  (Art.  196,  Reg.  33, 
Jan.  5,  1914.) 

720  Law  1[219.  Taxes  Withheld  to  be  Paid  to  the  Government. — [Every  withholding 
agent]  “shall  on  or  before  June  fifteenth  pay  the  tax  to  the  official  of  the  United 

States  Government  authorized  to  receive  it.”  [i[3002.] 

721  The  normal  tax  of  [8  or  10]  per  cent,  shall  be  deducted  and  withheld  at  the  source^  and 
payment  made  to  the  collector  of  internal  revenue  as  provided  in  the  law,^  by  the 

debtor,  or  his,  her,  or  its  duly  appointed  agent  authorized  to  make  such  deduction  and 
payment.  (Art.  34,  Reg.  33,  Jan.  5,  1914.) 

722  and  shall  pay  the  taxes  so  withheld  to  the  collector  of  Internal  revenue  for  the 
district  in  which  the  said  withholding  agent  resides  or  has  his,  her,  or  its  principal 

place  of  business.  (Art.  64,  Reg.  33,  Jan.  5,  1914.) 

******♦**♦♦♦ 

723  In  order  that  persons  whose  income  tax  is  deducted  and  withheld  and  is  to  be  paid 
at  the  source,  may  have  an  opportunity  to  file  with  the  source  which  is  required 

to  withhold  and  pay  tax  for  them,  certificate  claiming  the  benefit  * * * exemptions 

provided  for  in  [If 638  and  1[641.]  * * * the  law,  withholding  agents  will  not  pay 

to  collectors  of  internal  revenue  the  tax  withheld  by  them  under  the  law  until  after  the  time 
for  filing  claim  for  * * * exemptions  has  expired.  (T.  D.  1965,  Mar.  23,  1914.) 

724  * * * ^ collectors  will  delay  reporting  for  assessment  taxes  remaining  in  the 

hands  of  withholding  agents,  until  the  annual  reports  of  such  agents,  w’hich  must 

be  filed  not  later  than  March  1 In  each  year,  are  received.  (Art.  189,  Reg.  33,  Jan.  5,  1914.) 

726  * * * The  withholding  agent  will  not,  however,  forward  to  the  collector  amounts 

withheld  by  him  until  notices  of  assessment  are  received  from  the  collector.  (Art. 
33,  Reg.  33,  Jan.  5,  1914.) 


INC. 


78 


TAX 


INDIVIDUALS. 


726  The  withholding  agent  is  not  required  by  law  to  forward  to  the  Collector  the  tax 
withheld  by  him  until  he  has  received  notice  of  assessment  and  then,  like  the  tax 

assessed  in  other  cases,  payment  should  be  made  by  him  on  or  before  June  30  [15]  of  each 
year.  (T.  D.  2131,  Jan.  18,  1915.) 

727  Tax  having  been  Deducted  at  the  Source  is  not  to  be  Again  Deducted  by  Agent 
'or  other  Person. — No  other  person,  firm,  or  organization,  in  whatever  capacity 

acting,  having  the  receipt,  custody,  or  disposal  of  any  income,  as  herein  provided,  shall 
be  required  to  again  deduct  and  withhold  the  normal  tax  of  1 [8]  per  cent,  thereon.  (Art. 
34,  Reg.  33,  Jan.  5,  1914.) 

728  Law  ^220.  "Withholding  Agents  are  Liable  for  the  Tax  to  be  Withheld. — “Every 
such  individual,  corporation,  or  partnership  is  hereby  made  liable  for  such  tax  and” 

729  Law  ^221.  Withholding  Agents  are  Indemnified. — [Every  withholding  agent]  “is 
hereby  indemnified  against  the  claims  and  demands  of  any  individual,  corporation, 

or  partnership  for  the  amount  of  any  payments  made  in  accordance  w'ith  the  provisions 
of  this  section.” 

730  Law  ^222.  Income  on  which  Tax  has  been  Withheld  to  be  Included  in  Recipient’s 
Return  of  Income. — “(d)  Income  upon  which  any  tax  is  required  to  be  withheld 

at  the  source  under  this  section  shall  be  included  in  the  return  of  the  recipient  of  such 
income,” 

731  Law  ^223.  Amount  of  Tax  "Withheld  at  the  Source  to  be  Credited  against  Amount 
of  Tax  as  computed  in  Creditor’s  Return. — “but  any  amount  of  tax  so  withheld 

shall  be  credited  against  the  amount  of  income  tax  as  computed  in  such  return.” 

732  If  for  any  reason  there  is  included  in  the  return  which  a foreign  corporation  is 
required  to  make  of  all  income  received  from  sources  within  the  United  States  any 

income  upon  w’hich  tax  has  been  withheld  at  the  source,  such  foreign  corporation  may 
take  credit  against  the  amount  of  tax  due  for  the  amount  of  the  tax  so  withheld  at  the 
source;  provided  a statement  is  attached  to  the  return  setting  forth  the  source  and  amount 
I of  the  income  upon  which  the  tax  was  so  withheld.  (Art.  201,  11602,  Reg.  33,  Rev.,  Jan. 

2,  1918.) 

733  Refund,  on  Return. — Where,  upon  filing  return  of  income,  it  appears  that  a non- 
resident alien  is  not  liable  for  income  tax,  but,  nevertheless,  income  tax  shall  have 

been  withheld  at  the  source,  in  order  to  obtain  a refund  on  the  basis  of  the  showing  made 
by  the  return  there  shall  be  attached  to  the  return  a statement  showing  accurately  the 
amounts  of  tax  withheld,  with  the  names  and  post-office  addresses  of  all  withholding 
agents.  (Art.  32,  1[222,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

734  Law  1[224.  If  Tax  Required  to  be  Withheld  is  Paid  by  Creditor,  such  Tax  is  not 
to  be  Recollected  from  the  Withholding  Agent. — “(e)  If  any  tax  required  under 

this  section  to  be  deducted  and  withheld  is  paid  by  the  recipient  of  the  income,  it  shall  not 
^ be  re-collected  from  the  withholding  agent;” 

736  Law  1[225.  If  Tax  Required  to  be  Withheld  be  Paid  by  the  Creditor  no  Penalty 
Attaches  for  Innocent  Failure  to  make  Return  or  to  Pay  Tax. — “nor  in  cases  in 
which  the  tax  is  so  paid  shall  any  penalty  be  imposed  upon  or  collected  from  the  recipient 
of  the  income  or  the  withholding  agent  for  failure  to  return  or  pay  the  same,  unless  such 
failure  was  fraudulent  and  for  the  purpose  of  evading  payment.” 

Penalty  for  Failure  to  Make  Return  and  to  pay  Tax.  [Read  at  1fl572]. 

736  Law  1|80.  Surtax  on  NetIncomeiAll  Individuals. — “Sec.  211.  (a)  That,  in  lieu  ot  the 
taxes  imposed  by  subdivision  (b)  of  section  1 [surtax  on  individuals — income  tax] 

of  the  Revenue  Act  of  1916  and  by  section  2 [surtax  on  individuals — war-income  tax]  of 
the  Revenue  Act  of  1917,  but  in  addition  to  the  normal  tax  imposed  by  section  210  [1[47lj  of 
this  Act,  there  shall  be  levied,  collected,  and  paid  for  each  taxable  year  upon  the  net  income 
of  every  individual,  a surtax  equal  to  the  sum  of  the  following;”  [1[2829.] 

737  Law  1[81.  Surtax  Rates. — “1  per  centum  of  the  amount  by  which  the  net  income 

I exceeds  $5,000  and  does  not  exceed  $6,000; 

2 per  centum  of  the  amount  by  which  the  net  income  exceeds  $6,000  and  does  not 
exceed  $8,000; 

3 per  centum  of  the  amount  by  which  the  net  income  exceeds  $8,000  and  does  not 
exceed  $10,000; 


INC. 


79 


TAX 


INDIVIDUALS. 


(737) 

4 per  cent  aril  of  the  amount  by  which  the  net  income  exceeds  $10,000  and  does  not 
exceed  $12,000; 

5 per  centurii  of  the  amount  by  which  the  net  income  exceeds  $12,000  and  does  not 
exceed  $14,000; 

6 per  centum  of  the  amount  by  which  the  net  income  exceeds  $14,000  and  does  not 
exceed  $16,000; 

7 per  centum  of  the  amount  by  which  the  net  income  exceeds  $16,000  and  does  not 
exceed  $18,000; 

8 per  centum  of  the  amount  by  which  the  net  income  exceeds  $18,000  and  does  not 
exceed  $20,000; 

9 per  centum  of  the  amount  by  which  the  net  income  exceeds  $20,000  and  does  not 
exceed  $22,000; 


10  per  centum  of  the  amount  by  which 
exceed  $24,000; 

11  per  centum  of  the  amount  by  which 
exceed  $26,000; 

12  per  centum  of  the  amount  by  which 
exceed  $28,000; 

. 13  per  centum  of  the  amount  by  which 
exceed  $30,000; 

14  per  centum  of  the  amount  by  which 
exceed  $32,000; 

15  per  centum  of  the  amount  by  which 
exceed  $34,000; 

16  per  centum  of  the  amount  by  which 
exceed  $36,000; 

17  per  centum  of  the  amount  by  which 
exceed  $38,000; 

18  per  centum  of  the  amount  by  which 
exceed  $40,000; 

19  per  centum  of  the  amount  by  which 
exceed  $42,000; 

20  per  centum  of  the  amount  by  which 
exceed  $44,000; 

21  per  centum  of  the  amount  by  which 
exceed  $46,000; 

22  per  centum  of  the  amount  by  which 
exceed  $48,000; 

23  per  centum  of  the  amount  by  which 
exceed  $50,000; 

24  per  centum  of  the  amount  by  which 
exceed  $52,000; 

25  per  centum  of  the  amount  by  which 
exceed  $54,000; 

26  per  centum  of  the  amount  by  which 
exceed  $56,000; 

27  per  centum  of  the  amount  by  which 
exceed  $58,000; 

28  per  centum  of  the  amount  by  which 
exceed  $60,000; 

29  per  centum  of  the  amount  by  which 
exceed  $62,000; 

30  per  centum  of  the  amount  by  which 
exceed  $64,000; 

31  per  centum  of  the  amount  by  which 
exceed  $66,000; 

32  per  centum  of  the  amount  by  which 
exceed  $68,000; 

33  per  centum  of  the  amount  by  which 
exceed  $70,000; 

34  per  centum  of  the  amount  by  which 
exceed  $72,000; 

f 35  per  centum  of  the  amount  by  which 
exceed  $74,000; 

, 36  per  centum  of  the  amount  by  which 
exceed  $76,000; 

t 37  per  centum  of  the  amount  by  which 
exceed  $78,000; 

INC. 


the  net  income  exceeds  $22,000  and  does  not 
the  net  income  exceeds  $24,000  and  does  not 
the  net  income  exceeds  $26,000  and  does  not 
the  net  income  exceeds  $28,000  and  does  not 
the  net  income  exceeds  $30,000  and  does  not 
the  net  income  exceeds  $32,000  and  does  not 
the  net  income  exceeds  $34,000  and  does  not 
the  net  income  exceeds  $36,000  and  does  not 
the  net  income  exceeds  $38,000  and  does  not 
the  net  income  exceeds  $40,000  and  does  not 
the  net  income  exceeds  $42,000  and  does  not 
the  net  income  exceeds  $44,000  and  does  not 
the  net  income  exceeds  $46,000  and  does  not 
the  net  income  exceeds  $48,000  and  does  not 
the  net  income  exceeds  $50,000  and  does  not 
the  net  income  exceeds  $52,000  and  does  not 
the  net  income  exceeds  $54,000  and  does  not 
the  net  income  exceeds  $56,000  and  does  not 
the  net  income  exceeds  $58,000  and  does  not 
the  net  income  exceeds  $60,000  and  does  not 
the  net  income  exceeds  $62,000  and  does  not 
the  net  income  exceeds  $64,000  and  does  not 
the  net  income  exceeds  $66,000  and  does  not 
the  net  income  exceeds  $68,000  and  does  not 
the  net  income  exceeds  $70,000  and  does  not 
the  net  income  exceeds  $72,000 -and  does  not 
the  net  income  exceeds  $74,000  and  does  not 
the  net  income  exceeds  $76,000  and  does  not 

80 


TAX 


INDIVIDUALS, 


(737) 

38  per  centum  of  the  amount  by  which  the  net  income  exceeds  $78,000  and  does  not 
exceed  $80,000; 

39  per  centum  of  the  amount  by  which  the  net  inconle  exceeds  $80,000  and  does  not 
exceed  $82,000; 

40  per  centum  of  the  amount  by  which  the  net  income  exceeds  $82,000  and  does  not 
exceed  $84,000; 

41  per  centum  of  the  amount  by  which  the  net  income  exceeds  $84,000  and  does  not 

exceed  $86,000;  ' 

42  per  centum  of  the  amount  by  which  the  net  income  exceeds  $86,000  and  does  not 
exceed  $88,000; 

43  per  centum  of  the  amount  by  which  the  net  income  exceeds  $88,000  and  does  not 

exceed  $90,000;  ' 

44  per  centum  of  the  amount  by  which  the  net  income  exceeds  $90,000  and  does  not 
exceed  $92,000; 

45  per  centum  of  the  amount  by  which  the  net  income  exceeds  $92,000  and  does  not 
exceed  $94,000; 

46  per  centum  of  the  amount  by  which  the  net  income  exceeds  $94,000  and  does  not 
exceed  $96,000; 

47  per  centum  of  the  amount  by  which  the  net  income  exceeds  $96,000  and  does  not 
exceed  $98,000; 

48  per  centum  of  the  amount  by  which  the  net  income  exceeds  $98,000  and  does  not 
exceed  $100,000; 

52  per  centum  of  the  amount  by  which  the  net  income  exceeds  $100,000  and  does  not 
exceed  $150,000; 

56  per  centum  of  the  amount  by  which  the  net  income  exceeds  $150,000  and  does  not 
exceed  $200,000; 

60  per  centum  of  the  amount  by  which  the  net  income  exceeds  $200,000  and  does  not 
exceed  $300,000; 

63  per  centum  of  the  amount  by  which  the  net  income  exceeds  $300,000  and  does  not 
exceed  $500,000; 

64  per  centum  of  the  amount  by  which  the  net  income  exceeds  $500,000  and  does  not 
exceed  $1,000,000; 

65  per  centum  of  the  amount  by  which  the  net  income  exceeds  $1,000,000.” 

Application  of  the  Rates  for  Fiscal  Year  Embracing  Parts  of  Calendar  Years  With 
Differing  Rates. — [Read  at  ^1678.] 

738  Law  ^82.  Maximum  Surtax  Limitation  in  the  Case  of  the  Sale  of  Certain  Mines, 
or  Oil  or  Gas  Wells. — “(b)  In  the  case  of  a bona  fide  sale  of  mines,  oil  or  gas  wells, 

or  any  interest  therein,  where  the  principal  value  of  the  property  has  been  demonstrated 
by  prospecting  or  exploration  and  discovery  work  done  by  the  taxpayer,  the  portion  of  the 
tr''  Imposed  by  this  section  attributable  to  such  sale  shall  not  exceed  20  per  centum  of  the 
selling  price  of  such  property  or  interest.”  ]1[2831.] 

739  Surtax  Computed  on  Separate  Incomes  of  Husband  and  Wife. — The  regulation! 
of  the  department  requiring  the  incomes  of  husband  and  wife  to  be  combined  and 

authorizing  the  aggregate  exemption  ♦ ♦ ♦ from  such  combined  income  are  applicable 

for  the  purpose  of  the  normal  tax  only.  The  additional,  or  surtax,  imposed  by  the  act  will 
be  computed  on  the  basis  of  the  separate  income  of  each  individual;  that  is,  on  the  amount 
of  each  individual’s  income  in  excess  of  the  minimum  amounts  upon  which  the  surtax  at  the 
graduated  rate  is  to  be  calculated.  (T.  D.  2090,  Dec.  14,  1914.) 

740  The  separate  incomes  of  husband  and  wife  should  not  be  combined  in  a return  of 
income  for  the  purpose  of  assessing  the  additional  or  surtax.  (T.  D.  2137,  Jan. 

30,  1915.) 

741  All  Taxable  Income  Received  by  Beneficiaries  Through  Fiduciaries  is  Subject  to 
Surtax. — A beneficiary  is  liable  for  the  normal  tax  upon  the  amount  of  net  income 

derived  by  him  from  a taxable  source  through  a fiduciary  * ♦ * and  is  also  liable  for 

the  additional  tax  assessable  on  the  amount  of  net  income  received  by  him  in  excess  of 
[$5,000],  and  in  order  to  determine  whether  the  net  income  of  a beneficiary  is  or  is  not  in 
excess  of  [$5,000]  and  subject  to  the  additional  tax  the  amount  derived  by  him  from  an 
estate  and  all  other  taxable  sources  is  required  to  be  shown  on  his  personal  annual  return. 
(T.  D.  2090,  Dec.  14,  1914.) 

742  Corporations  Are  Not  Subject  to  Surtax. — Corporations  coming  within  the  terms 
of  this  law  are  subject  to  the  normal  tax  only;  that  is,  a tax  computed  at  a level 

rate  of  [12]  per  cent  of  their  entire  net  income  regardless  of  the  amount  of  such  net  income. 
(Art.  185,  Reg.  22,  Jan.  5,  1914.) 


INC. 


81 


TAX 


INDIVIDUALS. 


743  Dividends  Received  by  Beneficiaries  Through  Fiduciaries  are  Subject  to  Surtax. — 

Dividends  in  the  hands  of  a fiduciary  and  belonging  to  a beneficiary  are  not  subject 
to  the  normal  tax,  but  will  be  subject  to  the  additional  tax  to  the  beneficiary  whenever 
the  beneficiary’s  income  from  all  taxable  source  is  in  excess  of  [$5,000].  (T.  D.  2090, 

Dec.  14,  1914.) 

744  Specific  Exemption  in  its  Relation  to  the  Additional  Tax. — Personal  exemptions 
from  tax  are  granted  in  respect  of  the  normal  income  tax  only.  Where  the  total 

of  allowable  exemptions  and  credits  exceeds  the  amount  of  net  income,  the  excess  of  such 
exemptions  may  not  be  availed  of  as  against  the  additional  tax.  (Art.  14,  ^154,  Reg.  33, 
Rev.,  Jan.  2,  1918.) 

745  In  Hyman  Cohen  vs.  John  Z,  Lowe,  Jr.,  Collector,  District  Court,  Southern  District 
of  New  York,  July  18,  1916  (234  Fed.  474)  the  Court  held  against  the  contention 

of  the  plaintiff,  that,  before  assessing  the  additional  tax  on  the  excess  of  net  income  over 
$20,000,  he  should  have  been  allowed  an  exemption  of  $3,000,  as  in  the  case  of  the  normal 
tax  (Act  of  1913).  [Comment.] 

746  Law  1[197.  Individuals  May  Be  Subject  to  Normal  Tax  and  to  Surtax  on  Undis- 
tributed Profits  of  Certain  Corporations. — “Sec.  220.  That  if  any  corporation, 

however  created  or  organized,  is  formed  or  availed  of  for  the  purpose  of  preventing  the 
imposition  of  the  surtax  upon  its  stockholders  or  members  through  the  medium  of  permit- 
ting its  gains  and  profits  to  accumulate  instead  of  being  divided  or  distributed,  such  corpora- 
tion shall  not  be  subject  to  the  tax  imposed  by  section  230  [^1662],  but  the  stockholders 
or  members  thereof  shall  be  subject  to  taxation  under  this  title  in  the  sam.e  manner  as 
provided  in  subdivision  (e)  of  section  218  [If  1305]  in  the  case  of  stockholders  of  a personal 
service  corporation,  except  that  the  tax  imposed  by  Title  III  [war-profits  and  excess- 
profits  tax]  shall  be  deducted  from  the  net  income  of  the  corporation  before  the  computation 
of  the  proportionate  share  of  each  stockholder  or  member.”  [^2995.] 

747  Law  1[198.  “The  fact  that  any  corporation  is  a mere  holding  company,  or  that  the 
gains  and  profits  are  permitted  to  accumulate  beyond  the  reasonable  needs  of  the 

business,  shall  be  prima  facie  evidence  of  a purpose  to  escape  the  surtax;” 

748  Law  ^199,  “but  the  fact  that  the  gains  and  profits  are  in  any  case  permitted  to 
accumulate  and  become  surplus  shall  not  be  construed  as  evidence  of  a purpose  to 

escape  the  tax  in  such  case  unless  the  Commissioner  certifies  that  in  his  opinion  such  ac- 
cumulation is  unreasonable  for  the  purposes  of  the  business.” 

749  Law  ^200.  “When  requested  by  the  Commissioner,  or  any  collector,  every  corpo- 
ration shall  forward  to  him  a correct  statement  of  such  gains  and  profits  and  the 

names  and  addresses  of  the  individuals  or  shareholders  w^ho  would  be  entitled  to  the  same 
if  divided  or  distributed,  and  of  the  amounts  that  would  be  payable  to  each.” 

760  Subdivision  2 of  paragraph  A,  income-tax  law  of  October  3,  1913  [^746  et  seq.  above], 
imposes  no  duty  on  the  taxpayer  to  ascertain  his  distributive  interest  in  the  un- 
divided surplus  of  corporations  for  the  purpose  of  making  return  of  the  amount,  in  addition 
to  the  amount  of  dividends  declared  on  his  stock,  unless  the  [Commissioner]  has  certified 
that,  in  his  opinion,  such  accumulation  is  unreasonable  for  the  purpose  of  the  business. 
(T.  D.  2135,  Jan.  23,  1915.) 

751  Law  ^7.  “Secretary”  Defined. — “The  term  ‘Secretary’  means  the  Secretary  of 
the  Treasury;” 

762  Law  ^[8.  “Commissioner”  Defined, — “The  term  ‘Commissioner’  means  the 
Commissioner  of  Internal  Revenue;” 

763  Law  ^9.  “Collector”  Defined. — “The  term  ‘collector’  means  collector  of  internal 
revenue;” 

754  Law  1[83.  Net  Income  Defined. — “Sec.  212.  (a)  That  in  the  case  of  an  individ- 

ual the  term  ‘net  income’  means  the  gross  income  as  defined  in  section  213  [^763,] 
less  the  deductiens  allowed  by  section  214  [^1019].”  [^2832.] 

756  Law  1[84.  Net  Income  to  Be  Based  on  Taxpayer’s  Annual  Accounting  Period. — 
“(b)  The  net  income  shall  be  computed  upon  the  basis  of  the  taxpayer’s  annual 
accounting  period  (fiscal  year  or  calendar  year,  as  the  case  may  be)  in  accordance  with  the 
method  of  accounting  regularly  employed  in  keeping  the  books  of  such  taxpayer;”  [^2833-]-.] 


INC. 


82 


TAX 


INDIVIDUALS. 


756  Law  ^85.  Basis  of  Computation  to  Reject  Income  Clearly. — “but  if  no  such 
method  of  accounting  has  been  so  employed,  or  if  the  method  employed  does  not 

clearly  reflect  the  income,  the  computation  shall  be  made  upon  such  basis  and  in  such  manner 
as  in  the  opinion  of  the  Commissioner  does  clearly  reflect  the  income.”  [^2834.] 

757  Law  1^86.  Basis  of  Computation  to  be  the  Calendar  Year  in  Certain  Instances. — 
“If  the  taxpayer’s  annual  accounting  period  is  other  than  a fiscal  year  as  defined 

in  section  200  [1|478]  or  if  the  taxpayer  has  no  annual  accounting  period  or  does  not  keep 
books,  the  net  income  shall  be  computed  on  the  basis  of  the  calendar  year.”  [^2839.] 

758  Law  ^87.  Changing  From  One  Accounting  Period  to  Another. — “If  a taxpayer 
changes  his  accounting  period  from  fiscal  year  to  calendar  year,  from  calendar  year 

to  fiscal  year,  or  from  one  fiscal  year  to  another,  the  net  income  shall,  with  the  approval  of 
the  Commissioner,  be  computed  on  the  basis  of  such  new  accounting  period,  subject  to  the 
provisions  of  section  226  [^1479].”  [^2840.] 

759  An  individual  keeping  accounts  upon  any  basis  other  than  that  of  actual  receipts 
and  disbursements,  unless  such  other  basis  does  not  clearly  reflect  his  income  may, 

subject  to  regulations  made  by  the  Commissioner  of  Internal  Revenue  with  the  approval 
of  the  Secretary  of  the  Treasury,  make  his  return  upon  the  basis  on  which  his  accounts  are 
kept.  (Art.  24,  ^167,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

760  Returns  should  be  made  on  the  basis  of  receipt  unless  the  individual  liable  for  the 
return  keeps  accounts  on  some  other  basis  which  will  clearly  reflect  his  income. 

(Art.  26,  1[171,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

761  L aw  ^12.  “Taxpayer”  Defined. — “The  term  Taxpayer’  includes  any  person,  trust 
or  estate  subject  to  a tax  imposed  by  this  Act;” 

762  Law  ^2.  “Person”  Defined. — “The  term  ‘person’  includes  partnerships  and  corpo- 
rations as  well  as  individuals;” 

763  Law  1[88.  Gross  Income  Defined. — “Sec.  213.  That  for  the  purposes  of  this 

title  (except  as  otherwise  provided  in  section  233,  1788])  the  term  “gross  income” — 

[Read  at  1[2841.] 

764  Law  ^89.  “(a)  Includes  gains,  profits,  and  income  derived  from  salaries,  wages, 

or  compensation  for  personal  service  (including  in  the  case  of  the  President  of  the 

United  States,  the  judges  of  the  Supreme  and  inferior  courts  of  the  United  States,  and  all 
other  officers  and  employees,  whether  elected  or  appointed,  of  the  United  States,  Alaska, 
Hawaii,  or  any  political  subdivision  thereof,  or  the  District  of  Columbia,  the  compensation 
received  as  such),  of  whatever  kind  and  in  whatever  form  paid,” 

[For  salaries  of  officials  of  a State  or  political  subdivision  thereof  see  ^1013  and  ^2863.] 

765  Law  ^90.  “or  from  professions,  vocations,  trades,  businesses,  commerce,  or  sales, 
or  dealings  in  property,  whether  real  or  personal,  growing  out  of  the  ownership 

or  use  of  or  interest  in  such  property;” 

766  Law  ^91.  “also  from  interest,  rent,  dividends,  securities,  or  the  transaction 
of  any  business  carried  on  for  gain  or  profit,” 

767  Law  %92.  “or  gains  or  profits  and  income  derived  from  any  source  whatever,” 

768  Law  ^93.  “The  amount  of  all  such  items  shall  be  included  in  the  gross  income  for  the 
taxable  year  in  which  received  by  the  taxpayer,  unless,  under  methods  of 

accounting  permitted  under  subdivision  (b)  of  section  212  [1[755],  any  such  amounts  are 
to  be  properly  accounted  for  as  of  a different  period;  but”  [“Gross  income  does  not 
include,”  for  which  see  1[944.] 

769  Gross  income  includes  gains  or  profits  and  income  derived  from  any  source  whatever 
except  such  as  is  specifically  exempted  from  income  tax  under  provisions  of  section 

4,  act  of  September  8,  1916,  as  amended  by  act  of  October  3,  1917.  [Subdiv.  (b)  of 
Sec.  213  (1f944)  Act  of  1918.]  (Art.  4,  ^12,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

770  Law  ^29.  “Dividends”  Defined. — “Sec.  201.  (a)  That  the  term  ‘dividend’ 

when  used  in  this  title  (except  in  paragraph  (10)  of  subdivision  (a)  of  section  234 

(f2248])  means” 

[For  “dividends”  in  Reg.  No.  45,  read  at  ^3094.] 


INC. 


83 


TAX 


INDIVIDUALS. 


771  Law  ^30.  Distribution  by  Corporations  in  General. — “(1)  any  distribution 
made  by  a corporation,  other  than  a personal  service  corporation.,  to  its  share- 
holders or  members,  whether  in  cash  or  in  other  property  or  in  stock  of  the  corporation, 
out  of  its  earnings  or  profits  accumulated  since  February  28,  1913,  or” 

772  Law  ^31.  Distribution  by  Personal  Service  Corporations. — “(2)  any  such  dis- 
tribution made  by  a personal  service  corporation  out  of  its  earnings  or  profits 

accumulated  since  February  28,  1913,  and  prior  to  January  1,  1918.” 

773  Dividends  Paid  with  Securities. — Dividends  declared  by  a corporation  and  paid 
with  securities  in  which  the  surplus  of  the  corporation  has  been  invested,  regardless 

of  the  character  of  such  securities,  is  to  be  accounted  for  as  a dividend  for  income-tax 
purposes  by  the  recipients  of  same  to  the  extent  that  it  represents  a distribution  of  surplus 
accrued  to  the  corporation  since  March  1,  1913.  (Art,  4,  ^27,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

774  Dividends  Paid  in  Liberty  Bonds. — The  appended  opinion  of  the  Attorney  General 
on  the  question  of  exemption  from  income  tax  of  corporation  dividends  paid  in 

the  form  of  Liberty  Loan  bonds  is  published  for  the  information  of  internal-revenue  officers 
and  others  concerned.  (T.  D.  2512,  June  8,  1917.) 


The  Secretary  of  the  Treasury: 

7 76  Sir:  Pursuant  to  section  356  of  the  Revised  Statutes  you  ask  my  opinion  upon 
the  following  questions  arising  under  the  administration  of  your  department: 

(1)  Whether  the  stockholders  of  a corporation  receiving  a dividend  declared 
776  payable  and  distributable  in  bonds  issued  under  the  act  of  Congress  approved 

April  24,  1917,  will  have  to  pay  an  income  tax. 

(2)  Whether  a corporation  owning  these  bonds  would  be  to  that  extent  exempt 
7 77  from  excise  taxes,  franchise  taxes,  and  other  corporation  taxes  of  the  United  States 

and  of  the  several  States. 

I am  of  the  opinion  that  an  affirmative  answer  must  be  returned  to  the  first  question 

778  and  a negative  answer  to  the  second. 

The  Act  of  April  24,  1917,  provides  as  to  the  bonds  thereby  authorized  that — 

779  The  principal  and  interest  thereof  ♦ * ♦ shall  be  exempt,  both  as  to  principal 
and  interest,  from  all  taxation,  except  estate  or  inheritance  taxes,  imposed  by 

authority  of  the  United  States,  or  its  possessions,  or  by  any  State  or  local  taxing  authority,  ^ 

Like  every  exemption  from  taxation,  this  provision  must  be  literally  construed 

780  and  can  not  be  extended  beyond  its  precise  terms.  It  protects  an  owner  of  these 
bonds  from  any  tax  of  whatever  character,  except  estate  or  inheritance  taxes, 

levied  upon  them  by  reason  of  his  possession  and  ownership;  but  a tax  levied  upon  one’s 
net  income  or  annual  gain  can  not  be  evaded  because  the  income  or  gain  happens  to  be 
liquidated  by  the  delivery  of  a certain  number  of  these  bonds  or  other  nontaxable  securities. 

Such  a tax  is  upon  the  income  itself  as  an  entirety  and  not  upon  the  specific  articles  into 
which  this  income  is  finally  transmuted.  When  these  bonds,  therefore,  are  used  as  a 
medium  of  payment,  whether  in  the  discharge  of  a private  debt  or  a corporate  dividend, 
the  profit  or  gain  to  the  recipient  is  nevertheless  subject  to  income  tax. 

Similar  principles  control  in  answering  your  second  question,  I assume  that 

781  in  speaking  of  “excise  taxes,  franchise  taxes,  and  other  corporation  taxes”  you 

refer  to  those  taxes  which  are  laid,  not  upon  the  property  of  a corporation  by  reason  ^ 

of  possession  or  ownership,  but  upon  the  value  of  the  exercise  of  corporate  privileges — 
a value  which  may  be  measured  by  the  size  of  its  annual  income,  the  amount  of  its  capital 
stock,  or  such  other  standard  of  measurement  as  the  taxing  power  may  select. 

Such  a tax,  for  instance,  was  the  special  excise  tax  upon  corporations  under  the  act 

782  of  August  5,  1909  (36  Stat.,  11,112),  discussed  by  the  Supreme  Court  of  the  United 
States  in  the  case  of  Flint  v.  Stone  Tracy  Co.  (220  U.  S.,  107),  in  which  the  court 

said: 

It  is  therefore  well  settled  by  the  decisions  of  this  court  that  when  the  sovereign 

783  authority  has  exercised  the  right  to  tax  a legitimate  subject  of  taxation  as  an  \ 

exercise  of  a franchise  or  privilege,  it  is  no  objection  that  the  measure  of  taxation 

is  found  in  the  income  produced  in  part  from  property  which  of  itself  considered  is  non- 
taxable. Applying  that  doctrine  to  this  case,  the  measure  of  taxation  being  the  income 
of  the  corporation  from  all  sources,  as  that  is  but  the  measure  of  a privilege  tax  within  the 
lawful  authority  of  Congress  to  impose,  it  is  no  valid  objection  that  this  measure  includes 
in  part  at  least,  property  which  as  such  could  not  be  directly  taxed  (p.  165). 

The  special  excise  tax  levied  upon  corporations  by  the  act  of  September  8,  1916 

784  (39  Stat.,  756,  789),  and  measured  by  the  fair  value  of  their  capital  stock  is  a tax 

of  the  same  general  character,  imposed  with  respect  to  the  carrying  on  or  doing  \ 
business  by  such  corporations,  and  the  rule  laid  down  in  the  case  of  Flint  v.  Stone  Tracy 
Co.  applies  equally  to  it.  Quoting  again  from  that  decision:  ♦ ♦ * The  distinction 


INC. 


84 


TAX 


INDIVIDUALS. 


lies  between  the  attempt  to  tax  the  property  as  such  and  to  measure  a legitimate  tax  upon 
the  privileges  involved  in  the  use  of  such  property  (p.  163). 

Respectfully, 

T.  W.  Gregory,  Attorney  General.  (T.  D.  2512,  June  8,  1917.) 

This  office  has  before  it  your  letter  of  June  8,  1917,  asking  whether  dividends 

785  paid  in  Liberty  Loan  bonds  will  be  taxable  to  shareholders  who  receive  them. 
^In  reply  you  are  advised  that,  in  fairness  to  all  concerned,  inquiries  similar  to 

that  submitted  by  you  were  forwarded  to  the  Attorney  General  for  his  opinion.  ^'In 
accordance  with  the  Attorney  General’s  opinion  it  is  held  that  under  the  Income  Tax  Act 
of  September  8,  1916,  Liberty  Loan  bonds  purchased  from  the  eariiings  or  profits  of  a 
corporation,  which  have  accrued  since  March  1,  1913,  wdll  constitute  income  to  the  stock- 
holders to  the  amount  of  the  earnings  or  profits  invested  by  the  corporation  in  the  bonds. 
If  the  bonds  were  purchased  from  earnings  or  profits  accrued  prior  to  March  1,  1913,  they 
would  not,  of  course,  represent  taxable  incom.e;  and  if  the  surplus  from  which  they  were 
purchased  accrued  in  part  before  and  in  part  after  March  1,  1913,  they  would  represent 
taxable  income,  under  the  provisions  of  law  applicable  to  dividends,  to  the  amount  of  the 
surplus  accrued  since  that  date.  ^You  are  probably  aware  of  the  present  provisions. of  ’aw 
that  dividends  are  subject  to  super  tax,  only,  in  the  hands  of  individuals,  and  that  an 
individual  is  not  liable  for  the  super  tax  until  his  net  income  exceeds  $20,000  [$5,000]. 
^The  income  derived  by  an  individual  from  the  interest  paid  on  Liberty  Loan  bonds  does  not 
constitute  taxable  income,  whether  the  bonds  have  been  received  as  a dividend  or  other- 
wise. [This  sentence  refers  to  the  Liberty  3^%  Bonds  specifically  but  is  applicable, 
to  a limited  extent,  to  all  Liberty  Bond  issues.  Read  at  ’[[981.]  (Letter  to  Lee,  Higginson 
& Company,  Boston,  signed  by  Deputy  Commissioner  L.  F.  Speer,  and  dated  June  30,  1917.) 

786  Determination  of  Cash  Value  to  the  Shareholder  of  a Dividend  Paid  in  Liberty 
Bonds. — Acknowledgment  is  made  of  your  letter  of  October  23,  1918,  reading  in 

part  as  follows: 

“Where  a corporation  distributed  Liberty  Bonds  among  its  stockholders  as  a dividend: 

1.  Should  an  individual  stockholder  make  return  of  that  dividend  for  surtax  purposes 
at  the  par  value  or  at  the  market  value  of  the  Liberty  Bonds 

2.  If  the  corporation  bought  the  Liberty  Bonds  at  99.25  and  the  market  value  thereof 
when  received  by  the  stockholder  was  94.25,  should  the  stockholder  make  return  of  the 
dividend  at  99.25  or  at  94.25?” 

787  In  reply  you  are  advised  that,  for  the  purposes  of  the  income  tax,  income,  in  both 
instances,  should  be  predicated  on  the  cash  value  of  the  Liberty  Bonds  at  the  time 

of  their  receipt  by  the  stockholders.  (Letter  to  Ropes,  Gray,  Boyden  & Perkins,  Boston, 
Mass.,  signed  by  Deputy  Commissioner  L.  F.  Speer,  and  dated  November  12,  1918.) 

788  Interest  on  Exempt  Bonds  on  Distribution  as  Dividend. — Interest  on  State,  muni- 
cipal, and  United  States  bonds  received  by  corporations  is  not  taxable  to  the 

corporation.  Upon  amalgamation  with  other  funds  of^the  corporation  such  income  loses 
its  identity.  When  distributed  to  stockholders  as  a dividend,  the  entire  amount  of  the 
dividend  is  subject  to  inclusion  in  returns  of  income  for  the  purposes  of  the  income  tax. 
(Art.  4,  ^42,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

789  Scrip  Dividends. — The  dividend  paid  by  the  corporation  [in  1914]  is  income  to  the 

stockholder  for  1914  ♦ ♦ ♦ ^ dividends  must  be  included  in  the  return 

and  at  the  face  value  of  the  scrip. 

For  income  tax  purposes  this  transaction  is  held  to  be  a payment  in  cash  of  the  divi- 

790  dend,  and  an  investment  of  the  cash  in  the  scrip.  (Extract  from  letter  to  Oudin, 
Kilbreth  & Schackno,  signed  by  Deputy  Commissioner  L.  F.  Speer,  and  dated 

Jan.  19,  1915.) 

791  Dividends  Paid  by  a Foreign  Corporation. — Dividends  declared  and  paid  by  a foreign 
corporation  which  derives  its  entire  income  from  business  done  wholly  within  the 

United  States  and  pays,  under  the  provisions  of  the  Federal  income-tax  law,  a tax  upon  its 
net  income,  should  be  treated  in  the  same  manner  as  dividends  from  domestic  corporations. 
(T.  D.  2090,  Dec.  14,  1914.) 

792  Income  From  Private  Banks  Considered  as  Dividends. — In  the  case  of  private 
banks  which  have  the  form  of  corporations  and  which  are  held  to  be  associations 

within  the  meaning  of  the  Federal  income-tax  law,  it  is  not  the  purpose  of  this  office  to 
assess  the  income  tax  against  such  banking  associations  and  then  also  against  the  individual 
members  of  the  association. 

Income  which  the  members  of  the  association  receive  from  the  bank  because  of  their 

793  investments  therein  will  be  considered  dividends,  ♦ * ♦ ^ D 2152, 

Feb.  12,  1915.)  » 


INC. 


85 


TAX 


INDIVIDUALS. 

794  Private  banks  which  have  the  form  of  corporate  organizations,  elect  officers  and  a 
board  of  managers,  have  a distinctive  name,  a fixed  situs,  and  distribute  their  net 

earnings  upon  the  basis  of  the  amount  of  capital  invested  by  the  members  or  owners,  are 
held  to  be  associations  within  the  meaning  of  the  Federal  income  tax  law,  and  in  their  or- 
ganized capacity  should  make  returns  of  annual  net  income  and  pay  any  income  tax  thereby 
shown  to  be  due. 

The  holders  of  the  stock  or  the  owners  of  the  bank  will  be  exempt  from  the  normal 

795  tax  to  the  extent  of  the  dividends  or  earnings  which  they  receive  from  such  private 

banks  as  make  returns  in  their  organized  capacity  and  pay  income  tax  in  accordance 
therewith.  * * * . (T.  D.  2137,  Jan.  30,  1915.) 

796  Taxes  Paid  by  Bank  for  Owners  of  Bank  Stock  Considered  as  Dividends. — Taxes 

assessed  against  the  stockholders  of  a bank  and  paid  by  the  bank  in  behalf  of  the 

stockholders  do  not  constitute  an  allowable  deduction  from  the  gross  income  of  the  bank, 
but  do  constitute  an  allowable  deduction  in  the  return  of  the  individual  ♦ * * , 

amount  of  taxes  so  paid  should  be  included  in  his  return  as  income,  the  said  amount  being 
considered  as  an  additional  dividend  to  the  amount  of  the  taxes  paid.  (T.  D.  2135,  Jan.  23, 
1915.) 

797  Profits  of  Limited  Partnerships  Considered  as  Dividends. — The  profits  of  limited 
partnerships  making  returns  in  the  same  manner  as  corporations  make  returns  will 

be  treated  the  same  as  dividends  of  corporations  and  will  be  returned  in  the  returns  of 
individuals  in  the  same  manner  as  are  dividends  upon  the  stock  of  corporations;  that  is 
to  say,  the  dividends  received  from  such  limited  partnerships  will  not  be  subject  to  the 
normal  tax  in  the  hands  of  the  members  of  the  partnership  receiving  the  same.  (T.  D. 
2137,  Jan.  30,  1915.) 

798  Dividends  Paid  on  Life  Insurance  Policies. — Dividends  paid  on  life  Insurance 
policies  that  have  not  matured,  whether  such  dividends  are  drawn  in  cash  by  the 

insured  or  applied  to  the  reduction  of  the  annual  premium  due,  are  not  considered  items  of 
taxable  income  under  the  law,  and  should  be  excluded  from  a return  of  income. 

799  Dividends  from  paid-up  policies,  however,  are  considered  income  to  the  recipient, 
and  m.ust  be  included  in  the  annual  return  of  income  * * * ^ They  are 

considered  the  same  as  dividends  or  net  earnings  from  corporations  subiect  to  a like  tax  and 
may  ♦ ♦ * . (T.  D.  2137,  Jan.  30,  1915.) 

800  Law  1132.  Earnings  and  Profits  to  be  Distributed  First. — “(b)  Any  distribution 
shall  be  deemed  to  have  been  made  from  earnings  or  profits  unless  all  earnings  and 

profits  have  first  been  distributed.” 

801  Reference  is  made  to  your  letter  of  April  22,  1918,  relative  to  the  following:  “As- 
suming a corporation  to  have  undivided  surplus  or  profits  of  $500,000;  to  have  re- 
valued its  assets,  resulting  in  an  increase  of  $1,000,000;  and  to  have  declared  a stock  divi- 
dend amounting  to  $750,000 — said  by  the  corporation  to  have  been  out  of  the  revaluation 
increase,  will  the  Treasury  Department  accept  the  statement  of  the  corporation,  or  will  it 
insist  on  $500,000  (or  two-thirds  of  the  stock  dividend)  as  representing  the  undivided  surplus 
or  profits — and  hence  taxable — and  the  balance  of  $250,000  (or  one-third)  out  of  the  increase 
due  to  the  revaluation  and  hence  not  taxable?”  ^In  reply,  you  are  advised  that  if  the  un- 
distributed surplus  or  profits  of  the  corporation  accumulated  since  March  1,  1913,  are  suf- 
ficient to  pay  the  $750,000  dividend,  then  all  of  such  dividend  will  be  taxable.  If  only 
$500,000  surplus  Is  on  hand  on  the  date  of  payment  of  the  dividend,  then  the  amount  of  the 
dividend  that  is  over  and  above  such  surplus  on  hand  will  be  exempt.  ^If  there  is  no  surplus 
on  hand  on  the  date  of  payment  of  the  dividend,  then  all  of  the  dividend  will  be  tax  exempt. 
In  short,  the  dividend  is  taxable  to  the  extent  of  the  undivided  profits  (accumulated  since 
March  1,  1913)  on  hand  on  the  date  of  payment  of  such  dividend  [Read  HSll).  (Letter  to 
Hornblower  and  Weeks,  Boston,  Mass.,  signed  bv  Deputy  Commissioner  L.  F.  Speer,  and 
dated  May  14,  1918.) 

802  Law  ^33.  Earnings  and  Profits  Since  February  28,  1913,  to  be  Distributed  First 
by  Corporations  Generally. — “Any  distribution  made  in  the  year  1918  or  any  year 

thereafter  shall  be  deemed  to  have  been  made  from  earnings  or  profits  accumulated  since 
February  28,  1913,  or,” 

803  Law  ^34.  Earnings  and  Profits  Most  Recently  Accumulated  to  be  Distributed 
First  by  a Personal  Service  Corporation. — “in  the  case  of  a personal  service  corpo- 
ration, from  the  most  recently  accumulated  earnings  or  profits;” 

804  Any  distribution  made  to  shareholders  in  the  year  1917  [1918]  or  subsequent  years 

♦ * * shall  be  deemed  to  have  been  made  from  the  most  recently  accumulated 

undivided  surplus  or  profits,  and  shall  constitute  income  of  the  distributee  for  the  year  in 
which  received,  * ♦ ♦ . 

INC.  86  TAX 


INDIVIDUALS. 


Thus,  if  a corporation  distributed  dividends  in  1917  [1918],  such  dividends  will  be 

805  deemed  to  have  been  paid  from  the  earnings  of  1917  [1918],  and  the  recipient,  if 
an  individual,  will  be  liable  to  additional  tax,  if  any,  * * * at  the  rates  for  the 

year  1917  [1918],  ♦ * ♦ . (Art.  107,  1[374  and  ^375,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

806  Relation  of  Income  and  War  Excess  Profits  Taxes  Paid  or  Accrued  to  Dividend 
Distributions. — In  determining  the  source  of  earnings  from  which  a particular 

distribution  is  made  a corporation  is,  however,  permitted  to  treat  the  undivided  profits 
and  surplus  of  the  current  year  as  reduced  by  payments  for  income  and  excess  profits  taxes 
or  if  keeping  its  accounts  upon  an  accrual  basis  by  proper  reserves  for  such  taxes,  although 
such  payments  or  reserves  are  not  deductible  in  computing  the  income  of  the  corporation 
for  income  and  excess  profits  taxes.  (T.  D.  2700,  April  16,  1918.) 

807  Receipt  is  acknowledged  of  your  letter  of  the  23d  ult.,  in  which  you  refer  to  Treasury 
Decision  2700,  especially  to  the  provisions  of  the  last  paragraph  but  one  [1[806] 

contained  therein  and  ask  for  certain  information  relative  thereto.  You  ask  to  be  advised 
* * * whether  the  earnings  for  the  first  half  of  1918  may  be  charged  with  the  corres- 

ponding taxes  accruing  during  that  period  for  the  purpose  of: 

“(<z)  Properly  apportioning  dividends  declared  during  the  first  half  of  1918;  * ♦ ♦ 

808  In  reply  you  are  informed  that  while  income  and  war  excess  nrofits  taxes  are  not 
deductible  in  preparing  a return  of  a corporation  for  the  year  1917  and  subsequent 

years,  if  the  corporation  keeps  its  books  on  an  accrued  basis,  liabilities  for  all  taxes 
accruing  during  the  taxable  period  are  proper  charges  in  determining  the  earnings  of  the 
different  periods  during  the  year.  Therefore,  it  is  believed  that  question  (a)  may  be  an- 
swered by  stating  that  taxes  accrued  during  the  first  half  of  the  year  1918  are  properly  to 
be  considered  in  determining  the  amount  of  earnings  out  of  which  dividends  could  be  paid 
during  that  period.  (Letter  to  Smith,  Robertson  and  Moorhouse,  Seattle,  Wash.,  signed 
by  Deputy  Commissioner  L.  F.  Speer,  and  dated  May  13,  1918.) 

809  The  Most  Recently  AccumulatedUndividedProfits  and  Surplus  Shall  Still  Be  Deemed 
to  have  been  Distributed  on  Payment  of  a Dividend  even  though  such  Funds  are 

Invested  in  United  States  Bonds.  In  reply  you  are  advised  that  in  accordance  with 
Treasury  Decision  2700  investments  in  obligations  of  the  United  States  issued  after  Sep- 
tember 1,  1917,  may  be  treated  as  made  from  any  earnings  which  the  corporation  may 
designate;  but,  as  the  investment  of  earnings  does  not  prevent  them  from  being  distributed 
as  dividends,  earnings  used  in  the  purchase  of  such  obligations  will  not  be  relieved  from 
taxation  as  dividends.  ^In  the  case  cited  by  you,  if  the  corporation  distributed  a dividend 
in  the  year  1918,  as  it  would  appear  is  contemplated,  and  it  has  no  undistributed  earnings 
for  the  year  1918,  at  the  time  of  payment,  the  dividend  will  be  deemed  to  have  been  paid 
from  the  undistributed  earnings  of  the  year  1917,  regardless  of  the  fact  that  such  earnirtgs 
have  been  Invested  in  obligations  of  the  United  States  issued  after  September  1,  1917. 
(Letter  to  Arthur  Young  & Company,  Kansas  City,  Mo.,  signed  by  Deputy  Commissioner 
L.  F.  Speer,  and  dated  May  27,  1918.) 

810  Law  ^35.  Earnings  and  Profits  Prior  to  March  1,  1913,  Distributed  Tax  Free. — 
“but  any  earnings  or  profits  accumulated  prior  to  March  1,  1913,  may  be  distributed 

in  stock  dividends  or  otherwise,  exempt  from  the  tax,  after  the  earnings  and  profits  accumu- 
lated since  February  28,  1913,  have  been  distributed.” 

811  Law  1[36.  Stock  Dividends. — “(c)  A dividend  paid  in  stock  of  the  corporation 
shall  be  considered  income  to  the  amount  of  the  earnings  or  profits  distributed.” 

[Read  at  1[3097.; 

812  Misapprehension  exists  as  to  the  effect  of  the  decision  of  the  Supreme  Couiu  in  the 
case  of  Towne  vs.  Eisner  [(245  U.  S.  418)  see  ^2733.],  handed  down  January  7,  1918. 

In  this  opinion  it  was  held  that  under  the  Act  of  October  3,  1913,  a stock  dividend  declared 
by  a corporation  January  2,  1914,  was  not  properly  regarded  as  income.  It  does  not 
necessarily  follow,  however,  that  no  stock  dividends  are  to  be  held  taxable  under  the  pro- 
visions of  the  Acts  of  September  8,  1916,  and  October  3,  1917. 

The  Act  of  October  3,  1913,  which  was  the  only  Act  before  the  Court  In  the  case, 

813  contained  no  provision  expressly  providing  for  treating  stock  dividends  as  income, 
and  the  decision  of  the  Court  was  to  the  effect  that  the  Act  was  not  to  be  construed 

as  taxing  such  dividends.  The  Court  did  not  decide  that  such  dividends  cannot  be  Income 
within  the  meaning  of  the  Sixteenth  Amendment,  but  expressly  recognized  that  the  word 
“income”  may  have  a different  meaning  in  the  Statute  from  the  meaning  in  the  Constitution. 
The  Act  of  September  8,  1916,  contains  an  express  provision  taxing  stock  dividends 

814  declared  and  paid  out  of  earnings  accrued  since  March  1,  1913.  In  the  absence 
of  a decision  as  to  the  legal  effect  of  these  express  provisions  contained  in  the  later 

Acts,  the  Bureau  of  Internal  Revenue  naturally  will  continue  to  be  governed  by  the  express 
provisions  of  the  later  Acts  in  reference  to  stock  dividends.  (Statement  issued  to  Col- 
lectors and  Agents,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  Jan.  10,  1918.) 


INC. 


87 


TAX 


INDIVIDUALS. 


816  Stock  Dividends  Under  the  Act  of  September  8,  1916. — (Decision.  Macomber 
V.  Eisner,  Collector,  U.  S.  District  Court,  Southern  District  of  New  York,  Jan. 
23,  1919.)  [Comment:  This  is  a suit  for  the  recovery  of  tax  paid  under  the  Act  of  Sep- 
tember 8,  1916,  on  a “stock  dividend”  received  by  the  plaintiff.  The  contention  of  counsel 
for  the  plaintiff,  Murray,  Prentice  & Howland,  of  New  York,  is  that  the  provision  of  the 
taxing  Act  by  which  so-called  “stock  dividends”  are  in  terras  stated  to  be  income,  to  be 
taxable  as  such  to  the  same  extent  as  are  cash  dividends,  is  unconstitutional,  because  to 
tax  “stock  dividends”  is  to  tax  capital  or  principal,  and  such  a.tax  may  not  be  imposed 
except  as  other  direct  taxes  are  laid,  that  is,  by  apportionment  among  the  several  states 
according  to  population.  Judge  Mayer,  of  the  United  States  District  Court,  Southern 
District  of  New  York,  on  January  23,  1919,  overruled  the  demurrer  of  the  Government  to 
the  complaint  upon  the  authority  of  Towne  v.  Eisner,  245  U.  S.  418  [^2738],  and  Peabody 
V.  Eisner,  247  U.  S.  347  [^2802].  It  is  understood  that  the  Government  will  immediately 
appeal  from,  this  decision  to  the  United  States  Supreme  Court  and  that  the  case  will  be 
advanced  on  the  docket  so  that  speedy  adjudication  miay  be  looked  for,  perhaps  during  the 
present  termi.  Mr.  Charles  E.  Hughes  and  Mr.  George  Welwood  Murray  presented  the 
case  for  the  plaintiff.  Inasramch  as  a like  provision  relative  to  “stock  dividends”  appears 
in  the  Act  of  September  8,  1916,  as  am.ended  by  the  Act  of  October  3,  1917,  and  also  in  the 
Revenue  Bill  (The  Revenue  Act  of  1918)  now  pending  before  Congress,  the  final  judgment 
in  Macomber  v.  Eisner  will  be  controlling  for  the  Revmnue  Acts  of  1916,  1917  and  1918. 
The  question  as  to  the  liability  of  “stock  dividends”  to  tax  under  the  Act  of  October  3,  1913, 
was  disposed  of  in  Towne  v.  Eisner  above  cited,  where  the  decision  by  the  Supreme  Court 
on  January  7,  1918,  was  avainst  the  Government’s  contention.  Counsel  in  the  Macomber 
case  were  also  counsel  in  the  Towme  case. 

816  The  opinion  in  the  above  case  consists  merely  of  an  endorsement  on  the  demurrer, 
as  follows: 

“Demurrer  overruled  on  the  authority  of  Towne  v.  Eisner,  245  U.  S.  418.  See 
also  Peabody  v.  Eisner,  247  U.  S.  347. 

Julius  M.  Mayer, 

January  23,  1919.  U.  S.  D.  J. 

Note:  In  reading  at  ^[2492  (Refund  of  taxes  paid  on  “stock  dividends”  under 

817  Act  of  October  3,  1913)  and  1[2496  (Refund  of  taxes  paid  on  account  of  “stock 
dividends”  under  Revenue  Act  of  1916  and  1917,  in  event  such  taxes  are  hereafter 

held  to  have  been  erroneously  assessed),  it  is  to  be  borne  in  mind  that  until  the  Supreme 
Court  has  affirmed  the  decision  of  the  lower  court  the  status  of  “stock  di'^dacnds”  received 
since  December  31.  1915,  remains  unchanged,  ofiicially.] 


818  Determination  of  Profit  or  Loss  from  Disposition  of  Stock  Received  ThroughlStock 
Dividend. — By  Sections  2 (a)  and  31  (a)  of  the  Income  Tax  Act  of  September  8, 

1916,  as  amended,  taxable  income  includes  stock  dividends  paid  by  a corporation  in  1916 
or  subsequent  years  out  of  its  earnings  or  profits  accrued  since  March  1,  1913,  to  the 
amount  of  the  earnings  or  profits  so  distributed,  and  excludes  stock  dividends  paid  in  1916 
or  subsequent  years  out  of  surplus  other  than  earnings  or  profits  accrued  since  March  1, 
1913.  In  Towne  v.  Eisner,  245  U.  S.  418  [^[[2738]  stock  dividends  paid  in  1913,  1914  or 
1915  out  of  surplus  however  created  were  held  not  to  be  taxable  income  under  the  Income 
Tax  Act  of  October  3,  1913. 

Section  31  (b)  of  the  Act  of  September  8,  1916,  as  amended.  Article  107  [11804]  of 

819  the  Incom.e  Tax  Regulations,  and  Treasury  Decisions  2659  [1[834l  of  February  28, 
1918,  and  2678  [1[846]  of  March  23,  1918,  provide  the  method  of  determining  out  of 

what  earnings  or  profits  a dividend  declared  in  1917  or  subsequent  years  is  deemed  to  have 
been  paid. 

For  the  purpose  of  ascertaining  under  the  Income  Tax  Act  the  gain  or  loss  derived 

820  from  the  sale  of  stock  or  other  property,  its  cost,  or  if  acquired  before  March  1, 
1913,  its  fair  market  price  or  value  as  of  March  1,  1913,  is  evidently  the  basis  to 

be  sought.  Such  basis  once  found,  the  problem  is  resolved  into  a matter  of  subtraction. 
To  avoid  unnecessary  complication  “cost”  is  used  herein  to  include  also,  where  required, 
“fair  market  price  or  value  as  of  March  1,  1913.” 

For  the  purpose,  then,  of  ascertaining  the  gain  or  loss  derived  from  the  sale  of 

82 1 stock  of  a corporation  received  as  a dividend,  or  from  the  sale  of  the  stock  in  respect 
of  which  such  dividend  was  paid,  the  cost  of  such  stock  is  to  be  determined  in 

accordance  with  the  following  rules: 

1.  In  the  case  of  stock  (a)  received  as  a dividend  in  1913,  1914  or  1913  out  of 

822  surplus,  however  created,  or  (b)  received  as  a dividend  in  1916  or  subsequent  years 
out  of  surplus  other  than  earnings  or  profits  accrued  since  March  1,  1913,  the 

cost  of  each  share  of  new  stock  is  the  quotient  of  the  cost  of  the  old  stock  divided  by  the 
number  of  old  and  new  shares  added  together. 

2.  In  the  case  of  the  stock  in  respect  of  which  any  stock  dividend  was  paid  as 

823  described  under  1,  the  cost  of  each  share  of  old  stock  is  similarily  the  quotient 
of  the  cost  of  the  old  stock  divided  by  the  number  of  old  and  new  shares. 


INC. 


88 


TAX 


INDIVIDUALS. 


3.  In  the  case  of  stock  received  as  a dividend  In  1916  or  subsequent  years  out  of 

824  surplus  earnings  or  profits  accrued  since  March  1,  1913,  the  cost  of  each  share 
is  the  valuation  at  which  it  was  returnable  as  income,  as  shown  by  the  transfer 

of  surplus  to  capital  account  on  the  books  of  the  corporation,  usually  its  par  value. 

4.  In  the  case  of  the  stock  in  respect  of  which  any  stock  dividend  was  paid  a» 

825  described  under  3,  the  cost  of  each  share  is  its  original  cost,  regardless  of  any  stock 
dividend. 

Paragraph  28  of  Regulations  No.  33  (revised)  is  hereby  amended  to  read  as  follows: 

826  Stock  dividends  declared  from  earnings  or  profits  accrued  prior  to  March  1,  1913, 
or  from  surplus  created  by  the  revaluation  of  capital  assets  or  by  placing  a value 

upon  trademarks,  goodwill,  etc.,  do  not  represent  a distribution  of  earnings  or 
profits  subject  to  tax  as  a dividend  In  the  hands  of  the  recipient  shareholder  [Read  ^800]. 
When  stock  received  in  paym.ent  of  such  a dividend,  or  stock  in  respect  of  which  any  such 
dividend  was  paid,  is  sold,  the  cost  of  each  share  of  stock,  whether  old  or  new,  for  the 
purpose  of  ascertaining  the  gain  or  loss  resulting  from  its  sale,  is  the  quotient  of  the  cost 
of  the  old  stock,  if  acquired  on  or  after  March  1,  1913,  or  its  fair  market  price  or  value 
as  of  that  date  if  acquired  prior  thereto,  divided  by  the  number  of  old  and  new  shares 
added  together.  The  profit  so  ascertained  from  the  sale  of  such  stock  is  Income  subject 
to  both  normal  and  additional  tax  and  shall  be  accounted  for  in  the  shareholder’s  return 
rendered  for  the  year  in  which  the  sale  is  made. 

Paragraph  60  of  Regulations  No.  33  (revised)  is  hereby  amended  to  read  as  follows: 

827  When  stock  is  sold  from  lots  purchased  at  different  times  and  at  different  prices 
and  the  Identity  of  the  lots  can  not  be  determined  as  to  the  dates  of  purchase, 

the  stock  sold  shall  be  charged  against  the  earliest  purchases  of  such  stock.  The  excess 
of  the  amount  realized  on  the  sale  over  the  cost  of  the  stock,  or  its  fair  market  price  or 
value  as  of  March  1,  1913,  If  purchased  before  that  date,  will  be  the  profit  to  be  accounted 
for  as  income.  In  the  case  of  stock  received  as  a stock  dividend  out  of  surplus  other  than 
earnings  or  profits  accrued  since  March  1,  1913,  or  of  stock  in  respect  of  which  any  such 
dividend  was  paid,  the  cost  of  each  share  of  such  stock  shall  be  ascertained  as  specified  in 
paragraph  28  [1[826]  hereof.  (T.  D.  2734,  June  17,  1918.) 

828  Law  ^37.  “Liquidating  Dividends.” — “Amounts  distributed  in  the  liquidation 
of  a corporation  shall  be  treated  as  payments  in  exchange  for  stock  or  shares, 

and  any  gain  or  profit  realized  thereby  shall  be  taxed  to  the  distributee  as  other  gains  or 
profits.”  [1F3100.]  ^ ^ 

829  Status  of  a Liquidating  Dividend  for  Income  Tax  Purposes. — If  the  * * * Man- 
ufacturing Company  after  such  sale  of  its  assets  dissolves  and  distributes  to  its  stock- 
holders in  liquidation  the  net  proceeds  of  the  sale,  the  stockholders  would  be  held  to  be 
taxable  upon  so  much  of  the  amounts  received  by  them  respectively  as  is  In  excess  of  the 
cost  to  them  of  their  stock.  A liquidating  dividend  is  not  deemed  to  be  taxable  as  an 
ordinary  dividend  but  is  to  be  treated  as  an  am.ount  received  in  exchange  for  the  stock  of 
the  liquidating  company.  (Part  of  letter  to  The  Corporation  Trust  Company,  signed  by 
Commissioner  Daniel  C.  Roper,  and  dated  January  13,  1919.) 

830  Dividend  from  Depletion  Reserve. — A reserve  set  up  out  of  gross  receipts  and 
maintained  by  a corporation  for  the  purpose  of  making  good  any  loss  or  wasting 

of  capital  assets  on  account  of  depletion  is  not  to  be  considered  a part  of  the  earned  surplus 
of  the  company,  but  a reserve  for  the  return  or  liquidation  of  capital.  A dividend  paid 
from  such  reserve  will  be  considered  a liquidating  dividend  and  will  not  constitute  taxable 
income  to  the  stockholder  except  to  the  extent  that  the  amount  so  received  is  in  excess 
of  the  capital  actually  invested  by  the  stockholder  in  the  shares  of  stock  held  by  him,  and 
with  respect  to  which  the  distribution  was  made.  No  dividend  will,  however,  be  deemed 
to  have  been  paid  from  such  reserve  except  to  the  extent  that  such  dividend  exceeds  the 
surplus  and  undivided  profits  of  the  corporation  at' the  time  of  such  payment,  and  unless 
the  books,  records,  published  statements,  etc.,  of  the  corporation  clearly  indicate  a cor- 
responding reduction  of  capital  assets  resulting  from  such  payment.  (Art.  4,  ^26,  Reg.  3S, 
Rev.,  Jan.  2,  1918.) 

831  Law  ^38.  Certain  Stock  Dividends  Apportionable.  “(d)  If  any  stock  dividend 
(1)  is  received  by  a taxpayer  between  January  1 and  November  I,  1918,  both  dates 
inclusive,  or” 

832  Law  ^39.  “(2)  is  during  such  period  bona  fide  authorized  or  declared,  and 

entered  on  the  books  of  the  corporation,  and  is  received  by  a taxpayer  after 

November  I,  1918,  and  before  the  expiration  of  thirty  days  after  passage  of  this  Act,” 

[For  date  of  passage  see  ^12824.) 

833  Law  1140.  “then  such  dividend  shall,  in  the  manner  provided  in  Sec.  206  [1[1678], 
be  taxed  to  the  recipient  at  the  rates  prescribed  by  law  for  the  years  in  which  the  cor- 
poration accu mulated  the  earnings  or  profits  from  which  such  dividend  «'as  paid,  but  the 
dividend  shall  be  deemed  to  have  been  paid  from  the  most  recently  accumulated 
earnings  or  profits.”  [1[3098.] 


INC. 


89 


TAX 


INDIVIDUALS. 


[Applicable  in  part  only,  now.]  From  inquiries  reaching  this  office,  it  is  apparent 

834  that  there  is  confusion  in  the  minds  of  the  public  as  to  the  effect  and  application 
of  the  provisions  of  Section  31,  of  the  Act  of  September  8,  1916,  added  by  the  Act 

of  October  3,  1917,  Section  1211,  relative  to  the  basis  of  taxation  of  certain  dividends. 
That  section,  after  defining  dividends,  provided  that  “any  distribution  made  to  the  share- 
holders or  members  of  a corporation  * * * in  the  year  1917,  or  subsequent  tax  years, 

shall  be  deemed  to  have  been  made  from  the  most  recently  accumulated  undivided  profits 
or  surplus,  and  shall  constitute  a part  of  the  annual  income  of  the  distributee  for  the  year 
in  which  received,  and  shall  be  taxed  to  the  distributee  at  the  rates  prescribed  by  law  for 
the  years  in  which  such  profits  or  surplus  were  accumulated  * * * »» 

Regulations  No.  33  (Revised),  Article  107,  paragraph  375,  provide  as  follows: 

835  “Thus,  If  a corporation  distributed  dividends  in  1917,  such  dividends  will  be  deemed 
to  have  been  paid  from  the  earnings  of  1917,  and  the  recipient,  if,  an  individual, 

will  be  liable  to  additional  tax,  if  any,  and  if  a corporation  to  income  tax,  at  the  rates 
for  the  year  1917;  unless  it  is  shown  to  the  satisfaction  of  the  Commissioner  of  Internal 
Revenue,  that  at  the  time  such  dividends  were  paid,  the  earnings  up  to  that  time  were 
not  sufficient  to  cover  the  distribution,  In  which  case  the  excess  over  the  earnings  of  the 
taxable  year  will  be  deemed  to  have  been  paid  from  the  most  recently  accumulated  surplus 
of  prior  years,  and  will  be  taxed  at  the  rate  or  rates  for  the  year  or  years  in  which  earned.” 
The  rule  may  be  applied  as  follows:  Assume  that  a corporation  with  a capital 

836  stock  of  $10,000,000  had  surplus  earnings  of  $500,000  a year  in  excess  of  the  amount 
of  dividends  paid,  making  its  total  surplus  on 

December  31,  1915,  $500,000,  and  on 
December  31,  1916,  $1,000,000. 

On  December  31,  1916,  it  declared  a dividend  of  2%  payable  February  15,  1917. 

837  Unless  it  is  shown  to  the  satisfaction  of  the  Commissioner  of  Internal  Revenue 
that  its  earnings  from  January  1 to  February  15  were  insufficient  for  the  payment  of 

the  $200,000  distributed  as  a dividend  on  February  15,  the  entire  amount  so  distributed 
will  be  deemed  to  have  been  paid  from  earnings  of  1917,  and  will  be  taxable  in  the  hands 
of  the  stockholders  at  the  1917  rate.  If,  however,  it  is  established  to  the  satisfaction  of 
the  Commissioner  of  Internal  Revenue  that  its  earnings  up  to  February  15  were  but 
$100,000,  then  $100,000  or  half  of  the  total  dividend  paid  by  the  corporation  on  February 
I5th  would  be  taxable  in  the  hands  of  the  stockholders  at  the  1917  rates,  and  the  other  half 
would  be  deemed  to  have  been  paid  from  the  surplus  of  the  corporation  of  1916  and  would 
be  taxable  to  the  stockholders  at  the  1916  rate.  If  the  dividend  paid  on  February  15  were 
of  such  amount  as  to  exceed  the  ascertained  1917  earnings  up  to  the  date  of  payment  and 
also  the  1916  surplus  of  the  corporation,  the  amount  of  such  excess  would  be  deemed  to  have 
been  paid  from  the  surplus  of  1915  and  would  be  taxable  in  the  hands  of  the  stockholders 
at  the  1915  rate. 

All  dividends  received  in  1917,  even  though  paid  by  corporations  from  earnings 

838  of  previous  years,  constitute  income  to  the  recipients  for  1917.  The  method  of 
ascertaining  the  precise  rate  applicable  to  such  portions  of  dividends  received  in 

1917,  as  within  the  above  rules  are  to  be  taxable  at  rateg  prevailing  for  previous  years,  is 
as  follows:  The  amount  of  the  income  of  the  recipient  to  which  the  1917  rates  are  applicable 
is  first  ascertained.  To  such  amount  is  then  added  the  amount  of  income  of  the  recipient 
liable  to  tax  at  the  1916  rates  and  the  table  of  1916  rates  applied  to  see  in  which  brackets 
such  income  falls:  the  income  liable  to  1915  rates  then  added  and  the  table  of  1915  rates 
applied  to  it.  For  Instance,  an  individual  has  $20,000  of  income  liable  to  1917  rates  and 
$25,000  of  dividends  liable  to  1916  rates.  The  total  would  be  $45,000  of  which  $20,000 
would  be  taxable  at  the  1917  rates,  $20,000  to  $40,000  at  the  1%  additional  tax  rate  under 
the  1916  table  and  $5,000  at  the  2%  additional  tax  rate  under  the  same  table.  If  he  had 
another  $25,000  dividend  liable  at  1915  rates,  the  first  $5,000  would  fall  in  the  bracket 
between  $20,000  an  $50,000  at  the  additional  1%  tax  rate,  and  the  other  $20,000  in  the 
second  bracket  of  $50,000  to  $75,000  at  the  2%  additional  tax  rate  under  the  1915  table. 

In  order  that  this  office  may  verify  the  correctness  of  the  rates,  taxpayers  reporting 

839  dividends  received  at  other  than  1917  rate,  under  the  various  columns  in  Block  F 
of  Form  1040,  will  be  required  to  render  a statement  at  the  time  of  filing  the  return, 

or~at  a subsequent  date,  showing  the  corporations  from  which  dividends  taking  other  than 
1917  rates  were  received,  with  the  amount  of  dividend  received  from  each.  (T.  D.  2659, 
Feb.  28,1918.) 

[Special  for  1917.)  In  view  of  the  difficulty  which  many  corporations  are  having  in 

840  determining  whether  earnings  in  1917  up  to  the  date  of  a dividend  payment  in  that 
year  were  sufficient  to  cover  the  dividend  paid,  it  is  held  that  in  any  case  where 

there  is  doubt  upon  the  point,  corporations  may  distribute  the  earnings  for  the  accounting 
period  within  which  the  dividend,  or  dividends,  in  question  were  paid,  ratably  over  the 
period,  for  the  purpose  of  determining  the  amount  of  the  earnings  during  the  period  up  to 
the  date  of  payment.  This  should  be  read  in  connection  with  instructions  set  forth  in  T. 
D.  2659.  [1834].  [Note  the  new  law  provision  at  1846.]  (T.  D.  2678,  March  23,  1918.) 


INC. 


90 


TAX 


INDIVIDUALS. 


841  Surtax  Rates  for  1913,  19H,  and  1915. — No  super  tax  or  surtax  on  net  incomes  of 
$20,000  or  less. 

Over  $20,000  to  $50,000 1% 

Over  $50,000  to  $75,000 2% 

Over  $75,000  to  $100,000 3% 

Over  $100,000  to  $250,000 4% 

Over  $250,000  to  $500,000 .5% 

Over  $500,000 6% 

842  Surtax  Rates  for  1916  and  1917. — 


Amount  subject  to  tax.  1916.  1917. 

Per  cent.  Per  cent, 

$5,000  to  $7,500 1 

$7,500  to  $10,000 2 

$10,000  to  $12,500 3 

$12,500  to  $15,000 4 

$15,000  to  $20,000 5 

$20,000  to  $40,000 1 8 

$40,000  to  $60,000 2 12 

$60,000  to  $80,000 3 17 

$80,000  to  $100,000 4 22 

$100,000  to  $150,000 5 27 

$150,000  to  $200,000 6 31 

$200,000  to  $250,000 7 37 

$250,000  to  $300,000 8 42 

$300,000  to  $500,000 9 46 

$500,000  to  $750,000 10  50 

$750,000  to  $1,000,000 10  55 

$1,000,000  to  $1,500,000 11  61 

$1,500,000  to  $2,000,000 12  62 

On  excess  of  $2,000,000 13  63 


843  The  Taxpayer  is  to  Ascertain  in  What  Year  or  Years  Dividends  are  Deemed  to 

Have  Been  Earned. — Will  it  be  the  taxpayer’s  duty  to  advise  himself  what  pro- 
portion of  a [stock]  dividend  received  by  him  is  properly  chargeable,  * * * , to  the 

corporate  earnings  or  profits  for  each  tax  year?  (Answer.)  Yes.  (Question  43^,  1918 
Income  Tax  Primer.) 

844  Stock  Dividends  of  Foreign  Corporations  Received  in  1918  Are  to  be  Apportioned 
to  Prior  Years. — Supplementing  office  letter  of  February  13,  1918,  and  in  further 

reference  to  your  communication  of  February  6,  1918,  requesting  that  you  be  advised 
whether  dividends  paid  on  stock  of  a foreign  corporation  should  be  shown  on  Form  1040, 
Revised,  as  apportioned  to  the  year  or  years  in  which  the  earnings  from  which  such  divi- 
dends were  distributed,  accrue  to  the  corporation,  you  are  advised  that  it  is  held  by  this 
office  that  the  provisions  of  Section  31  (b)  added  to  the  Act  of  September  8,  1916,  by 
Section  1211  of  the  Act  of  October  3,  1917,  apply  equally  to  dividends  paid  by  a foreign 
corporation.  (Letter  to  The  Corporation  Trust  Company,  signed  by  Commissioner 
Daniel  C.  Roper,  and  dated  March  14,  1918.) 

846  Law  1[4 1 . Dividends  distributed  during  first  sixty  days  of  taxable  year. — “(e)  Any 
distribution  made  during  the  first  sixty  days  of  any  taxable  year  shall  be  deemed 
to  have  been  made  from  earnings  or  profits  accumulated  during  preceding  taxable  years;” 

846  Law  ^ 42.  “but  any  distribution  madeduring  theremainder  of  thetaxableyearshall 
be  deemed  to  have  been  made  from  earnings  or  profits  accumulated  between  the 

close  of  the  preceding  taxable  year  and  the  date  of  distribution,  to  the  extent  of 
such  earnings  or  profits,  and  if  the  books  of  the  corporation  do  not  show  the  amount  of 
such  earnings  or  profits,  the  earnings  or  profits  for  the  accounting  period  within  which  the 
distribution  was  made  shall  be  deemed  to  have  been  accumulated  ratably  during  such 
period.”  [Note  the  ruling,  applicable  to  1917,  at  11840.]  [1[3094.] 

847  Uncompleted  Contracts. — If  I enter  into  a contract  in  1917  which  will  not  be  com- 
pleted until  1918,  and  which  requires  me  to  make  expenditures  for  material  and 

labor,  provide  for  possible  losses,  etc.,  must  I include  the  advance  payments  I receive 
in  1917  in  ray  return  for  that  year?  (Answer.)  No.  As  you  are  unable  to  determine  what 
amount  of  gain  or  profit  you  will  derive  from  the  contract  until  it  is  completed,  the  pay- 
ments received  thereon  during  1917  need  not  be  included  in  your  return  for  that  year. 
W'hen  the  contract  is  completed  the  net  gain  or  profit  derived  therefrom  should  be  reported 
under  Gross  Income  in  your  return  rendered  for  the  year  1918.  (Question  22,  1918  Income 
Tax  Primer.) 


INC. 


91 


TAX 


INDIVIDUALS. 


848  Payments  of  Income  Made  in  Liberty  Loan  Bonds. — Various  questions  have  arisen 
as  to  the  taxable  status  of  payments  of  income  made  in  the  form  of  Liberty  Loan 

bonds  and  it  was  thought,  in  fairness  to  all  concerned,  that  inquiries  of  this  nature  should 
be  submitted  by  the  Department  to  the  Attorney  General  for  his  opinion.  This  has  been 
done  and,  * * * Attorney  General  holds,  in  part,  that:  [Read  11775]  (Part  of 

letter  to  Kenefick,  Cooke,  Mitchell  & Bass,  Buffalo,  signed  by  Deputy  Commissioner 
L.  F.  Speer,  and  dated  June  22,  1917.) 

849  Compensation  Not  Paid  in  Money. — Where  service  is  rendered  for  a stipulated 
price,  wage,  or  salary  and  paid  with  something  other  than  money,  the  stipulated 

value  of  service  in  terms  of  money  is  the  value  at  which  the  thing  taken  in  payment  is  to  be 
considered  for  the  purpose  of  the  income  tax. 

850  Where  there  Is  no  stipulation  as  to  the  value  of  service  and  payment  for  service  is 
made  with  something  other  than  money,  the  market  or  reasonable  value  of  the 

thing  taken  in  payment  is  the  amount  to  be  included  as  income  for  the  purposes  of  the 
income  tax.  (Art.  4,  1[21-22,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

851  Rent  Not  Paid  in  Money. — Amounts  expended  by  tenants  for  taxes  and  necessary 
^ repairs  under  agreement,  in  addition  to  a stipulated  cash  rental,  are  items  of  tax- 
able income,  and  as  such  should  be  reported  in  the  return  of  the  landlord.  A 
corresponding  amount  may  be  deducted  by  the  landlord.  (Art.  4,  1[57,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

852  Board,  lodging  or  other  consideration  received  in  lieu  of  rental  is  considered  income 
equal  in  amount  to  the  indebtedness  In  payment  of  which  it  is  received,  and  should 

be  Included  In  any  return  of  annual  net  income  its  recipient  is  required  to  render  under 
the  provisions  of  the  income-tax  law.  (T.  D.  2135,  Jan.  23,  1915.) 

853  Promissory  Note  Received  in  Payment  of  an  Account  is  Equivalent  to  Cash  Settle- 
ment.— The  receipt  of  a promissory  note  in  settlement  of  an  account  is  held  to  be, 

in  effect,  a payment  of  that  account,  and  so  much  of  the  amount  of  such  note  as 
represents  net  income  Is  subject  to  tax  as  of  the  tax  year  in  which  received.  (Part  of  letter 
addressed  to  Carey,  Piper  and  Hall,  Baltimore,  Maryland,  signed  by  Deputy  Commissioner 
L.  F.  Speer  and  dated  March  1,  1915.) 

854  Interest  on  Bank  Deposits. — [Interest  on  bank  deposits  or  on  certificates  of  deposit] 
whether  paid  or  accrued  and  unpaid,  must  be  included  In  the  annual  income  return 

of  the  person  entitled  to  receive  such  interest,  whether  on  open  account  or  on  the 
certificate  of  deposit.  (Art.  67,  Reg.  33,  Jan.  5,  1914.) 

855  Interest  on  bank  accounts  should  be  returned  as  income  for  the  year  in  which 
credited.  (Extract  from  letter  to  Beekman,  Menken  and  Griscom,  signed  by 

Commissioner  W.  H.  Osborn  and  dated  February  18,  1915.) 

85G  Amounts  Credited  Building  and  Loan  Associations. — Amount  credited  to  share- 
holders of  building  and  loan  associations,  when  title  to  such  credit  passes  to  the 
shareholder  at  the  time  of  the  credit,  has  a taxable  status  for  the  normal  and  additional 
taxes  for  the  year  of  the  credit.  Where  the  amount  of  such  accumulations  does  not  become 
available  to  the  shareholder  until  the  maturity  of  a share,  the  amount  of  a share  in  excess 
of  the  aggregate  amount  paid  in  by  the  shareholder  is  income  to  be  accounted  for  as  for 
the  vear  of  the  maturity  of  the  share  for  both  the  normal  and  additional  tax.  (Art. 
4,  fl8,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

857  Actual  Receipt  vs.  Constructive  Receipt  of  Income. — Actual  receipt  is  a reduc- 
tion to  possession.  Constructive  receipt  Is  where  income  is  credited  to  or  made 

available  to  recipients  and  is  to  be  reported  as  income;  as  credit  to  account  of  recipients 
of  saving-bank  interest,  etc.  (Art.  4,  1151,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

858  Commission  Determined  and  Credited  But  Not  Drawn. — Reference  is  made  to 
your  letter  of  March  14,  1918,  relating  to  an  individual,  paid  on  a commission  basis, 

who  during  1917  earned  about  $20,000  against  which  earnings  but  $4,000  has  been  with- 
drawm.  You  request  to  be  advised  whether  the  individual  must  account  for  the  full 
amount  of  his  income  for  the  year  1917.  1|In  reply  you  are  advised  that  under  the  regu- 
lations it  is  held  that  income  credited  to  or  made  available  to  the  recipient  is  a construc- 
tive receipt  and  the  amount  is  to  be  returned  for  income  tax  purposes  for  the  year  in 
which  such  income  was  credited  or  made  available.  Accordingly  the  salesman  must 
■'include  in  his  return  the  $20,000  commission  earned  by  him  during  the  year  1917.  (Let- 
ter to  Certified  Audit  Company  of  America,  New  York,  N.  Y.,  signed  by  Deputy  Commis- 
•sioner  L.  F.  Speer,  and  dated  April  30,  1918.) 

92 


INC. 


TAX 


INDIVIDUALS. 


859  When  Special  Compensation  (Bonus)  is  Considered  Taxable  Income. — Special 
payments  made  by  a corporation  as  extra  compensation  to  certain  of  its  employees 

may  be  deducted  from  gross  income  if  it  is  clearly  shown  that  such  payments  are  made  as 
compensation  for  services  rendered  and  are  paid  in  pursuance  of  a contract  expressed 
or  implied. 

If  such  so-called  “compensation”  is  a gratuity  or  voluntary  payment,  for  which 

860  no  service  is  rendered,  the  amounts  so  paid  are  not  deductible.  In  cases  wherein 
the  payments  are  made  as  compensation  for  services  rendered,  the  employee 

receiving  the  same,  if  he  be  a “taxable  person,”  will  be  required  to  include  the  amount 
of  such  compensation  in  his  personal  income  tax  return — [Read  discussion  of  subject 
at  paragraph  1979.]  (T.  D.  2152,  Feb.  12,  1915.) 

861  Salaries  Paid  by  Exempt  Organizations. — Salaries  paid  by  corporations,  which 
corporations  have  been  held  to  be  exempt  from  the  income  tax  under  paragraph 

G of  the  income-tax  law,  are  subject  to  the  income  tax  and  should  be  returned  as  income 
by  the  individual,  * * * . (T.  D.  2090,  Dec.  14,  1914.) 

862  Living  Quarters  as  Part  of  Salary. — When  an  individual  is  furnished  living  quarters 
V ..  4I  in  addition  to  salary,  the  rental  value  of  such  living  quarters  is  regarded  as  com- 
pensation subject  to  the  income  tax.  (T.  D.  2090,  Dec.  14,  1914.) 

863  Quarters,  Mileage,  Expenses  of  Government  Officers  and  Employees. — Quarters; 
Commutation  of  quarters  and  the  money  equivalent  of  quarters  furnished  in  kind 

shall  be  returned  as  incoiue. 

When  quarters  are  furnished  in  kind,  of  a less  number  of  rooms  than  the  number 

864  allowed  by  law,  the  money  equivalent  only  of  the  number  of  rooms  actually 
assigned  shall  be  returned  as  income.  When  quarters  are  furnished  in  kind,  of 

a greater  number  of  rooms  than  the  number  allowed  by  law,  it  is  to  be  assumed  that  the 
excess  number  is  assigned  for  the  convenience  of  the  Government,  and  the  money  equi- 
valent only  of  the  number  of  rooms  allowed  by  law  shall  be  returned  as  income. 

Heat  and  light:  Amounts  received  by,  or  paid  for,  an  officer  for  heat  and  light 

865  shall  be  returned  as  income. 

This  includes  the  money  equivalent,  as  fixed  by  the  Government  of  heat  and 

866  light  furnished  to  an  officer  occupying  public  quarters. 

Mileage:  The  difference  between  the  amount  received  as  mileage  and  the  amount 

867  of  actual  necessary  expenses  incurred  on  a journey  shall  be  returned  as  income. 
Mileage,  as  such,  is  not  gain,  profit,  or  income  to  the  officer,  as  he  is  required  to 

868  pay  his  actual  expenses  while  traveling  under  mileage  orders.  The  gain,  profit, 
or  income  is  the  difference  between  the  amount  received  as  mileage  and  the 

amount  properly  expended  by  the  officer  while  traveling;  and  this  difference,  only, 
should  be  returned  as  income. 

The  actual  expenses  to  be  deducted  by  the  individual  before  ascertaining  his 

869  gain,  profit,  or  income  on  account  of  mileage  are  the  expenses  for  which  reimburse- 
ment would  be  made  by  the  Government  if  he  had  traveled  on  an  actual  expense 

basis  instead  of  a mileage  basis. 

870  Reimbursement  for  actual  expenses:  Amounts  paid  by  the  Government  in 
the  nature  of  reimbursement  for  subsistence  and  other  items  of  actual  expenses 

incurred  while  absent  on  business  for  the  Government  are  not  required  to  be 
returned  as  income.  (T.  D.  2079,  Nov.  24,  1914.) 

87  1 Per  diem  allowance  in  lieu  of  subsistence  while  under  traveling  orders;  the  total 
allowance  is  income  and  there  may  be  taken  as  a deduction  for  expense  the  amount 
actually  expended  from  such  allowance  for  actual  necessary  traveling  expenses.  (Art.  4, 
^55,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

872  Reference  is  made  to  Mim.  1078,  dated  August  27,  1914,  requiring  revenue  agents 
and  inspectors  paid  from  the  appropriations  “Collecting  the  Income  Tax”  to 

modify  their  Forms  132  for  August,  1914,  and  thereafter  to  report  “headquarters”  instead 
of  “legal  residence,”  the  “headquarters”  being  the  home — the  actual  domicile  of  the 
officer. 

There  has  been  so  much  confusion  resulting,  and  so  many  officers  have  attempted 

873  to  change  their  homes  for  the  purpose  of  enabling  them  to  receive  per  diem  in 
lieu  of  subsistence,  that  it  is  found  to  be  necessary  to  issue  the  following  instruc- 
tions as  supplemental  to  the  mimeograph  above  cited. 

1.  The  Act  of  August  1,  1914,  provides  that  heads  of  executive  departments 

874  ntay  prescribe  within  limits  per  diem  in  lieu  of  subsistence  to  persons  traveling 
on  duty  away  from  their  designated  posts  of  duty  when  not  otherwise  fixed  by  law. 

2.  The  Comptroller  of  the  Treasury  has  ruled  that  headquarters  may  be  estab- 


INC. 


93 


TAX 


INDIVIDUALS. 


876  lished  as  the  designated  posts  of  duty  of  the  agents  and  inspectors  whose  per 
diem  in  lieu  of  subsistence  is  not  fixed  by  law — that  is,  they  will  be  considered  as  in  a 
travel  status  when  on  duty  away  from  their  headquarters. 

3.  With  the  Comptroller’s  ruling  in  view,  the  headquarters  of  the  officers  referred 

876  to  have  been  fixed  at  their  homes. 

4.  When  a particular  place  has  been  reported  by  an  agent  or  inspector  as  his 

877  home  when  commissioned,  he  cannot  thereafter  report  his  home  or  headquarters 
elsewhere  for  the  purpose  of  claiming  per  diem  in  lieu  of  subsistence,  without 

first  obtaining  the  permission  of  the  Commissioner  of  Internal  Revenue.  This  does 
not  mean  that  a home  may  be  established  elsewhere  than  the  place  originally  reported 
as  headquarters  and  per  diem  in  lieu  of  subsistence  claimed  when  within  the  confines  of 
the  new  or  most  recent  home,  as  that  would  be  a perversion  of  the  law  and  the  regulations 
made  to  carry  the  law  into  effect.  In  other  words,  when  a particular  place  is  reported 
as  home,  such  place  will  continue  as  a home  until  actual  domicile  is  taken  up  elsewhere, 
and  when  that  is  done  or  contemplated  being  done,  the  Commissioner  should  be  fully 
advised  of  the  change  or  proposed  change,  the  reason  therefor  set  forth  in  full  and  per- 
mission requested  to  report  the  new  abode  as  “headquarters”  on  Form  132.  If  the  Com- 
missioner approves,  a new  commission  will  issue,  and,  if  he  does  not  approve,  the  agent 
or  inspector,  as  the  case  may  be,  will  not  charge  per  diem  in  lieu  of  subsistence  when  he  is 
at  or  within  the  confines  of  his  home  as  at  first  reported  or  his  actual  home  established 
thereafter,  as  under  no  circumstances  can  per  diem  in  lieu  of  subsistence  be  paid  when 
such  agent  or  inspector  is  at  or  within  the  confines  of  his  actual  home.  (T.  D.  2124, 
Jan.  13,  1915.) 

878  Retired  Pay. — Retired  pay  of  Army  and  naval  officers  and  judges  of  the  United 
States  courts  [read  at  11764]  is  subject  to  the  income  tax.  (Art.  4,  1[58,  Reg.  33, 

Rev.,  Jan.  2,  1918.) 

879  Bad  Debts. — Bad  debts  which  have  been  claimed  and  allowed  as  a deduction 
in  prior  returns  are  considered  income  if  subsequently  collected.  (Art.  4,  ^14, 

Reg.  33,  Rev.,  Jan.  2,  1918.) 

880  Commissions  Paid  Salesmen. — Are  income  to  the  salesmen  as  well  as  expense 
to  the  payer.  (Art.  4,  1[19,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

881  Percentage  of  Net  Profits. — For  service  paid  for  on  a percentage  of  net  profits 
is  income  to  the  employee,  and  to  be  accounted  for  as  such.  (Art.  4,  1[20,  Reg. 

33,  Rev.,  Jan.  2,  1918.) 

882  Compensation  Determined  After  Service  is  Rendered. — In  the  case  of  compensa- 
tion for  service  rendered,  where  no  determination  of  compensation  is  had  until 

the  completion  of  the  service,  the  amount  received  in  consideration  of  the  service  is  income 
to  be  accounted  for  as  for  the  calendar  year  of  its  receipt. 

Where  the  service  and  payment  period  is  divided  by  the  end  of  the  taxable  year, 

883  the  compensation  for  the  period  so  divided  at  the  end  of  the  year  will  be  accounted 
for  as  income  for  the  year  in  which  payment  is  actually  received.  Where  the 

service  is  compensated  by  fee,  or  is  of  such  nature  that  no  part  of  the  fee  or  compensation 
becomes  due  until  the  completion  of  the  service,  the  entire  amount  received  should  be 
income  to  be  accounted  for  as  for  the  year  of  receipt. 

A person  having  a salary  by  the  year  and  in  addition  commissions  on  sales,  the 

884  salary  to  be  paid  at  the  time  commissions  are  determined,  and  the  determination 
of  commissions  is  in  the  succeeding  calendar  year,  the  entire  amount  of  salary 

and  commissions  should  be  accounted  for  as  income  of  the  calendar  year  of  receipt.  (Art. 
4,  1152-54,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

886  Compensation  for  Services  as  Trustees. — If  no  determination  was  made  of  the 
amount  due  the  trustee  of  an  estate  as  compensation  for  his  services  over  a period 
of  years  until  the  trust  was  terminated,  the  amount  allowed  him  should  be  returned  in 
full,  subject  to  allowable  deductions,  as  income  for  the  year  in  which  paid;  and  should  not 
be  prorated  over  the  length  of  time  during  which  he  served  as  trustee.  (T.  D.  2135,  Jan. 
23,  1915.) 

886  Voluntary  Offerings  Received  by  Clergyman. — Easter  offerings,  and  fees  received 
by  clergymen  for  funerals,  masses,  marriages,  baptisms,  etc.,  are  considered 

income  subject  to  tax  under  the  provisions  of  the  income-tax  law  of  October  3,  1913. 
Christmas  gifts,  however,  are  not  considered  income  within  the  meaning  of  the  law  and 
should  not  be  included  in  a return.  (T.  D.  2090,  Dec.  14,  1914.) 

887  Renewal  Premium. — Commissions  on  renewal  premium  for  insurance  received 
by  agents  on  account  of  business  written  is  income  to  be  accounted  for  as  such 

and  for  the  calendar  year  of  its  receipt.  (Art.  4,  1[56,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

INC.  94  TAX 


INDIVIDUALS. 


888  A commission  retained  by  a life  insurance  agent  on  his  own  life  insurance  policy 
is  held  to  be  income  accruing  to  the  agent,  and  should  be  Included  in  his  return  of 

income  for  the  assessment  of  the  income  tax.  (T.  D.  2137,  Jan.  30,  1915.) 

889  Royalty. — Royalty  paid  to  a proprietor  by  those  who  are  allowed  to  develop  or 
use  property,  or  operate  under  some  right  belonging  to  him,  is  to  be  accounted  for  as 

income.  (Art.  4,  1[59,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

890  Farms  and  Farmers. — The  term  “farm”  as  herein  used  embraces  the  farm  in  the 
ordinarily  accepted  sense  and  includes  plantations,  ranches,  stock  farms,  dairy 

farms,  poultry  farms,  fruit  farms,  truck  farms,  and  all  land  used  for  similar  purposes: 
and  for  the  purpose  of  this  decision  all  corporations,  partnerships,  or  individuals  who 
cultivate,  operate,  or  manage  such  farms  for  gain  or  profit,  either  as  owners  or  tenants, 
are  designated  as  “farmers.” 

All  gains,  profits  and  income  derived  from  the  sale  or  exchange  of  farm  products, 

891  whether  produced  on  the  farm  or  purchased  and  resold  by  the  farmer,  shall  be 

included  in  the  return  of  income  for  the  year  in  which  the  products  were  actually 

marketed  and  sold. 

All  items  of  expense  connected  with  the  planting,  cultivating,  harvesting  and 

892  marketing  of  a crop,  or  the  care,  feeding  and  marketing  of  live  stock  may  be 
claimed  as  deductions  only  in  the  return  rendered  for  the  year  during  which  such 

expenditures  were  made.  This  ruling  applies  even  though  the  crops  or  stock  in  connection 
with  which  the  expenses  were  incurred  may  not  have  been  sold  or  exchanged  for  money 
or  a money  equivalent  during  the  year  for  which  the  return  is  rendered. 

That  portion  of  Treasury  Decision  2153  and  paragraph  32  of  Regulations  No.  33 

893  (Revised)  which  provides  “cost  of  stock  purchased  for  resale  is  an  allowable 

deduction  under  the  item  of  expense,”  is  hereby  annulled.  It  is  held  that  the 

amount  expended  in  purchasing  stock  for  resale  is  an  investment  of  capital  and  is  not 
to  be  taken  as  an  item  of  expense  for  the  year  in  which  the  stock  was  purchased,  or  for 
any  subsequent  year;  but  when  the  stock  so  purchased  is  sold  its  cost  is  to  be  deducted 
from  the  sales  price  in  ascertaining  the  amount  of  gain  or  profit  returnable  for  tax 
purposes. 

Where  the  cost  of  stock  or  farm  products  purchased  in  1916,  or  any  previous  year, 

894  for  sale,  or  the  expense  of  producing  stock  or  products  on  the  farm,  has  been 
claimed  as  a deduction  or  taken  into  consideration  in  ascertaining  the  farmer’s 

liability  to  income  tax  for  some  year  prior  to  1917,  and  the  stock  or  farm  products  so 
purchased  or  produced  were  sold  during  the  latter  year,  the  entire  proceeds  of  the  sale 
are  to  be  returned  as  income  for  the  year  in  which  the  sale  was  made,  for  the  reason  that 
the  farmer,  having  once  received  the  benefit  of  the  deduction.  Is  not  again  entitled  to  it. 
If,  however,  such  cost  or  expense  had  not  been  claimed  as  a deduction,  or  had  not  been 
taken  into  consideration  in  ascertaining  the  farmer’s  liability  to  income  tax  for  a previous 
year,  the  amount  of  such  cost  or  expense  may  be  deducted  from  the  selling  price  of  the 
stock  or  farm  products  and  the  difference  only  returned  as  income. 

Farmers  who  keep  books  according  to  some  approved  method  of  accounting 
896  which  clearly  show  the  net  income,  and  take  annual  inventories,  may,  if  the  same 
method  is  consistently  followed  from  year  to  year,  prepare  their  returns  in  accord- 
ance with  the  show'ing  made  by  the  books  and  inventories.  If  the  inventory  method  is 
adopted  the  farmer  should,  in  order  to  ascertain  gross  income,  add  to  the  amount  received 
from  sales  made  during  the  year,  the  inventory  of  the  live  stock  and  products  on  hand 
at  the  close  of  the  year,  and  from  this  sum  deduct  the  amount  expended  in  purchasing 
live  stock  and  products  plus  the  Inventory  of  the  live  stock  and  products  at  the  beginning 
of  the  year. 

The  inventory  at  the  beginning  of  a tax  year  must  be  the  same  figure  as  at  the  close 

896  of  the  next  preceding  year  a»nd  must  include  the  cost  price  of  live  stock  or  products 
purchased  for  resale,  and  may  include  the  live  stock  and  products  produced  on  the 

farm  and  still  on  hand.  Where  gross  income  is  ascertained  by  inventories,  no  deduction 
can  be  made  for  live  stock  or  products  lost  during  the  year,  whether  purchased  for  resale 
or  produced  on  the  farm,  as  such  losses  will  be  reflected  in  the  inventory  by  reducing  the 
amount  of  live  stock  or  products  on  hand  at  the  close  of  the  year. 

Live  stock  purchased  for  draft,  breeding  or  dairy  purposes,  or  for  any  purpose 

897  other  than  resale,  may  be  included  in  the  inventory  for  each  year  at  a figure  which 
will  reflect  the  reduction  in  value  estimated  to  have  occurred  during  the  year  through 

increase  of  age  or  other  causes.  Such  a reduction  in  value  should  be  based  on  the  cost  and 
estimated  life  of  the  live  stock.  In  the  case  of  the  loss  of  such  live  stock  no  deduction  can 
be  made,  as  the  loss  will  be  reflected  in  the  inventory  at  the  end  of  the  year.  Where  the 
inventory  method  is  used,  the  cost  price  of  the  article  sold  must  not  be  taken  as  an  additional 
deduction  in  the  return  of  income  as  it  is  reflected  in  the  inventory. 

In  view  of  the  foregoing,  all  corporations,  partnerships,  and  individuals  engaged 

898  in  the  live  stock  or  farming  business,  which  do  not  keep  books  of  account  and  ascer- 
tain their  gross  income  by  inventory,  should  prepare  their  returr.'  of  annual  net 

INC.  95  TAX 


INDIVIDUALS. 


income  on  the  basis  of  actual  receipts  and  disbursements  in  order  that  their  returns  o 
income  may  be  susceptible  of  audit  for  purposes  of  verification.  Treasury  Decision 
2433  [1[1928|  contains  additional  information  relative  to  the  rendering  of  returns  of  income 
by  corporations  keeping  books  in  accordance  with  standard  systems  of  accounting,  or  in 
conformity  with  the  requirements  of  some  Federal,  State  or  municipal  authority,  having 
supervision  over  such  corporations. 

The  foregoing  relates  only  to  income  derived  from  the  operation  of  a farm  and  has 

899  no  relation  to  the  gain  or  profit  which  may  result  from  the  sale  of  the  farm. 

Where  a farmer  exchanges  farm  produce  for  merchandise,  groceries,  or  mill  products, 

900  the  market  value  of  the  article  or  product  received  in  exchange  is  to  be  returned 
as  income. 

90 1 A farmer  is  not  required  to  include  in  his  income  tax  return  the  value  of  farm  produce 
consumed  by  himself  and  family.  (T.  D.  2665,  Mar.  8,  1918,  as  amended  by 

SBC— Mim.— 1836,  Mar.  18,  1918.) 

902  The  term  “farm”  as  herein  used  embraces  the  farm  in  the  ordinarily  accepted  sense* 
plantations,  ranches,  stock  farms,  dairy  farms,  poultry  farms,  fruit  farms,  truck 

farms,  and  all  lands  used  for  similar  purposes;  and  for  the  purposes  of  this  decision 
all  persons  who  cultivate,  operate,  or  manage  farms  for  gain  or  profit,  either  as  owners  or 
tenants,  are  designated  as  “farmers.” 

All  gains,  profits,  and  income  derived  from  the  sale  or  exchange  of  farm  products, 

903  whether  produced  on  the  farm  or  purchased  and  resold  by  a farmer,  shall  be  included 
in  the  return  of  income  for  the  year  in  which  the  products  were  actually  marketed 

and  sold;  and  all  allowable  deductions,  including  the  legitimate  expenses  incident  to  the 
production  of  that  year  or  future  years,  may  be  claimed  in  the  return  of  income  for  the 
tax  year  in  which  the  right  to  such  deductions  shall  arise,  although  the  products  to  which 
such  expenses  and  deductions  are  incidental  may  not  have  been  sold  or  exchanged  for  money, 
or  a money  equivalent  during  the  year  for  which  the  return  is  rendered. 

Rents  received  in  crop  shares  shall  likewise  be  returned  as  of  the  year  in  which  the 

904  the  crop  shares  are  reduced  to  money  or  a money  equivalent,  and  allowable  de- 
ductions likewise  shall  be  claimed  in  the  return  of  income  for  the  tax  year  to  which 

they  apply,  although  expenses  and  deductions  may  be  incident  to  products  which  remained 
unsold  at  the  end  of  the  year  for  which  the  deductions  are  claimed.  When  farm  products 
are  held  for  favorable  market  prices,  no  deduction  on  account  of  shrinkage  in  weight  or 
physical  value  or  losses  by  reason  of  such  shrinkage  or  deterioration  in  storage  shall  be 
allowed.  (Art.  4,  ^29-31,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

905  Where  stock  has  been  purchased  for  any  purpose  and  afterwards  dies  from  disease 
or  injury  or  is  killed  by  order  of  the  authorities  of  a State  or  the  United  States  and 

the  cost  thereof  has  not  been  claimed  as  an  item  of  expense,  the  actual  purchase  price  of 
such  stock,  less  any  depreciation  which  may  have  been  previously  claimed,  may  be  deducted 
as  a loss.  Property  destroyed  by  order  of  the  authorities  of  a State  or  of  the  United  States 
may  in  like  manner  be  claimed  as  a loss;  but  if  reimbursement  is  made  by  a State  or  the 
United  States,  in  whole  or  in  part,  on  account  of  stock  killed  or  property  destroyed,  the 
amount  received  shall  be  reported  as  income  for  the  year  in  which  reimbursement  is  made. 
[Read  1[916.] 

The  cost  of  farm  machinery  is  not  an  allowable  deduction  as  an  item  of  expense, 

906  but  the  cost  of  ordinary  tools  may  be  included  under  this  item.  [Read  1[917.] 
Under  paragraph  7 of  section  5 (a),  act  of  1916,  providing  for  “a  reasonable  allow- 

907  ance  for  the  exhaustion,  wear,  and  tear  of  property  arising  out  of  its  use  or  employ- 
ment * ♦ * there  may  be  claimed  a reasonable  allowance  for  depreciation 

on  farm  buildings  (other  than  a dwelling  occupied  by  the  owner),  farm  machinery,  and  other 
physical  property,  including  stock  purchased  for  breeding  purposes,  but  no  claim  for 
depreciation  on  stock  raised  or  purchased  for  resale  will  be  allowed. 

A person  cultivating  or  operating  a farm  for  recreation  or  pleasure,  on  a basis 

908  other  than  the  recognized  principles  of  commercial  farming,  the  result  of  which 
is  a continual  loss  from  year  to  year,  is  not  regarded  as  a farmer.  In  such  cases 

if  the  expenses  incurred  in  connection  with  the  farm  are  in  excess  of  the  receipts  therefrom, 
the  entire  receipts  from  sale  of  products  may  be  ignored  in  rendering  a return  of  income, 
and  the  expenses  incurred  being  regarded  as  personal  expenses,  will  not  constitute  allowable 
deductions  in  the  return  of  income  derived  from  other  sources. 

An  individual  engaged  in  raising  and  selling  stock  (cattle,  sheep,  horses,  etc.), 

909  is  not  entitled  to  claim  as  a loss  the  value  of  such  animals  raised  as  die.  The  cost 
of  raising  will  have  been  taken  as  an  expense  deduction.  In  the  case  of  animals 

purchased,  which  die,  the  amount  of  purchase  money  will  be  an  allowable  deduction, 
if  not  previously  deducted  as  a business  expense.  (Art.  4,  1[33-37,  Reg.  33,  Rev.,  Jan. 
2,|1918.) 

910  A corporation  engaged  in  raising  and  selling  sheep,  cattle,  or  other  live  stock  can  not 
deduct  from  gross  income  any  amounts  claimed  as  a loss  on  account  of  the  death 

of  such  live  stock  through  exposure  or  otherwise,  unless  and  to  the  extent  that  such  stock 

INC.  96  TAX 


INDIVIDUALS. 


was  specifically  paid  for  in  cash  or  its  equivalent.  If  the  stock  is  raised  and  fed  upon  the 
farm  or  range,  the  cost  of  feeding  and  raising  the  stock  will  be  included  as  operating  expenses 
of  the  corporation,  and  no  loss  of  capital  is  sustained  when  the  live  stock  perishes.  If, 
however,  the  live  stock  was  purchased  and  the  cost  thereof  was  not  charged  into  expenses 
and  as  such  deducted  from  gross  income,  the  deductible  loss  will  be  the  actual  purchase 
price  of  the  stock  which  perished,  less  any  depreciation  which  had  been  previously  charged 
off  and  deducted  with  respect  to  such  purchased  live  stock.  (Art.  154,  1f472,  Reg.  33, 
Rev.,  Jan.  2,  1918.) 

911  In  case  of  sale  the  total  amount  received  for  stock  raised  and  for  stock  purchased 
for  resale  [modified  by  T.  D.  2665,  1[890]  is  to  be  accounted  for  as  income.  (Art.  4, 

1[38,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

912  Orchards  and  Ranches. — Amounts  expended  in  the  development  of  orchards  and 
ranches  prior  to  the  time  when  the  productive  stage  is  reached  constitute  invest- 
ments of  capital.  (Art.  4,  1[39,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

913  Farming  Corporations  Specifically  [Read  also  at  11890.]. — Corporations  engaged  in 
operating  plantations,  ranches,  stock  farms,  poultry  farms,  and  lands  used  for 

raising  fruit,  truck,  etc.,  including  orchards  of  all  kinds,  shall  make  their  returns  on  the 
basis  of  the  products  actually  marketed  and  sold  during  the  year,  whether  such  products 
were  produced  or  purchased  and  resold. 

All  deductions  shall  be  based  upon  the  legitimate  expense  incident  to  the  current 

914  year  whether  for  the  production  of  the  present  or  future  years,  except  that  in  a 
case  wherein  a corporation  is  engaged  in  producing  crops  which  take  more  than  a year 

from  the  time  of  planting,  to  the  process  of  gathering  and  disposal,  the  income  reported 
and  expenses  deducted  should  be  determined  upon  the  crop  basis. 

Cost  of  live  stock  purchased  for  resale  is  [not]  an  allowable  deduction  under  the 

915  item  of  expense,  but  money  expended  for  stock  for  breeding  [or  for  any  other] 
purposes  is  regarded  as  capital  invested,  and  amounts  so  expended  do  not  constitute 

allowable  deductions  except  as  hereinafter  stated.  [For  explanation  of  the  parts  in  brackets 
read  at  1[893.] 

VVhere  stock  has  been  purchased  for  any  purpose  and  afterwards  dies  from  disease 

916  or  injury  or  is  killed  by  order  of  the  authorities  of  a State  or  the  United  States,  and 
the  cost  thereof  has  not  been  claimed  as  an  item  of  expense  in  the  preparation  of 

previous  returns,  the  actual  purchase  price  of  such  stock,  less  any  depreciation  which  may 
have  been  previously  claimed,  less  also  any  insurance  or  indemnity  recovered,  may  be 
deducted  as  a loss.  The  actual  cost  of  property  destroyed  by  order  of  the  authorities  of  a 
State  or  of  the  United  States,  may,  in  like  manner,  be  claimed  as  a loss;  but  if  reimburse- 
ment is  made  by  a State  or  the  United  States,  in  whole  or  in  part,  on  account  of  stock 
killed  or  property  destroyed,  the  amount  received  shall  be  reported  as  income  for  the  year  in 
which  reimbursement  is  made.  In  determining  the  cost  of  stock  for  the  purpose  of  ascer- 
taining the  deductible  loss  there  shall  be  taken  into  account  only  the  purchase  price,  and 
not  the  cost  of  any  feed,  pasturage,  or  care,  which  has  been  deducted  as  an  expense  of 
operations.  [Read  1f905.]" 

The  cost  of  farm  machinery  represents  a capital  investment  and,  as  such,  is  not 

917  an  allowable  deduction  as  an  item  of  expense,  but  the  cost  of  ordinary  tools,  of 
short  life  or  insignificant  cost,  such  as  hand  tools,  including  shovels,  rakes,  etc., 

may  be  included  under  this  item.  [Read  1[906.] 

There  may  be  claimed  a reasonable  allowance  for  depreciation  on  farm  buildings, 

918  farm  machinery,  and  other  physical  property,  including  stock  purchased  for  breeding 
purposes,  but  no  claim  for  depreciation  on  stock  raised  or  purchased  for  resale 

will  be  allowed.  (Art.  123,  1[404-409,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

919  Actual  Receipt  vs.  Constructive  Receipt. — [In  reading  the  following  the  ruling  in 
1[857  should  be  borne  in  mind,  and  also,  that  taxpayers  are,  under  certain 

conditions,  permitted  to  make  returns  of  income  on  an  accrued  basis,  1[768.] 

920  Rent  is  Returnable  as  Income  in  Year  Received.— [Read  1[768.]^Tiurofiicri8Tn 
f receipt  of  your  letter  of  February  18,  1915,  and  in  reply  thereto  you  are  advised 

that  the  amount  of  rental  received  from  a piece  of  real  property  should  be  included  in 
any  personal  annual  return  of  net  income  the  landlord  may  be  required  to  render  for  the 
year  in  which  received,  and  deduction  may  be  claimed  on  account  of  any  expense  incurred 
in  the  maintenance  of  the  said  property,  or  its  use,  for  rental  purposes,  including  amounts 
paid  for  repairs,  insurance,  fuel,  light  and  water,  and  janitor  and  elevator  service,  if  any, 
and  in  addition  thereto  an  amount  representing  a reasonable  allowance  for  the  wear  and 
tear  of  the  property  arising  from  its  use  for  rental  purposes  may  be  claimed  as  a deduction, 
but  no  claim  for  depreciation  should  be  made  on  account  of  any  amount  of  expense  of 
restoring  property^  or  making  good  the  exhaustion  thereof  for  which  a deduction  is 
claimed  elsewhere  in  the  return.  (Letter  to  The  Corporation  Trust  Company  signed  by 
Acting  Commissioner  David  A.  Gates,  and  dated  February  26,  1915.) 

INC.  97 


TAX 


INDIVIDUALS. 


921  “A  tenant  pays  his  rent  for  the  months  of  November  and  December,  1914,  on 
January  5,  1915.  In  making  up  the  return  for  the  landlord  for  the  year  1914 

should  he  include  the  rent  received  on  January  5,  1915,  for  the  months  of  November 
and  December  or  should  it  be  included  in  his  return  for  the  year  1915?  * ♦ ♦ »> 

“In  reply  you  are  advised  that  the  landlord  should  include  in  his  return  of  annual 

922  net  income  the  rents  actually  paid  to  him  within  the  year;  ♦ ♦ ♦ The  rent 

paid  on  January  5,  1915,  for  the  months  of  November  and  December,  1914,  belonga 

to  the  year  1915  for  * * ♦ the  purposes  of  return  by  the  landlord  ♦ ♦ ♦ »» 

(Extract  from  letter  to  Wm.  S.  Lare,  signed  by  Deputy  Commissioner  L.  F.  Speer,  and 
dated  February  9,  1915.) 

923  Dividends  and  Interest  are  Returnable  as  Income  in  Year  Received. — [Read  1[768I. 
This  office  holds  that  dividends  on  stock  of  corporations  and  interest  on  notes, 

ordinary  mortgages,  and  corporate  obligations,  should  be  entered  on  the  annual  return 
for  the  year  in  which  such  payments  “were  received.  (Part  of  letter  to  Beekman,  Menken 
and  Griscom,  New  York,  N.  Y.,  signed  by  Commissioner  W.  H.  Osborn,  and  dated 
February  18,  1915.) 

924  Accounts  Receivable  are  Income  for  the  Year  in  which  Created. — This  office 
holds  that  the  net  income  of  the  individual  in  the  mercantile  business  should  be 

ascertained  from-  his  books  and  the  actual  inventory  of  his  merchandise,  which  is  in 
accordance  with  established  procedure  in  all  mercantile  businesses.  [Extract  from  letter 
to  Beekman,  Menken  and  Griscom,  signed  by  Deputy  Commissioner  L.  F.  Speer  and 
dated  March  31,  1915.) 

926  Accrued  Interest  on  Bonds  Purchased  Between  Interest  Dates.— Interest  accrued 
to  the  time  of  purchase  (advanced  by  purchaser)  is  not  to  be  accounted  for  as 
income  by  the  purchaser.  Only  the  amount  of  interest  assignable  to  the  portion  of  the 

interest  period  subsequent  to  the  purchase  has  a status  of  income  for  the  purposes  of  return 
and  tax  by  purchaser. 

The  amount  of  accrued  interest  so  advanced  by  the  purchaser  is  taxable  income 

926  to  be  accounted  for  in  the  return  of  the  vendor.  (Art.  4,  ^15-16,  Reg.'33,  Rev., 
Jan.  2,  1918.) 

927  Interest  Coupons  Exchanged  for  New  Bonds. — Coupons  from  bonds  for  interest 
thereon,  exchanged  for  other  bonds  are  held  to  be  the  equivalent  of  payment 

of  the  interest  coupons  and  purchase  of  the  new  bonds  with  the  cash.  The  amount  of 
the  coupons  to  be  accounted  for  as  income  for  the  calendar  year  in  which  the  exchange 
is  made.  (Art.  4,  ^17,  Reg.  33  Rev.  Jan.  2,  1918.) 

928  Scrip  Payment  of  Interest. — The  foregoing  [see  ^788]  holds  true  for  scrip  pay- 
ment of  interest  [i.  e.,  the  scrip  is  gross  income.]  (Art.  4,  ^43  Reg.  33,  Rev.,  Jan. 

2,  1918.) 

929  Private  Bank  Owned  by  an  Individual  or  by  a Partnership. — When  it  can  be 
clearly  shown  that  a private  bank  is  owned  by  one  man,  it  is  evident  that  such 

bank  is  not  an  association  within  the  meaning  of  the  Federal  income  tax  law,  and  that 
therefore  such  bank  will  not  be  required  to  make  a return  such  as  corporations  and  associa- 
tions are  required  to  make,  but  the  individual  owner,  ♦ * ♦ will  be  required  to 

make  a return  on  Form  1040,  showing  in  such  return  the  income  which  he  receives  not 
only  from  the  bank  but  from  all  other  sources.  (T.  D.  2137,  Jan.  30,  1915.) 

930  Private  banks  which  do  not  have  this  formal  organization  [paragraph  1732],  but 
which  transact  business,  not  in  the  name  of  the  bank,  but  in  the  name  of  the 

individuals  who  compose  the  firm,  as  John  Smith  & Co*,  are  held  to  be. co-partnerships 
and,  as  such,  are  not  required  to  [pay  tax].  In  such  cases  the  individuals  who  compose  the 
firm,  if  they  have  net  incomes  in  excess  of  [$1,000  or  $2,000]  will  be  required  to  make  indivi- 
dual returns  of  Form  1040,  accounting  for  therein  their  respective  incomes  arising  and 
accruing  from  the  earnings  of  the  bank.  (Mimeograph  letter  No.  1271  to  Collectors, 
Oct.  19,  1915.) 

931  Property  Acquired  by  Gift. — The  value  of  propertv  acquired  by  gift  is  not  subject 
to  income  tax,  but  all  gains,  profits,  or  income  derived  therefrom  are  subject  to 

tax  [see  1f961]  and  if  the  property  so  acquired  is  subsequently  sold  at  a price  greater  than 
the  appraised  value  at  the  time  the  property  was  acquired  by  gift,  the  gain  in  value  is 
held  to  be  income  and  subject  to  tax  under  the  provisions  of  the  Federal  income  tax  law. 
(T.  D.  2090,  Dec.  14,  1914.) 

932  Legacies. — The  general  policy  of  the  law  and  rule  of  interpretation  require  that 
legacies  in  all  cases,  unless  clearly  inconsistent  with  the  intention  of  the  testator, 

should  be  held  to  be  vested  rather  than  contingent.  Where  there  is  a vested  interest 

98 


INC. 


TAX 


INDIVIDUALS. 


the  income  from  such  interest,  whether  distributed  or  not,  is  subject  to  the  tax;  and 
when  in  the  hands  of  fiduciaries  they  are  required  to  account  for  and  pay  the  tax  thereon. 
(T.  D.  2090,  Dec.  14,  1914.) 

933  Sale  of  Stock  Received  as  a Bonus. — Where  common  stock  is  received  as  a bonus 
in  consideration  of  the  purchase  of  preferred  stock,  the  entire  proceeds  derived 

from  the  sale  or  transfer  of  such  stock  is  income  subject  to  the  normal  and  additional  tax. 
(Art.  4,  ^40,  Reg.  33,  ^ev.,  Jan.  2,  1918.) 

934  ^ Sale  of  Stock  Acquired  by  Gift. — The  fair  market  price  or  value  of  stock  acquired 

by  gift  subsequent  to  March  1,  1913,  is  the  basis  for  computing  gain  derived  or 
loss  sustained  by  the  sale  thereof.  If  acquired  by  gift  prior  to  March  1,  1913,  the  fair 
market  price  or  value  as  of  that  date  is  the  basis  for  computation.  (Art.  4,  ^41,  Reg.  33, 
Rev.,  Jan.  2,  1918.) 

935  Sale  of  Property  Acquired  by  Inheritance. — The  appraised  value  at  the  time  of 
the  death  of  a testator  is  the  basis  for  determining  gain  or  profit  upon  sale  sub- 
sequent to  the  death  after  March  1,  1913.  (Art.  4,  ^44,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

936  Interest  on  Bonds  Received  by  Legatee. — A legatee  is  required  to  return  as 
income  the  full  amount  of  interest  received  by  him  on  a bond,  notwithstanding 

the  fact  that  a part  of  the  first  coupon,  payable  after  he  had  received  it,  had  been  added 
to  the  bond  and  included  in  the  gross  estate  of  the  decedent,  thereby  becoming  subject 
to  the  estate-tax  law.  (T.  D.  2570,  Nov.  6,  1917.) 

937  Income  Received  by  Beneficiaries  Through  Fiduciaries. — A beneficiary  is  liable 
for  the  normal  tax  upon  the  amount  of  net  income  derived  by  him  from  a taxable 

source  through  a fiduciary  less  ♦ * * the  amount  of  income  on  which  the  normal 

tax  has  been  withheld  at  source,  and  is  also  liable  for  the  additional  tax  assessable  on  the 
amount  of  net  income  received  by  him  in  excess  of  [$5,000];  and  in  order  to  determine 
whether  the  net  income  of  a beneficiary  is  or  is  not  in  excess  of  [$5,000]  and  subject  to  the 
additional  tax,  the  amount  derived  by  him  from  an  estate  and  all  other  taxable  sources 
in  required  to  be  shown  on  his  personal  annual  return.  (T.  D.  2090,  Dec.  14,  1914.) 

938  Income  Accruing  to  Minor  through  Natural  Guardian. — The  parent  is  held  to  be 
the  natural  guardian  of  a minor  child.  Income  received  by  the  minor  child  from 

sources  other  than  the  parent  should  be  included  by  the  parent  in  his  return  of  income. 
The  fact  that  such  income  is  not  appropriated  by  the  parent  is  immaterial,  as  it  will  be 
held,  in  the  absence  of  a showing  of  fact  to  the  contrary,  that  such  income  was  subject 
to  appropriation  and  was  appropriated  by  the  parent,  and  that  the  child  receives  the 
same  as  a gift  from  the  parent.  Where  the  income  is  from  a separate  estate  and  the 
parent  has  been  appointed  guardian  and  the  conditions  are  such  that  the  income  so  received 
IS  to  be  held  for  the  use  of  the  child,  it  shall  not  be  included  in  the  return  of  income  of  the 
parent,  but  shall  be  accounted  for  otherwise  for  the  purposes  of  the  income  tax  in  man- 
ner and  form  as  called  for  by  the  facts  of  the  particular  case.  ,4(Art.  29,j^201,  Reg.  33, 
Rev.,  Jan.  2,  1918.) 

939  Pensions. — Pensions  paid  by  the  United  States,  private  institutions,  or  individuals 
are  to  be  accounted  for,  for  income  tax  purposes,  in  all  cases  where  income  of  the 

pensioner  is  liable  for  income  tax.  (Art.  4,  ^[49,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

940  Distributable  Amounts  Received  by  Fiduciary  to  be  Returned  by  Beneficiary 
Whether  Distributed  or  Not. — The  beneficiary  will  be  required  in  the  case  of  trust 

estates  to  account  for  the  actual  amounts  distributed  or  credited  to  him.  (Art.  29,  1[210, 
Reg.  33,  Rev.,  Jan.  2,  1918.) 

941  In  answer  to  your  letter  of  the  1st  inst.,  there  was  sent  to  you  a telegram  reading 
as  follows:  “Beneficiary  should  report  his  share  of  the  distributable  income  received 

by  fiduciary  during  year.^  Fiduciary  should  inform  beneficiary  of  his  share  of  distributable 
income  received  by  fiduciary  also  of  his  share  of  dividends  received  by  fiduciary  included 
therein.”  (Letter  to  F.  W.  Denio,  Old  Colony  Trust  Co.,  Boston,  Mass.,  signed  by  Com- 
missioner Daniel  C.  Roper,  and  dated  Mar.  5,  1918.) 

942  Dividends  in  the  hands  of  a fiduciary  and  belonging  to  a beneficiary  are  not  subject 

to  the  normal  tax,  but  will  be  subject  to  the  additional  tax  to  the  beneficiary  when- 
ever the  beneficiary’s  income  from  all  taxable  sources  is  in  excess  of  [$5,000].  (T.  D. 

2090,  Dec.  14,  1914.) 

943  Unless  the  beneficiary  is  under  some  disability  which  requires  the  fiduciary  to  act, 
the  beneficiary  will  make  his  own  return  and  account  for  the  tax  upon  his  entire  net 

income.  (T.  D.  2090,  Dec.  14,  1914.) 


INC. 


99 


TAX 


INDIVIDUALS. 


Other  Gross  Income. — [Read  under  “Corporations,”  at  ^1789.] 

944  Law  1f94.  Gross  Income  Exempt  From  Law. — “(b)  [Gross  income]  Does  not 
include  the  following  items,  which  shall  be  exempt  from  taxation  under  this  title:” 

[Read  at  1[2863.] 

945  Law  ^95.  Proceeds  of  Life  Insurance  Policies  on  Death  of  Insured  are  Exempt. — 

“(l)  [Gross  income  does  not  include]  The  proceeds  of  life  insurance  policies  paid 
upon  the  death  of  the  insured  to  individual  beneficiaries  or  to  the  estate  of  the  insured;” 

946  Law  ^96.  Returns  to  Insured  of  Premiums  Paid  Under  Life  Insurance,  Endow- 
ment, or  Annuity  Contracts  Are  Exempt. — “(2)  [Gross  income  does  not  include] 

The  amount  received  by  the  insured  as  a return  of  premium  or  premiums  paid  by  him  under 
life  insurance,  endowment,  or  annuity  contracts,  either  during  the  term  or  at  the  maturity 
of  the  term  mentioned  in  the  contract  or  upon  surrender  of  the  contract;” 

[Read  at  ^28g4.] 

947  The  amount  paid  under  a life  insurance,  endowment,  or  annuity  contract  is  not 
income  when  returned  to  the  person  making  the  contract,  either  upon  the  maturity 

or  surrender  of  the  contract;  but  the  amount  by  which  the  sum  received  exceeds  the  sum 
paid  and  coming  into  the  hands  of  the  person  making  the  contract  and  payment  is  income. 
(T.  D.  2090  as  amended  by  T.  D.  2152,  Feb.  12,  1915.) 

948  Where  insured  receives,  under  any  form  of  life  insurance,  an  amount  in  excess  of 
premiums  paid  for  the  insurance,  such  excess  has  a taxable  status  and  is  to  be 

accounted  for  as  for  the  calendar  year  of  its  receipt.  (Art.  4,  ^45,  Reg.|33,  Rev.,  Jan. 
2,  1918.)! 

949  There  are  two  matters  relating  to  Income  Tax  on  Individuals  regarding  which  I 
am  unable  to  find  any  mention  in  the  Law  itself  or  in  the  Treasury  Decisions,  and 

would  be  glad  to  have  you  inform  me  about  them  at  this  time. 

First.  * * ♦ . ^ 

950  Second.  Cancelled  Life  Insurance: 

An  Endowment  Policy  and  a Straight  Life  Policy  are  surrendered  by  the  Policy- 
holder to  the  Insurance  Company  and  cancelled,  not  at  maturity  but  at  an  arbitrary  date, 
and  the  “cash  surrender  value”  is  paid  by  the  company  to  the  policyholder.  This  amount 
exceeds  the  total  of  premiums  theretofore  paid  on  the  respective  policies. 

Is  any  portion  of  this  difference  regarded  as  Taxable  Income.^  If  so,  what  pro- 

951  portion,  seeing  that  the  payment  of  premiums  and  consequent  earning  thereon  by 
the  Company  began  several  years  before  the  inception  of  the  Income  Tax  Lav/? 

(Answer).  You  are  further  advised  that  the  difference  between  the  amount  received  by  an 
insurance  policyholder  upon  the  maturity  or  surrender  of  the  policy  and  the  aggregate 
amount  of  premiums  paid  during  the  lifetime  of  the  policy,  constitutes  taxable  income 
W’hich  should  be  included  in  any  personal  return  the  individual  may  be  required  to  render 
for  the  year  during  which  the  proceeds  of  the  policy  are  received.  (Part  of  letter  of  inquiry 
to  the  Commissioner  of  Internal  Revenue,  from  W.  W.  Bacon,  Philadelphia,  dated  Jan. 
19,  1917,  and  the  answer  thereto,  signed  by  Deputy  Commissioner  L.  F.  Speer,  and  dated 
Feb.  8,  1917.) 

Dividends  paid  on  life  insurance  policies  that  have  not  matured,  whether  such 
962  dividends  are  drawn  in  cash  by  the  insured  or  applied  to  the  reduction  of  the  annual 
premium  due,  are  not  considered  items  of  taxable  income  under  the  law,  and  should 
be  excluded  from  a return  of  income.  (T.  D.  2137,  Jan.  30,  1915.) 

953  Dividends  on  paid-up  policies  are  in  the  nature  of  corporate  dividends  and  are  to 
be  accounted  for  as  income  for  the  purposes  of  the  additional  tax  only,  (Art.  4, 

1f46,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

954  Dear  Sir:  It  has  been  my  judgment  that  annuities  sold  by  the  National  Life 
Insurance  Company  and  other  insurance  companies  were  not  subject  to  tax  under 

the  Income  Tax  Law,  but  I realize  that  the  statute  is  not  entirely  free  from  doubt,  so  far 
as  relates  to  such  portion  of  annuity  payments  as  may  be  treated  as  income,  though  such 
portions  are  comparatively  small  and  the  determination  of  their  amount  is  difficult  and 
almost  impracticable.  I would  like  to  know,  however,  whether  the  Department  has  made 
any  ruling  relative  to  the  taxation  of  annuities  and  if  any  ruling  has  been  made,  would 
be  glad  to  receive  a copy  of  it.  (Letter  to  Commissioner  W.  H.  Osborn,  signed  by  Fred. 
A.  Howland,  Counsel,  National  Life  Insurance  Company  and  dated  Feb.  5,  1914.)  (Answer). 
Sir:  In  reply  to  your  letter  of  Feb.  5,  relative  to  the  taxation  of  annuities^  under  the 
Income  Tax  Law,  you  are  informed  that  life  insurance  annuities  shall  not  be  included  as 
income.  (Signed  by  Deputy  Commissioner  L.  F.  Speer,  and  dated  Feb.  17,  1914.) 


INC. 


100  TAX 


INDIVIDUALS. 


965  Dear  Sir:  I should  have  made  earlier  acknowledgment  of  your  telegram  of  De- 
cember 27th  reading  as  follows: 

“As  at  present  advised,  this  office  holds  that  proceeds  of  life  insurance  policies 
paid  pursuant  to  terms  of  contract,  whether  upon  maturity  of  policy,  death  of  insured 
or  as  annuities  are  not  subject  to  tax  in  hands  of  beneficiaries  * * * ^ Payment 

of  deferred  dividends  in  so  far  as  they  represent  portions  of  actual  premiums  received 
are  proceeds  of  insurance  policy  within  the  meaning  of  law.” 

I thank  you  very  much  for  advising  of  the  ruling  on  the  subjects  mentioned  and  in 
956  communicating  with  the  counsel  of  other  insurance  companies  I find  that  it  cleared 
up  in  their  minds  some  important  points.  There  is,  however,  one  further  question 
which  I raised  in  my  letter  of  November  17th  and  possibly  your  telegram  of  the  27th 
covers  it.  The  question  is  one  of  considerable  importance  and  one  which  we  are  called 
upon  to  deal  with  at  once.  I am  taking  the  liberty  of  bringing  the  matter  to  your  attention 
at  this  time  and  state  a concrete  case  with  which  wemust  deal  very  shortly.  On  February  1, 
1914,  this  company  will  be  called  upon  to  pay  an  annuity  instalment  of  $3,448.46  under 

annuity  contract  No. . This  annuity  contract  was  purchased  for  cash  February  1, 

1903,  the  consideration  being  $40,985.  Annually  on  February  1st,  under  the  terms  of  the 
annuity  contract,  the  sum  of  $3,448.46  is  payable  to  the  annuitant. 

The  query  is:  Is  this  instalment  of  $3,448,46  which  the  company  must  pay”” to 
967  the  annuitant  on  February  1,  1914,  and  future  annual  instalments,  subject  to  the 
income  tax?  It  is  my  opinion,  as  I expressed  it  in  my  letter  to  you  of  November 
17th,  that  the  proper  construction  of  the  income  tax  law  of  1913  imposes  no  tax  in  such  a 
case. 

I would  thank  you  very  much  indeed  if  you  would  give  me  a ruling  in  the  matter. 
958  As  the  company  is  constantly  having  to  answer  inquiries  of  annuitants  in  such 
cases,  I would  appreciate  very  much  if  you  would  send  me  a wire  on  the  subject 
at  my  expense.  (Letter  to  Commissioner  W.  H.  Osborn,  signed  by  Frederick  L.  Allen, 
General  Solicitor,  Mutual  Life  Insurance  Company  and  dated  Jan.  8,  1914.)  (Answer.) 
So  much  of  annuities  paid  to  annuitant  as  represents  payment  made  by  him  on  annuity 
contract  and  paid  back  to  him  shall  not  be  included  in  income  of  annuitant.  Any  incre- 
ment on  purchase  price  of  annuity  is  taxable  income.  * * * (Signed  by  Commissioner 

W.  H.  Osborn,  and  dated  Jan.  12,  1914.) 

69  Sir:  In  reply  to  your  letter  of  January  28th,  in  which  you  request  to  be  advised 
whether  income  received  from  or  credited  to  policholders  of  life  insurance,  as  divi- 
dends, shall  be  included  as  income,  you  are  informed  that  dividends  paid  on  life 
insurance  policies  that  have  not  matured,  whether  such  dividends  are  paid  by  the  company 
in  cash  or  added  to  the  face  value  of  the  policy,  are  not  considered  items  of  taxable  income 
under  the  law,  and  should  be  excluded  in  making  the  annual  return. 

Dividends  from  paid-up  policies  are  considered  income  to  the  recipient,  and  must  be 

960  included  in  the  annual  return.  (Letter  to  Robert  Lynn  Cox,  General  Counsel  and 
Manager,  Association  of  Life  Insurance  Presidents,  signed  by  Deputy  Commissioner 

L.  Speer,  and  dated  Mar.  5.  1914.) 

961  i^aw  ^97.  Value  of  Property  Acquired  by  Gift,  Bequest,  etc.,  is  Exempt. — “(3) 
[Gross  income  does  not  include]  The  value  of  piv  perty  acquired  by  gift,  bequest, 

devise,  or  descent  (but  the  income  from  such  property  shall  be  included  in  gross  income);” 

962  Where  the  monthly  salary  of  an  officer  or  employee  is  paid  for  a limited  period  after 
his  death  to  his  widow  in  recognition  of  the  services  rendered  by  her  husband, 

no  services  being  rendered  by  the  widow,  it  is  held  that  such  payment  is  a gratuity  and 
exempt  from  taxation  under  the  income  tax  law.  Such  a payment  would  not,  however, 
be  an  allowable  deduction  as  an  expense  of  carrying  on  business  in  the  return  of  the  person, 
firm,  or  corporation  paying  same.  (T.  D.  2090,  Dec.  14,  1914.) 

963  Law  ^98.  Interest  on  United  States  Bonds,  etc..  Except  as  Otherwise  Provided 
in  the  Act  of  Authorization,  and  on  Bonds  of  State  or  Political  Subdivision  Thereof 

is  Exempt. — “(4)  [Gross  income  does  not  include]  Interest  upon  (a)  the  obligations  of  a 
State,  Territory,  or  any  political  subdivision  thereof,  or  the  District  of  Columbia  or” 

964  Law  ^99.  “(b)  securities  issued  under  the  provisions  of  the  Federal  Farm  Loan 

Act  of  July  17,  1916;  or” 

966  Law  ^100.  “(c)  the  obligations  of  the  United  States  or  its  possessions  [Read  ^975 

below];  or” 

966  Law  1[101 . “(d)  bonds  Issued  by  the  War  Finance  Corporation  [Read  1[975  below]:” 

967  Law  11102.  Provided,  That  every  person  owning  any  of  the  obligations,  securities 
or  bonds  enumerated  in  clauses  (a),  (b),  (c)  and  (d)  shall,  in  the  return  required 

101  TAX 


INC. 


INDIVIDUALS. 


by  this  title,  submit  a statement  showing  the  number  and  amount  of  such  obligations, 
securities  and  bonds  owned  by  him  and  the  income  received  therefrom,  in  such  form  and 
with  such  information  as  the  Commissioner  may  require.” 

(Read  beginning  at  ^2865.) 

963  Obligations  of  a State,  Political  Subdivisions,  etc. — Among  income  exempt  from  the 
income  tax  is  interest  upon  the  obligations  of  a State  or  any  political  subdivision 
thereof.  Obligations  issued  for  a public  purpose  by  or  on  behalf  of  the  State  or  a duly 
organized  political  subdivision  acting  by  constituted  authorities  duly  empowered  to  issue 
such  obligations  are  the  obligations  of  a State  or  a political  subdivision  thereof.  (Art.  83, 
^341,  Reg.  33,  Rev.,  Jan.  2,  1918,  as  amended  by  T.  D.  2715,  May  20,  1918.) 

969  Where  a municipality  purchases  a public  utility  subject  to  a mortgage  the  mortgage 
retains  its  original  character,  even  though  the  municipality  assumes  the  mortgage 

indebtedness  and  pays  the  interest  thereon.  Therefore,  the  indebtedness  secured  by  such 
mortgage  is  not  an  obligation  of  the  municipality  within  the  meaning  of  Paragraph  B of 
the  income  tax  law.  (T.  D.  2090,  Dec.  14,  1914.) 

970  Political  Subdivisions. — The  term  “political  subdivision”  denotes  any  division 
of  the  State  made  by  proper  authorities  thereof  acting  within  their  constitutional 

powers  for  the  purpose  of  carrying  out  a portion  of  those  functions  of  the  State  which 
by  long  usage  and  the  inherent  necessities  of  government  have  always  been  regarded 
as  public.  Political  subdivisions  of  a State,  within  the  meaning  of  the  exemption  referred 
to  in  Article  83,  include  special  assessment  districts  so  created,  such  as  road,  water,  sewer 
gas,  light,  reclamation,  drainage,  irrigation,  levee,  school,  harbor,  port  improvement 
and  similar  districts  and  divisions  of  a State.”  (Art.  84,  ^342,  Reg.  33,  Rev.,  Jan.  2,  1918, 
as  amended  by  T.  D.  2715,  May  20,  1918.) 

971  Referring  to  paragraph  B,  section  2 of  the  Income  Tax  Law,  which  reads  as 
follows: 

“That  in  computing  net  income  there  shall  be  excluded  interest  upon  the  obligations 
of  a State  or  any  political  subdivision  thereof,” 

you  are  informed  that  under  date  of  January  30,  1914,  The  Honorable,  The  Attorney 
General,  held  that  special  assessment  districts  created  under  the  laws  of  the  several  States 
for  public  purposes,  such  as  the  improvement  of  streets  and  public  highways,  the  pro- 
vision for  sewerage,  gas  and  light,  and  the  reclamation,  drainage  or  irrigation  of  bodies 
of  land^  within  such  special  assessment  districts  when  such  districts  are  for  public  use 
are  political  subdivisions  of  the  State  within  the  meaning  of  the  above  proviso. 

It  is  held  that  the  term  “political  subdivision”  includes  special  assessment  dis- 

972  tricts  or  divisions  of  a State  created  by  the  proper  authority  of  the  State  acting 
within  its  constitutional  powers  and  under  its  general  laws,  for  the  purpose  of 

carrying  out  a portion  of  those  functions  of  the  State  which  by  long  usap#^  and  inherent 
necessitates  of  government  have  always  been  regarded  as  public. 

Levee  and  school  districts,  when  lawfully  created  under  the  authority  of  the  State 

973  and  which  are  authorized  by  the  laws  of  the  State  to  levy  a tax  to  meet  the  obliga- 
tions of  such  districts,  are  also  held  to  be  political  subdivisions  of  a State  within 

the  meaning  of  the  Income  Tax  law. 

The  income  derived  from  interest  upon  the  obligations  of  all  such  public  districts 

974  shall,  therefore,  be  excluded  in  computing  net  income  for  the  income  tax.  (T.  D. 
1946,  Feb.  10,  1914.) 

975  Law  ^103.  Taxable  Status  of  Interest  on  Obligations  of  the  United  States  Issued 

After  September  1,  1917. — “In  the  case  of  obligations  of  the  United  States 
issued  after  September  1,  1917,  and  in  the  case  of  bonds  issued  by  the  War  Finance  Cor- 
poration, the  interest  shall  be  exempt  only  if  and  to  the  extent  provided  in  the  respective 
Acts  authorizing  the  issue  thereof  as  amended  and  supplemented,  and  shall  be  excluded 
from  gross  income  only  if  and  to  the  extent  it  is  wholly  exempt  from  taxation  to  the  tax- 
payer both  under  his  title  and  under  Title  III;” 

[Read  beginning  at  ^2868.] 

976  Perpetual  Exemption  Provision  Applicable  to  Second,  Third,  and  Fourth  Liberty 
Loan  Bond  Interest. — Attention  is  called  to  Section  7 of  the  Act  of  Congress 

approved  September  24,  1917,  “Second  Liberty  Loan  Act”  providing  for  the  issue  of  4% 
Liberty  Bonds,  Treasury  Certificates  of  Indebtedness  and  War  Savings  Certificates, 
which  reads  as  follows: 

“That  none  of  the  bonds  authorized  by  section  one,  nor  of  the  certificates  authorized 
by  action  five,  or  by  section  six,  of  this  Act,  shall  bear  the  circulation  privilege.  All  such 
bonds  and  certificates  shall  be  exempt,  both  as  to  principal  and  interest  from  all  taxation 
now  or  hereafter  imposed  by  the  United  States,  any  State,  or  any  of  the  possessions  of  the 
United  States  or  by  any  local  taxing  authority,  except  (a)  estate  or  inheritance  taxes, 
and  (b)  graduated  additional  income  taxes,  commonly  known  as  surtaxes,  and  excess 
profits  and  war-profits  taxes,  now  or  hereafter  imposed  by  the  United  States,  upon  the 

102  TAX 


INC. 


INDmDUALS. 


income  or  profits  of  individuals,  partnerships,  associations,  or  corporations.  The  interest 
on  an  amount  of  such  bonds  and  certificates  the  principal  of  which  does  not  exceed  in  the 
aggregate  $5,000,  owned  by  any  individual,  partnership,  association  or  corporation,  shall 
be  exempt  from  the  taxes  provided  for  in  subdivision  (b)  of  this  section.” 

You  are  hereby  informed  that  holders  (whether  individual,  partnerships,  associa- 

977  tions  or  corporations)  of  Liberty  Bonds,  Treasury  Certificates  of  Indebtedness 
and  War  Savings  Certificates  authorized  by  the  Act  of  September  24,  1917,  are 

entitled  to  exemption  from  all  income  and  war  excess  profits  taxes  upon  the  interest 
received  on  a principal  amount  not  to  exceed  $5,000  face  value  of  such  obligations.  If, 
for  example,  the  holder  owns  $5,000  Treasury  Certificates  of  Indebtedness,  $7,000  4% 
Liberty  Bonds,  and  $1,000  War  Savings  Certificates,  he  will  be  entitled  to  exemption 
from  graduated  additional  Income  taxes  and  war  excess  profits  taxes  upon  only  the  interest 
received  upon  $5,000  of  the  aforesaid  obligations.  It  is  immaterial  whether  the  4% 
Liberty  Bonds  were  issued  to  the  holder  in  exchange  for  Liberty  Bonds  of  the  first  series 
or  Treasury  Certificates  of  Indebtedness,  or  whether  issued  upon  a new  subscription. 
The  exemption  Is  upon  the  income  from  $5,000  face  value  of  the  obligations  issued  by 
authority  of  the  aforesaid  Act  of  September  24,  1917.  (T.  D.  2585,  Nov.  8,  1917.) 

978  Section  1200  of  the  Act  of  October  3,  1917,  so  amends  section  4 of  the  Act  of  Sep- 
tember 8,  1916,  as  to  exempt  from  the  tax,  interest  on  the  obligations  of  the  United 

States  issued  after  September  1,  1917,  only  if  and  to  the  extent  provided  in  the  act  of 
authorizing  their  issue. 

Said  act  provides  that  bonds  and  certificates  issued  thereunder  shall  be  exempt 

979  from  all  taxes  except  estate  or  inheritance  taxes,  additional  income  taxes,  com- 
monly known  as  surtaxes,  and  excess  or  war  profits  taxes.  (Art.  85,  ^343-344,  Reg.  33, 
Rev.,  Jan.  2,  1918.) 

980  Application  of  Exemption  when  Several  Members  of  Family  Invest  in  Liberty 
Bonds. — {Question.)  Please  answer  by  wire  at  once  if  possible  our  telegram, 

October  second,  as  follows:  “If  husband,  wife  and  minor  children  each  hold  new  Liberty 
fours  and  make  joint  income  tax  return  will  each  member  of  such  family  be  tax  exempt 
as  to  $5,000  bonds  each.  Wire  answer  to-day  if  possible.”  Information  very  important 
in  campaign  selling  Liberty  Bonds.  {Answer.)  Husband  and  wife  each  owning  in  own 
right  Liberty  Loan  Bonds  and  certificates  not  exceeding  five  thousand  dollars  each  entitle 
to  exemption  provided  by  Section  Seven  B,  Loan  Act.  Minor  children  having  separate 
estates  each  entitled  to  same  exemption.  (Telegram  to  Commissioner  of  Internal  Revenue 
from  Lee,  HIgginson  & Co.,  Boston,  Mass.,  and  the  reply  thereto,  signed  by  Acting 
Secretary  of  the  Treasury,  O.  T.  Crosby,  and  dated  October  8,  1917.) 

981  Special  Temporary  Exemption  Provisions  Applicable  to  Second,  Third,  and 
Fourth  Liberty  Loan  Bond  Interest. — Questions  have  arisen  with  regard  to  the 

exemption  of  interest  on  bonds  held  or  subscribed  for  by  trustees,  partnerships  or  cor- 
porations under  Section  1 of  the  supplement  to  Second  Liberty  Bond  Act,  approved 
September  24,  1918.  This  Section  is  as  follows: 

“That  until  the  expiration  of  two  years  after  the  date  of  the  termination  of  the  war 
between  the  United  States  and  the  Imperial  German  Government,  as  fixed  by  proclamation 
of  the  President — 

“(1)  The  interest  on  an  amount  of  Bonds  of  the  Fourth  Liberty  Loan  the  principal 
of  which  does  not  exceed  $30,000,  owned  by  any  individual,  partnership,  association,  or 
corporation,  shall  be  exempt  from  graduated  additional  income  taxes,  commonly  known 
as  surtaxes,  and  excess  profits  and  war-profits  taxes,  now  or  hereafter  imposed  by  the 
United  States,  upon  the  income  or  profits  of  Individuals,  partnerships,  associations,  or 
corporations;^ 

“(2)  The  interest  received  after  January  1,  1918,  on  an  amount  of  Bonds  of  the  FIrst 
Liberty  Loan  Converted,  dated  either  November  15,  1917,  or  May  9,  1918,  the  Second 
Liberty  Loan,  Converted,  and  Unconverted,  and  the  Third  Liberty  Loan,  the  principal 
of  which  does  not  exceed  $45,000  in  the  aggregate,  owned  by  any  individual,  partnership, 
association,  or  corporation,  shall  be  exempt  from  such  taxes;  Provided^  however^  That 
no  owner  of  such  Bonds  shall  be  entitled  to  such  exemption  in  respect  to  the  Interest  on 
an  aggregate  principal  amount  of  such  Bonds  exceeding  one  and  one-half  times  the  prin- 
cipal amount  of  Bonds  of  the  Fourth  Liberty  Loan  originally  subscribed  for  by  such 
owner  and  still  owned  by  him  at  the  date  of  his  tax  return;  and 

“(3)  The  Interest  on  an  amount  of  Bonds,  the  principal^of  which  docs  not  exceed 
$30,000,  owned  by  any  individual,  partnership,  association,  or  corporation,  issued  upon 
conversion  of  the  Z}/2  per  centum  Bonds  of  the  First  Liberty  Loan  in  the  exercise  of  any 
privilege  arising  as  a consequence  of  the  issue  of  bonds  of  the  Fourth  Liberty  Loan,  shall 
be  exempt  from  such  taxes. 

“The  exemption  provided  in  this  Section  shall  be  in  addition  to  the  exemption  pro- 
vided in  Section  7 of  the  Second  Liberty  Bond  Act  in  respect  to  the  interest  on  an  amount 
of  bondi  and  certificates,  authorized  by  such  Act  and  amendments  thereto,  the  principal 

103  TAX 


INC. 


INDIVroUALS. 


of  trhich  does  not  exceed  in  the  aggregate  $5,000,  and  in  addition  to  all  other  exemptions 
provided  in  the  Second  Liberty^  Bond  Act.” 

The  exemptions  authorized  by  subdivisions  (1)  and  (3)  of  section  one  are  con- 

982  ferred  by  reason  of  the  ownership  of  bonds  therein  referred  to,  while  the  exemption 
authorized  by  subdivision  (2)  is  a collateral  exemption  conferred  upon  the  bonds 

therein  referred  to  by  reason  of  the  original  subscription  for,  and  continued  holding  of 
Fourth  Liberty  Loan  Bonds. 

(1)  Trusts. — When  income  as  such  is  taxable  to  beneficiaries,  as  in  the  case, 

983  under  the  present  income  tax  law,  of  a trust  the  income  of  which  is  to  be  distri- 
buted annually  or  regularly  between  existing  beneficiaries,  each  beneficiary  is 

regarded  as  the  owner  of  a proportionate  part  of  the  bonds  held  in  trust  and  is  entitled 
to  exemption  on  account  of  such  ownership  as  if  he  owned  such  proportionate  part  of  the 
bonds  directly.  In  such  a case,  a subscription  by  a trustee  for  bonds  of  the  Fourth  Liberty 
Loan  constitutes  each  beneficiary  existing  at  the  time  of  such  subscription  an  original 
subscriber  for  his  proportionate  part  of  such  bonds,  and  entitles  such  beneficiary  to  the 
collateral  exemption  of  interest  on  bonds  of  previous  issues,  whether  owned  by  such 
beneficiary  or  by  the  trustee,  as  if  the  beneficiary  had  himself  originally  subscribed  for 
such  proportionate  part  of  the  bonds,  and  a subscription  by  such  beneficiary  for  bonds 
of  the  Fourth  Liberty  Loan  entitles  him  to  the  collateral  exemption  of  interest  on  bonds 
of  previous  issues  held  by  the  trustee. 

984  When  income  is  taxable  to  the  trustee  as  in  the  case,  under  the  present  income  tax 
law,  of  a trust  the  income  of  which  is  accumulated  for  the  benefit  of  unborn  or 

unascertained  persons,  the  trustee  is  regarded  as  the  owner  of  all  the  bonds  held  in  trust 
and  the  trust  is  entitled  to  exemption  on  account  of  such  ownership.  In  such  a case  a 
subscription  by  a trustee  constitutes  the  trustee  as  such  the  original  subscriber  and  entitles 
the  trust,  on  account  of  such  subscription,  to  the  collateral  exemption  of  interest  on  bonds 
of  previous  issues. 

(2)  PARTNERSHIPS. — When  income  of  a partnership  is  taxable  to  the  Individual 

985  partners,  as  under  the  present  income  tax  law,  each  partner  is  treated  as  the  owner 
of  a proportionate  part  of  the  bonds  held  by  the  partnership  and  entitled  to  exemp- 
tion on  account  of  such  ownership  as  if  such  partner  owned  such  proportionate  part  of  the 
bonds  directly. 

When  the  income  of  a partnership  is  taxable  to  the  partnership  as  such,  as  under 

986  the  present  [former]  excess  profits  tax  law,  the  partnership  is  treated  as  the  owner 
of  the  bonds  held  by  it  and  entitled  to  exemption  from  taxes  assessed  upon  the  income 

of  the  partnership  as  such. 

With  reference  to  a tax  assessed  upon  an  individual  partner  on  his  share  of  the  part- 

987  nership  income,  such  partner,  if  a partner  at  the  time  of  the  original  subscription 
by  the  partnership  for  bonds  of  the  Fourth  Liberty  Loan,  is  treated  as  an  original 

subscriber  for  a proportionate  part  of  such  bonds  subscribed  for  by  the  partnership  and  is 
entitled  to  the  collateral  exemption  of  interest  on  bonds  of  previous  issues,  on  account  of 
such  original  subscription  for  bonds  of  the  Fourth  Liberty  Loan,  as  if  he  had  subscribed 
directly  for  such  proportionate  part  of  the  bonds. 

With  reference  to  a tax  assessed  to  the  partnership  upon  the  partnership  Income 

988  as  a whole  [no  such  tax  assessed  now],  such  partnership  is  the  original  subs  criber 
and  entitled  to  the  collateral  exem.ption  of  interest  on  bonds  of  previous  issues, 

on  account  of  such  original  subscriptions  for  bonds  of  the  Fourth  Liberty  Loan. 

(3)  CORPORATIONS. — Income  of  a corporation  as  such  is  taxable  to  the  corpo- 

989  ration  and  is  not  taxable  to  the  stockholders.  The  corporation,  and  not  the  stock- 
holders, is  regarded  as  the  owner  of  the  bonds  held  by  the  corporation  and  entitled 

to  exemption  on  account  of  such  ownership.  When  bonds  of  the  Fourth  Liberty  Loan  are 
subscribed  for  by  the  corporation  it,  and  not  the  stockholders,  is  the  original  subscriber 
and  entitled  to  the  collateral  exemption  of  interest  on  bonds  of  previous  issues  on  account 
of  such  original  subscription.  (T.  D.  2762,  Oct.  21,  1918.) 

990  Exempt  Status  of  Interest  on  Liberty  Bonds  when  Purchased  on  Installment  Plan 
and  Not  Fully  Paid  for  on  December  31,  1918. — Reference  is  made  to  your  telegram 

dated  December  14,  1918:  “Please  wire  collect  your  ruling  is  exemption  from  tax  on  interest 
Second  and  Third  Liberty  Bonds  based  on  holdings  Fourth  Liberty  Bonds  dependent 
on  fourth  subscription  being  fully  paid  and  bonds  delivered  prior  to  end  December  or 
subscription  paid  on  government  plan  sufficient.”  l[In  reply  you  are  advised  that  an 
individual  who  originally  subscribed  to  bonds  of  the  Fourth  Liberty  Loan  to  an  amount 
not  exceeding  $30,000  in  accordance  with  the  government  plan  and  made  payments  in 
accordance  with  such  plan  is  not  required  to  pay  for  such  bonds  in  full  on  or  before  December 
31,  1918,  in  order  to  obtain  the  exemption  provided  in  Section  1 of  the  Supplement  to  the 
Second  Liberty  Bond  Act,  or  of  interest  on  bonds  of  the  previous  issues  referred  to  in 
subdivision  2 of  said  Section  1.  ^Likewise  if  an  Individual  subscribed  for  bonds  of  the 
Fourth  Liberty  Loan  through  a bank  by  agreeing  to  pay  the  subscription  price  in  install- 
ments acceptable  to  the  bank,  and  made  payments  in  accordance  with  this  plan,  it  will  not 

104 


INC. 


r V s: 


INDIVIDUALS. 


be  necessary  for  such  individual  to  pay  for  the  bonds  in  full  on  or  before  December  31, 
1918,  in  order  to  obtain  the  exemption  mentioned  in  the  preceding  paragraph.  (Letter  to 
Clark  J.  Milliron,  Los  Angeles,  Cal.,  signed  by  Acting  Deputy  Commissioner  Homer  S. 
Pace,  and  dated  January  3,  1919.) 

991  Government  Obligations  and  War  Finance  Corporation  Bonds  Beneficially  Owned 
by  Nonresident  Aliens  May  be  Tax  Exempt  Under  Certain  Conditions. — Section  3 

[of  the  “Fourth  Liberty  Bond  Act,”  Act  of  July  9,  1918].  That  notwithstanding  the  pro- 
visions of  the  Second  Liberty  Bond  Act  [1i976]  as  amended  by  the  Third  Liberty  Bond  Act, 
or  of  the  War  Finance  Corporation  Act,  bonds  and  certificates  of  indebtedness  of  the  United 
States  payable  in  any  foreign  money  or  foreign  moneys,  and  bonds  of  the  War  Finance 
Corporation  payable  in  any  foreign  money  or  foreign  moneys  exclusively  or  in  the  alter- 
native, shall,  if  and  to  the  extent  expressed  in  such  bonds  at  the  time  of  their  issue,  with  the 
approval  of  the  Secretary  of  the  Treasury,  while  beneficially  owned  by  a nonresident  alien 
individual,  or  by  a foreign  corporation,  partnership,  or  association,  not  engaged  in  business 
in  the  United  States,  be  exempt  both  as  to  principal  and  interest  from  any  and  all  taxation 
now  or  hereafter  imposed  by  the  United  States,  any  State,  or  any  of  the  possessions  of  the 
United  States,  or  by  any  local  taxing  authority.  (Sec.  3,  “Fourth  Liberty  Bond  Act” 
of  July  9,  1918.) 

992  Returns  of  Income  From  Exempt  Securities. — Where  the  entire  income  of  an  indi- 
vidual is  from  tax-exempt  bonds  and  where  the  amount  of  income  other  than  that 

from  tax-exempt  securities  is  less  than  the  amount  of  income  for  which  a return  is  required, 
no  return  of  income  is  to  be  made.  Interest  from  securities  which  is  exempt  from  tax 
under  section  4 [Sec.  213]  of  the  Income  Tax  Law  is  not  to  be  included  in  returns  of  income. 
[But  read  new  law  provision  at  ^975.]  (Art.  26,  ^178,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

993  No  Ownership  Certificates  Required. — It  has  been  called  to  the  attention  of  this 
office  that  banks  in  certain  sections  are  refusing  to  pay  coupons  for  interest  on 

bonds  of  States,  counties,  cities,  or  other  political  subdivisions  of  the  United  States,  when 
such  coupons  are  not  accompanied  by  certificates  of  ownership,  * * * ^ 

Please  inform  all  parties  interested,  giving  the  information  wide  publicity,  that 

994  the  income  derived  from  the  interest  upon  the  obligations  of  a State,  county,  city, 
or  any  other  political  subdivision  thereof,  and  upon  the  obligations  of  the  United 

States  or  Its  possessions  is  not  subject  to  the  income  tax  [is  still  not  subject  to  normal  in- 
come tax]  and  a certificate  of  ownership  in  connection  with  the  coupons  or  registered  Interest 
orders  for  such  interest  will  not  be  required. 

The  interest  coupons  should  clearly  show  on  their  face  whether  they  are  issued 

995  by  the  United  States  or  any  political  subdivision  thereof.  If,  however,  they  do  not 
clearly  show  this,  then,  of  course,  an  ownership  certificate  should  be  required. 

(T.  D.  1892,  Nov.  6,  1913.)  [Note  at  ^1377  that  “Information  at  the  source”  does  not 
apply  to  interest  on  obligations  of  the  United  States.] 

996  Law  1]104.  Income  of  Foreign  Governments  from  United  States  Sources. — 

“(5)  [Gross  income  does  not  include]  The  income  of  foreign  governments  received 
from  Investments  in  the  United  States  in  stocks,  bonds,  or  other  domestic  securities,  owned 
by  such  foreign  governments,  or  from  Interest  on  deposits  In  banks  In  the  United  States  of 
moneys  belonging  to  such  foreign  governments,  or  from  any  other  source  within  the  United 
States;”  [^[2875.] 

9 97  Section  30  of  the  act  of  September  8,  1916,  as  amended  by  the  act  of  October  3, 
1917  [1i996  above]  provides  that  the  income  of  foreign  governments  received  from 
investments  in  the  United  States  in  stocks,  bonds,  or  other  domestic  securities  owned  by 
them,  or  from  interest  on  deposits  in  banks  in  the  United  States  of  money  belonging  to 
such  foreign  governments,  is  exempt  from  the  tax  imposed  by  this  title.  This  does  not, 
however,  exempt  from  the  tax  any  income  collected  by  foreign  governments  from  invest- 
ments in  the  United  States  in  stocks,  bonds,  or  other  domestic  securities,  which  are  not 
bona  fide  owned  by  but  are  loaned  to  such  foreign  government.  The  exemption  here 
provided  for  is  predicated  upon  the  fact  that  the  securities  or  moneys  from  which  income 
is  derived  are  actually  owned  by  such  foreign  governments.  (Art.  87,  ^348,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

998  Law  ^105.  Accident  and  Health  Insurance,  and  “Damages”  Received. — “(6) 
[Gross  income  does  not  include]  Amounts  received,  through  accident  or  health 

insurance  or  under  workmen’s  compensation  acts,  as  compensation  for  personal  Injuries 
or  sickness,  plus  the  amount  of  any  damages  received  whether  by  suit  or  agreement  on  ac- 
count of  such  Injuries  or  sickness;”  [^2864.] 

999  The  Attorney  General  has  advised  upon  the  basis  of  recent  decisions  of  the  Supreme 
Court  (Doyle  v.  Mitchell  Brothers  Company  (247  U.  S.  179),  decided  May  20, 

105  TAX 


INC. 


INDIVIDUALS. 


last;  Lynch  v,  Hornby  [^[2763],  Lynch  v.  Turrish  [^2776]  and  Southern  Pacific  Company 
V.  Lowe  [^2804],  decided  June  3,  last)  and  it  is  accordingly  held  that  the  proceeds  of  an 
accident  insurance  policy  received  by  an  individual  on  account  of  personal  injuries  sus- 
tained by  him  through  accident  are  not  income  taxable  under  the  provisions  of  Title  I 
of  the  Act  of  September  8,  1916,  as  amended  by  Title  XII  of  the  Act  of  October  3,  1917, 
and  of  Title  I of  the  Act  of  October  3,  1917. 

It  is  held  upon  similar  principles  that  an  amount  received  by  an  individual  as  the 
1 000  result  of  a suit  or  compromise  for  personal  injuries  sustained  by  him  through  accident 
is  not  income  taxable  under  the  provisions  of  said  Titles. 

1 001  Such  provisions  of  Treasury  Decisions  and  of  Regulations  No.  33  (Revised)  as  are 
inconsistent  herewith  are  hereby  revoked.  (T.  D.  2747,  July  12,  1918.) 

1 002  Reimbursement  of  Expenses  Incident  to  an  Accident. — Amounts  received  from  a 
railroad  company  by  way  of  reimbursement  for  expenses  incident  to  an  accident 
are  not  subject  to  the  income  tax.  (T.  D.  2135,  Jan.  23,  1915.) 

1 003  Accident  Insurance  Paid  on  Death  of  the  Insured. — The  proceeds  of  accident  insur- 
ance policies  paid  upon  the  death  of  the  person  insured  to  the  beneficiaries  is  to  be 
treated  like  the  proceeds  of  life  insurance  policies  [^945].  (T.  D.  2135,  Jan.  23,  1915.) 

1 004  Law  Tfl06.  Income  Arising  Through  the  Exercise  of  an  Essential  Governmental 
Function  and  Accruing  to  any  State,  Etc. — “(7)  [Gross  income  does  not  include] 
Income  derived  from  any  public  utility  or  the  exercise  of  any  essential  governmental 
function  and  accruing  to  any  State,  Territory,  or  the  District  of  Columbia,  or  any  political 
subdivision  of  a State  or  Territory,  or  income  accruing  to  the  government  of  any  possession 
of  the  United  States,  or  any  political  subdivision  thereof.” 

1005  Law  II 107.  “Whenever  any  State,  Territory,  or  the  District  of  Columbia,  or  any 
political  subdivision  of  a State  or  Territory,  prior  to  September  8,  1916,  entered 

i n good  faith  into  a contract  with  any  person,  the  object  and  purpose  of  which  is  to  acquire, 
construct,  operate,  or  maintain  a public  utility,  no  tax  shall  be  levied  under  the  provisions 
of  this  title  upon  the  income  derived  from  the  operation  of  such  public  utility,  so  far  as 
the  paymicnt  thereof  will  impose  a loss  or  burden  upon  such  State,  Territory,  District  of 
Columbia,  or  political  subdivision;  but  this  provision  is  not  intended  to  confer  upon 
such  person  any  financial  gain  or  exemption  or  to  relieve  such  person  from  the  payment 
of  a tax  as  provided  for  in  this  title  upon  the  part  or  portion  of  such  Income  to  which 
such  person  or  corporation  is  entitled  under  such  contract;” 

1006  Law  ^108.  Compensation  of  Soldiers  and  Sailors. — “(8)  [Gross  income  does  not 
include]  So  much  of  the  amount  received  during  the  present  war  by  a person  in  the 

military  or  naval  forces  of  the  United  States  as  salary  or  compensation  in  any  form  from  the 
United  States  for  active  services  in  such  forces,  as  does  not  exceed  $3,500.” 

1007  Law  ^14.  “Military  and  Naval  Forces  of  the  United  States’*  Defined. — “The 
term  ‘military  or  naval  forces  of  the  United  States’  includes  the  Marine  Corps, 

the  Coast  Guard,  the  Army  Nurse  Corps,  Female,  and  the  Navy  Nurse  Corps,  Female, 
but  this  shall  not  be  deemed  to  exclude  other  units  otherwise  included  within  such  term;” 

1 008  Law  ^15.  The  “Present  War”  Defined. — “The  term  ‘present  war*  means  the  war 
in  which  the  United  States  is  now  engaged  against  the  German  Government.” 

1009  Law  ^16.  The  “Termination  of  the  War.” — “For  the  purposes  of  this  Act  the 
date  of  the  termination  of  the  present  war  shall  be  fixed  by  proclamation  of  the 

President.” 

1010  Coupon  Interest  Accruing  Prior  to  Incidence  of  Tax.— Where  coupons  bear  a date 
prior  to  March  1,  1913,  but  have  not  been  presented  for  paym.ent  until  1915, 

although  funds  have  been  on  hand  to  meet  them  since  maturity,  no  withholding  is 
required  for  the  reason  that  such  coupons  represent  income  that  was  due  and  payable 
and  could  have  been  reduced  to  possession,  on  demand,  prior  to  the  incidence  of  the 
income  tax. 

Where  coupons  were  due  and  payable  in  1911,  and  have  been  in  default  since 

1011  that  year,  funds  to  meet  them  having  been  deposited  with  the  withholding  agent 
since  January  1,  1915,  it  is  held  that  the  income  represented  by  such  coupons 

accrued  to  the  owners  of  the  bonds  prior  to  the  incidence  of  the  tax,  and  hence  does  not 
constitute  taxable  and  returnable  income.  (Extract  from  letter  to  the  Central  Trust 
and  Safe  Deposit  Company  of  Cincinnati,  dated  March  16,  1915,  embodying  a decision 
by  Commissioner  W.  H.  Osborn,  signed  by  A.  C.  Gilligan,  Collector.) 


INC. 


106  TAX 


INDIVIDUALS. 


I 0 1 2 Alimony. — Alimony  or  allowance  based  on  separation  agreement  is  not  Income 
to  the  recipient  thereof,  nor  is  it  an  allowable  deduction  for  the  person  paying 
the  same.  (Art.  4,  ^13,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1013  Salaries  of  State,  City,  etc..  Employees. — [There  shall  not  be  included  as  Income — ] 
(g)  Compensation  of  all  officers  and  employees  of  a State  or  any  political  subdivision 

thereof  except  when  such  compensation  is  paid  by  the  United  States  Government.  [The 
present  Act  does  not  except  such  compensation  as  did,  in  terms,  the  Acts  of  1913  and  of 
1916-17,  but  it  will  be  noted  at  ^[764,  that  “States  and  the  political  subdivision  thereof” 
are  omitted.  See  ^2863.]  (Art.  5,  ^71,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

An  individual  who  enters  into  a contract  with  a State,  or  any  political  subdivision 

1014  thereof,  for  the  doing  of  a thing  or  things  specified  by  the  contract,  the  completion 
of  which  will  constitute  a fulfillment  of  the  contract  on  the  part  of  such  individual, 

is  not  an  officer  or  employee  of  the  State  or  political  subdivision  thereof  within  the  meaning 
and  intent  of  section  4 of  the  income-tax  law  and  the  amount  received  by  him  from  the 
State  or  political  subdivision  thereof  under  the  terms  of  the  contract  is  to  be  accounted 
for  as  income.  (Art.  4,  ^47,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1015  Salaries  Received  Under  Funds  of  Smith-Lever  Act  of  May  8,  1914,  as  Taxable 
Income. — Section  1200  of  the  Act  of  October  3,  1917,  amending  Section  4 of  the 

Act  of  September  8,  1916,  provides  in  part  that  the  following  income  shall  be  exempt 
from  tax  [the  present  Act  does  not  so  provide,  in  terms,  but  see  ^764  and  ^2863]: 

“The  compensation  of  all  officers  and  employees  of  a State,  or  any  political  sub- 
division thereof,  except  when  such  compensation  is  paid  by  the  United  States  Government.” 
The  Smith-Lever  Act  of  May  8,  1914,  makes  provision  for  extending  the  benefits 

1016  of  the  Act  of  Congress  approved  July  2,  1862  (12  Stat.  503),  and  the  Act  approved 
August  30,  1890  (26  Stat.  417).  Under  the  aforesaid  Act  certain  colleges  were 

established  in  the  several  States  and  supported  by  the  income  from  lands  deeded  to  the  States 
for  that  purpose.  The  colleges  receiving  the  benefits  of  the  two  earlier  Acts  and  of  the 
Smith-Lever  Act  are  controlled  by  states.  The  funds  available  under  the  Smith-Lever 
Act  are  appropriated  by  State  legislatures  to  the  colleges  to  be  benefited  thereby.  The 
funds  appropriated  by  the  Federal  Government  are  paid  directly  into  the  State  Treasuries 
as  any  other  subventions  by  the  Federal  Government.  They  lose  their  identity  as  funds 
of  the  United  States  by  being  paid  to  the  states. 

There  may  be  considerable  difference  between  the  different  states  in  control  and  gov- 

1017  ernment  of  the  colleges  receiving  the  benefits  of  the  Act.  If  the  organization  of  the 
college  is  one  which  belongs  to  the  state  and  which  the  state  governs,  the  legislature 

may  vacate  offices,  elect  new  professors  and  do  whatever  it  thinks  necessary  in  the  man- 
agement of  the  college.  (Head  v.  Univ.,  19  Wall.  526).  If,  however,  the  colleges  are 
governed  by  trustees  who  are  not  directly  responsible  to  the  State  legislators,  the  em- 
ployees of  the  college  receiving  salaries  paid  in  part  from  Smith-Lever  funds  are  not 
employees  of  the  state,  and  accordingly  are  not  exempt  from  tax  on  the  ground  that  they 
are  employees  of  the  State. 

Where  the  employees  of  Universities  receiving  salaries  paid  in  part  or  In  whole 

1018  from  Smith-Lever  funds  are  officers  or  employees  of  a state,  they  are  not  required 
to  include  in  their  income  tax  returns  as  taxable  income  the  salaries  so  received. 

(T.  D.  2668,  March  9,  1918.) 

1019  Law  ^112.  Deductions  Allowed. — “Sec.  214.  (a)  That  in  computing  net  income 

there  shall  be  allowed  as  deductions:”  [1[2878]  [For  “net  losses”  read  at  1[19i3.] 

1 020  Law  11113.  Business  Expenses  Are  Deductible. — “(1)  All  the  ordinary  and  neces- 
sary expenses  paid  or  incurred  during  the  taxable  year  in  carrying  on  any  trade  or 

business,”  [1[2878].  [For  definition  of  “paid  or  incurred”  see  1[1923.] 

1021  Law  1[  11 4.  A Reasonable  Allowance  For  Salaries  Is  Deductible. — “including  a 
reasonable  allowance  for  salaries  or  other  compensation  for  personal  services  actually 

rendered,  and”  [For  general  discussion  of  salaries  and  bonuses,  read  at  1[1979  and  1[2882.] 

1 022  Law  If  1 15.  Certain  Rentals  Are  Deductible. — “including  rentals  or  other  payments 
required  to  be  made  as  a condition  to  the  continued  use  or  possession,  for  purposes 
of  the  trade  or  business,  of  property  to  which  the  taxpayer  has  not  taken  or  is  not  taking 
title  or  in  which  he  has  no  equity;”  [112891] 

1023  Law  1[151.  Certain  Items  of  “Expense”  Not  Deductible. — “Sec.  215.  That  in 
computing  net  income  no  deduction  shall  in  any  case  be  allowed  in  respect  of — ” 

1 024  Law  11152,  Personal  Expenses  Are  Not  Deductible. — “(a)  Personal,  living,  or 
family  expenses;”  [112965] 


INC. 


107  TAX 


INDIVIDUALS. 


1025  Law  11153.  Amounts  Paid  Out  For  New  Buildings  or  For  Permanent  Improvements 
Are  Not  Deductible. — “(b)  Any  amount  paid  out  for  new  buildings  or  for  permanent 
improvements  or  betterments  made  to  increase  the  value  of  any  property  or  estate;” 

[Read  at  112967.] 

1 026'Additions  and^Betterments. — Amounts  expended  in  additions  and  betterments  or 
for  furniture  and  fixtures  which  constitute  an  increase  in  capital  investment  and  add 
to  the  value  of  the  assets  are  not  a proper  deduction,  but  such  expenditures  when  capitalized 
may  be  extinguished  through  annual  depreciation  deductions,  which  latter  deductions  will 
be  computed  upon  the  basis  of  the  cost  and  probable  life  of  the  property.  (Art.  132,  1[433, 
Reg.  33,  Rev.,  Jan.  2,  1918.) 

1027  Law  1(154.  Expenditures  Covered  By  Depreciation  Allowance  Are  Not  Deductible. — 
“(c)  Any  amount  expended  in  restoring  property  or  in  making  good  the  exhaustion 

thereof  for  which  an  allowance  is  or  has  been  made;  or” 

1 028  Law  1fl55.^  Premiums  Paid  On  Business  Life  Insurance  Are  Not  Deductible. — 
“(d)  Premiums  paid  on  any  life  insurance  policy  covering  the  life  of  any  officer  or 

employee,  or  of  any  person  financially  interested  in  any  trade  or  business  carried  on  by  the 
taxpayer,  when  the  taxpayer  is  directly  or  indirectly  a beneficiary  under  such  policy.” 

1029  Section  32  of  the  act  of  September  8,  1916,  specifically  provides  that  premiums 
paid  by  corporations  for  insurance  covering  the  lives  of  officers,  employees,  or  those 

financially  interested  in  the  trade  or  business  of  such  corporations,  shall  not  be  deducted 
from  the  gross  income  of  the  corporations  paying  the  same.  This  provision  is  held  to 
apply  to  all  forms  of  life  insurance,  the  premiums  upon  which  the  corporations  may  pay, 
whether  or  not  the  corporations  are  the  beneficiaries  of  the  insurance  policies  upon  the  death 
of  the  insured,  and  all  rules  and  regulations  in  conflict  with  this  article  are  hereby  revoked. 
(Art.  236,  H664,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1030  Expenses  Incurred  in  Earning  Non-Taxable  Income. — Expenses  Incurred  in  earning 
income  which  is  not  subject  to  tax  under  the  income  tax  law  do  not  constitute 

allowable  deductions  in  computing  net  income  from  other  sources  which  are  taxable  under 
the  law.  (T.  D.  2137,  Jan.  30,  1915.) 

1031  Business  vs.  Personal  Expenses. — What  constitutes  an  item  allowable  as  a de- 
duction under  the  head  of  business  expenses? 

1032  Expenses  of  Professional  Men. — A physician  may  claim  as  deductions  the  cost  of 
medicines  and  medical  supplies  used  by  hi  n in  the  practice  of  his  profession,  expenses 

paid  in  the  operation  and  repair  of  an  automobile  used  in  making  professional  calls,  dues  to 
medical  societies  and  subscriptions  to  medical  journals,  the  expenses  of  attending  medical 
conventions,  the  rent  paid  for  office  rooms  and  the  hire  of  office  assistants,  the  cost  of  the 
fuel,  light,  water,  telephone,  etc.,  used  in  such  office  rooms.  Amounts  expended  for  books, 
medical  supplies  and  surgical  instruments  of  a permanent  character  are  not  allowable  as 
deductions. 

This,  in  a general  way,  outlines  the  ordinary  and  usual  expenses  incurred  by 
1 033  * * * or  a professional  man,  which  may  be  claimed  as  deductions,  and  the 

principles  underlying  these  allowances  are  equally  applicable  in  the  case  of  any  one 
engaged  in  a business,  trade  or  profession.  In  short,  all  expenses  connected  directly  and 
solely  with  the  conduct  of  an  income-producing  business,  trade,  profession  or  vocation, 
are  allowable. 

Items  of  personal  expense  or  items  connected  in  any  way  with  the  support,  main- 
1034  tenance  and  well-being  of  a family  are  not  allowed;  neither  are  the  amounts  paid 
for  tools,  implements,  vehicles,  machinery,  or  surgical  instruments  which  are  more 
or  less  permanent  in  character,  nor  the  cost  of  medical,  law  or  other  professional  books 
nor  amounts  expended  in  making  permanent  improvements  or  betterments  of  any  kind 
whatsoever,  allowable  as  deductions.  These  latter  items  are  held  to  be  investments  of 
capital  upon  which  depreciation  may  be  claimed. 

If  a physician,  or  other  professional  or  business  man,  rents  a home  and  uses 
1 035  a portion  of  same  for  professional  or  business  purposes,  may  any  portion  of  the  rent 
paid  for  that  home  be  claimed  as  a business  expense?  (Answer.)  Yes.  The 
proportion  of  the  rent  paid  which  is  properly  chargeable  to  the  number  of  rooms  so  used 
may  be  claimed  as  a deduction.  (Questions  46  and  57,  1918  Income  Tax  Primer.) 

1 036  Rent  For  Residential  Property. — In  the  case  of  a professional  man  who  rents  a 
property  for  residential  purposes  but  receives  there  clients,  patients,  or  callers 
in  connection  with  his  professional  work  (the  place  of  business  being  elsewhere),  no  part 
of  the  rent  is  deductible  as  business  expense.  (Art.  8,  1(114,  Reg.  33,  Rev.,  Jan.  2,  1918.) 


INC. 


108  TAX 


INDIVIDUALS. 


1037  Employment  of  Minor  Children  By  Parents. — If  I employ  a minor  son  or  daughter 
to  assist  me  in  my  business  or  trade  and  I pay  a salary  or  wage  for  such  assistance, 

may  I claim  the  amount  as  a deduction?  (Answer.)  No.  If,  however,  the  son  or  daughter 
has  attained  his  or  her  majority,  the  amount  of  compensation  paid  for  his  or  her  services 
may  be  so  claimed.  (Question  48,  1918  Income  Tax  Primer.) 

1038  Allowances  to  Minor  Children. — The  father  is  legally  entitled  to  the  service  of  his 
minor  children.  As  a rule,  allowances  which  he  gives  them,  whether  said  to  be  in 

consideration  of  service  or  otherwise,  are  not  allowable  deductions,  in  his  return  of  income 
nor  are  they  income  to  the  children.  (Art.  8,  11104,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 039  Paying  Salary  to  Self. — Can  a taxpayer  claim  a deduction  for  his  own  remuneration? 

(Answer.)  Wages  or  salary  drawn  by  a taxpayer  from  his  own  business  are  more 
in  the  nature  of  a charge  out  of  profits  than  a charge  against  profits.  If  such  could  be 
deducted  they  would  merely  be  added  to  his  income,  the  effect  of  which  would  be  to  take 
money  out  of  one  pocket  and  put  it  in  another.  Therefore,  no  deduction  can  be  claimed. 
(Question  49,  1918  Income  Tax  Primer.) 

1 040  Expenses  of  Salesmen  Working  on  Commission  Basis. — Can  a salesman  working 
on  a commission  basis  claim  as  deductions  the  amounts  expended  from  his  own 
funds  for  railroad  fare,  excess  baggage,  taxicab  or  street-car  fare,  show  rooms,  assistants, 
advertising,  etc.?  (Answer.)  Yes.  If  he  is  not  reimbursed  for  such  expenditures  by  his 
firm,  he  should  report  under  Gross  Income  the  total  amount  of  commissions  received  and 
he  may  then  claim  such  expenses  as  were  actually  incurred  and  paid  In  the  earning  of 
those  commissions.  (Question  51,  1918  Income  Tax  Primer.) 

1041  Reimbursements  For  Eicpenses  Paid. — Amounts  paid  out  for  expense  incident  to 
service  rendered,  and  which  are  reimbursable  are  not  deductible  as  expense  nor  are 
they  to  be  returned  as  income  when  received  in  reimbursements.  (Art.  8,  11112,  Reg.  33, 
Rev.,  Jan.  2,  1918.) 

1 042  Amounts  paid  from  a salary  received  for  all  services  rendered  are  deductible  in 
returns  of  income  as  business  expenses,  when  the  expenditures  are  occasioned  by 
the  service  in  respect  of  which  the  salary  is  paid.  (Art.  8,  UlOl,  Reg.  33,  Rev.,  Jan.  2, 1918.) 

1 043  Expenditures  From  Allowances. — The  pay  and  allowance  of  Army  officers  are  based 
on  the  obligation  of  an  officer  to  provide  equipment  and  mounts  as  a personal 
expense.  The  cost  of  mounts  and  equipment  is  not  therefore  a deductible  expense.  (Art.  8, 
^103,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 044  Expenses  of  Commuters. — “A,”  who  Is  employed  in'a  city,  has  his  home  in  a suburb. 

He  pays  carfare  between  his  home  and  place  of  employment  and  takes  his  noon 
lunch  in  the  city.  Can  the  amounts  expended  for  carfare  and  lunch  be  claimed  as  a business 
expense?  (Answer.)  No,  as  such  amounts  are  held  to  be  items  of  personal  expense. 
(Question  52,  1918  Income  Tax  Primer.) 

1 045  Life  and  Fire  Insurance  Premiums. — Premium  paid  for  Insurance  on  property  used 
for  business  purposes  is  an  allowable  deduction.  Insurance  paid  on  a dwelling 
owned  and  occupied  by  a taxpayer  is  a personal  expense  and  not  deductible.  Premium 
paid  for  life  insurance  by  the  insured  Is  not  deductible.  (Art.  8,  11109,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

1046  Can  the  amount  of  life  insurance  premiums  and  premiums  paid  for  insurance  on 
my  residence  property  be  claimed  as  deductions?  (Answer.)  No,  as  these  are 

held  to  be  items  of  personal  expense.  If,  however,  you  pay  premiums  on  insurance  policies 
covering  farm  buildings,  other  than  your  dwelling  house,  or  on  any  property  used  for 
business  purposes,  these  premiums  are  allowable  as  deductions.  (Question  54,  1918 
Income  Tax  Primer.) 

1047  Premium  on  Fidelity  Bond. — Where  an  employee  is  required  to  furnish  bond  and 
pay  the  premium  on  such  bond,  as  a necessary  incident  of  his  employment,  the 

premium  on  the  bond  will  constitute  an  allowable  deduction  in  computing  net  income. 
(T.  D.  2090,  Dec.  14,  1914.) 

1048  Expenses  in  Connection  With  Rental  Property. — This  office  Is  in  receipt  of  your  letter 
of  February  18,  1915,  and  in  reply  thereto  you  are  advised  that  the  amount  of  rental 

received  from  a piece  of  real  property  should  be  included  in  any  personal  annual  return 
of  net  income  the  landlord  may  be  required  to  render  for  the  year  in  which  received,  and 
deduction  may  be  claimed  on  account  of  any  expense  incurred  in  the  maintenance  of  the 


INC. 


109  TAX 


INDIVIDUALS. 


said  property,  or  Its  use,  for  rental  purposes,  including  arnounts  paid  for  repairs,  insurance* 
fuel,  light  and  water,  and  janitor  and  elevator  service,  if  any,  and  in  addition  thereto  an 
amount  representing  a reasonable  allowance  for  the  wear  and  tear  of  the  property  arising 
from  its  use  for  rental  purposes  may  be  claimed  as  a deduction,  but  no  claim  for  depreci- 
ation should  be  made  on  account  of  any  amount  of  expense  of  restoring  property  or  making 
good  the  exhaustion  thereof  for  which  a deduction  is  claimed  elsewhere  in  the  return. 

(Letter  to  The  Corporation  Trust  Company,  signed  by  Acting  Commissioner  David  A. 

Gates,  and  dated  Feb.  26,  1915.) 

Other  Expenses. — [In  general,  the  above  regulations,  in  their  application,  have  to  do 
with  individuals  only.  For  the  regulations  applicable  to  individuals  and  corporations 
generally  see  “Expenses”  under  “Corporations,”  at  ^1943.] 

1 049  Law  If  116.  All  Interest  Paid  or  Accrued  on  Indebtedness  With  One  Exception  Is 
Deductible. — “(2)  All  interest  paid  or  accrued  within  the  taxable  year  on  indebted- 
ness” [^2895.]  [Foi  construction  of  “paid  or  accured”  see  ^1923]. 

1050  Law  ^117.  Interest  Paid  in  Connection  With  Holdings  in  Certain  Tax-Free 
Obligations  and  Securities  Is  Not  Deductible.— “except  on  indebtedness  incurred 

or  continued  to  purchase  or  carry  obligations  or  securities  (other  than  obligations  of  the 
United  States  Issued  after  September  24,  1917),  the  interest  upon  which  is  wholly  exempt  , 

from  taxation  under  this  title  as  income  to  the  taxpayer,” 

1051  Interest  on  Indebtedness  Incurred  for  the  Payment  of  Dividend  Paying  Stock  is 
Deductible  for  Both  Normal  Tax  and  Supertax  Purposes. — Would  you  be  good 

enough  to  advise  us  by  telegram  at  our  expense,  whether  interest  upon  a note  the  proceeds 
of  which  were  used  for  the  purchase  of  dividend-paying  stock  would  be  allowed  as  a full 
deduction  or  only  as  a deduction  in  arriving  at  the  amount  of  income  subject  to  the  surtax.? 
(Answer.)  Interest  upon  a note  the  proceeds  of  which  are  used  to  purchase  dividend- 
paying stock  allowable  as  a deduction  for  normal  and  additional  tax  purposes.  (Letter 
of  inquiry  from  Harris,  Forbes  & Company,  New  York,  N.  Y.,  and  telegram  of  reply 
thereto  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  Nov.  19,  1917.) 

1052  Law  11119.  Taxes  Paid  or  Accrued  Are  Deductible. — “(3)  Taxes  paid  or  accrued 

within  the  taxable  year  imposed”  [For  construction  of  “paid  or  accrued”  see  If  1923].  f 

1053  Law  If  120.  United  States  Taxes  Except  Income  and  Excess-Profits  Taxes,  Are 
Deductible. — “(a)  by  the  authority  of  the  United  States,  except  income,  war- 

profits  and  excess-profits  taxes;  or” 

1 054  Law  If  121.  Taxes  Imposed  by  United  States  Possessions  Are  Deductible  or 
Allowed  as  a Credit. — “(b)  by  the  authority  of  any  of  its  possessions,  except  the 

amount  of  income,  war-profits  and  excess-profits  taxes  allowed  as  a credit  under  section  222 
[1fl059];  or” 

1 055  Law  If  122.  State  and  Municipal  Taxes  Are  Deductible. — “(c)  by  the  authority 
of  any  State  or  Territory,  or  any  county,  school  district,  municipality,  or  other 
taxing  subdivision  of  any  State  or  Territory,” 

1 056  Law  If  123.  Certain  Assessments  Against  Local  Benefits  Are  Not  Deductible. — ^ 
“not  including  those  assessed  against  local  benefits  of  a kind  tending  to  increase 

the  value  of  the  property  assessed;  or” 

1057  Law  If  124.  Taxes  Imposed  By  Foreign  Countries  Are  Either  Deductible  By  or 
Allowed  as  a Credit  to  Citizens  and  Residents. — “(d)  in  the  case  of  a citizen  or 

resident  of  the  United  States,  by  the  authority  of  any  foreign  country,  except  the  amount 
of  income,  war-profits  and  excess-profits  taxes  allowed  as  a credit  under  section  222 
[111059];” 

1 058  Inheritance  Talxes. — This  office  is  in  receipt  of  your  letter  of  February  4,  1916, 
and  in  reply  you  are  advised  that  a collateral  inheritance  tax  levied  under  the  laws 
of  the  State  of  New  York  being,  as  it  is,  a charge  against  the  corpus  of  the  estate,  does  not 
constitute  such  an  item  as  can  be  allowed  as  a deduction  in  computing  income  tax  liability 
to  either  the  estate  or  a beneficiary  thereof.  (Letter  to  Charles  J.  McDermott,  2 Rector 
Street,  New  York,  N.  Y.,  signed  by  Deputy  Commissioner  G.  E.  Fletcher,  and  dated 
Feb.  10,  1916.) 

Regulaltions  Under  “Taxes  Deductible.” — [Read  at  1[2036  and  at  1f2897.] 

1 059  Law  1[226.  Credit  For  Taxes. — “Sec.  222.^  (a)  That  the  tax  computed  under 
Part  II  [individual  normal  and  surtax]  of  this  title  shall  be  credited  with:”  [1f3008.] 


INC. 


110  TAX 


INDIVroUALS. 


1060  Law  ^227.  Certain  Income  and  Excess-Profits  Taxes  Paid  to  Foreign  Countries 
and  All  Such  Taxes  Paid  to  Possessions  of  the  United  States  By  Citizens  to  be 

Credited. — “(1)  In  the  case  of  a citizen  of  the  United  States,  the  amount  of  any  income, 
war-profits  and  excess-profits  taxes  paid  during  the  taxable  year  to  any  foreign  country, 
upon  income  derived  from  sources  therein,  or  to  any  possession  of  the  United  States; 
and”  [113008.] 

1061  Law  1[228.  Income  and  Excess-Profits  Taxes  Paid  To  Possessions  of  the  United 
States  By  Residents  Are  To  Be  Credited. — “(2)  In  the  case  of  a resident  of  the 

United  States,  the  amount  of  any  such  taxes  paid  during  the  taxable  year  to  any  possession 
of  the  United  States;  and”  [ifSOOS.] 

1 062  Law  ^229.  Certain  Income  and  Excess-Profits  Taxes  Paid  to  Foreign  Countries 
By  Alien  Residents  Are  To  Be  Credited. — “(3)  In  the  case  of  an  alien  resident  of  the 

United  States  who  is  a citizen  or  subject  of  a foreign  country,  the  amount  of  any  such  taxes 
paid  during  the  taxable  year  to  such  country,  upon  income  derived  from  sources  therein, 
if  such  country,  in  imposing  such  taxes,  allows  a similar  credit  to  citizens  of  the  United 
States  residing  in  such  country;  and”  [1[3008.] 

1063  Law  1[230.  Proportionate  Parts  of  Certain  Income  and  Excess-Profits  Taxes  Paid 
to  Foreign  Countries  and  of  All  Such  Taxes  Paid  to  Possessions  of  the  United  States 

To  Be  Credited  to  Members  of  Partnerships  and  to  Beneficiaries  of  Estates  or  Trusts. — 
“(4)  In  the  case  of  any  such  individual  who  is  a member  of  a partnership  or  a beneficiary 

of  an  estate  or  trust,  his  proportionate  share  of  such  taxes  of  the  partnership  or  the  estate 
or  trust  paid  during  the  taxable  year  to  a foreign  country  or  to  any  possession  of  the  United 
States,  as  the  case  may  be.”  [1[3008.] 

1 064  Law  1[231.  Adjustment  of  any  difference  between  amount  of  tax  paid  and  amount 
accrued. — “(b)  If  accrued  taxes  when  paid  differ  froTu  the  amounts  claimed 
as  credits  by  the  taxpayer,  or  if  any  tax  paid  is  refunded  inj-whole  or  ^in  part,  the  tax- 
payer shall  notify  the  Commissioner  who  shall  redetermine  the  amount  of  the  tax  due 
under  Part  II  of  this  title  for  the  year  or  years  affected,  and  the  amount  of  tax  due  upon 
such  redetermination,  if  any,  shall  be  paid  by  the  taxpayer  upon  notice  and  demand  by  the 
collector,  or  the  amount  of  tax  overpaid,  if  any,  shall  be  credited  or  refunded  to  the  tax- 
payer in  accordance  with  the  provisions  of  section  252  [112488].  In  the  case  of  such  a tax 
accrued  but  not  paid,  the  Commissioner  as  a condition  precedent  to  the  allowance  of  this 
credit  may  require  the  taxpayer  to  give  a bond  with  sureties  satisfactory  to  and  to  be 
approved  by  the  Commissioner  in  such  penal  sum  as  the  Commissioner  may  require,  con- 
ditioned for  the  payment  by  the  taxpayer  of  any  amount  of  tax  found  due  upon  any  such 
redeterm.ination;  and  the  bond  herein  prescribed  shall  contain  such  further  conditions 
as  the  Commissioner  may  require.”  [1[3012.] 

1065  Law  1[232.  Credits  for  Income  and  Excess-Profits  Taxes  Paid  To  Foreign  Countries 
and  to  Possessions  of  the  United  States  to  be  Allowed  Only  if  Satisfactory  Evidence 
be  Furnished. — “(c)  These  credits  shall  be  allowed  only  if  the  taxpayer  furnishes  evidence 
satisfactory  to  the  Commissioner  showing  the  amount  of  income  derived  from  sources 
within  such  foreign  country  or  such  possession  of  the  United  States,  and  all  other  information 
necessary  for  the  computation  of  such  credits.”  ]1[3011.] 

1 066  Law  1[  126.  All  Business  Losses  Not  Compensated  For  Are  Deductible. — “(4) 
Losses  sustained  during  the  taxable  year  and  not  compensated  for  by  insurance  or 
otherwise,  if  incurred  in  trade  or  business;”  [1[2901.] 

1067  Losses  actually  sustained  during  the  year  incurred  in  trade  are  limited  by  the 
language  of  the  act  itself. 

“In  trade,”  is  synonymous  with  business. 

1 068  “Business”  has  been  defined  as: 

“That  which  occupies  and  engages  the  time,  attention  and  labor  of  any  one  for  the 
purpose  of  livelihood,  profit,  or  improvement;  that  which  is  his  personal  concern  or 
interest;  employment,  regular  occupation,  but  it  is  not  necessary  that  it  should  be  his 
sole  occupation  or  employment.” 

The  doing  of  a single  act  incidentally  or  of  necessity  not  pertaining  to  the  particular 
1 069  business  of  the  person  doing  the  same  will  not  be  considered  engaging  in  or  carrying 
on  the  business.  (T.  D.  1989,  June  2,  1914.) 

1070  Loss  to  be  deductible  must  be  an  absolute  loss,  not  a speculative  or  fluctuating 
valuation  of  continuing  investment  [but  read  at  “Inventories”  at  If  1861]  but  must 
be  an  actual  loss,  actually  sustained  and  ascertained  during  the  tax  year  for  which  the 
deduction  is  sought  to  be  made;  it  must  be  * * * and  be  determined  and  ascertained 

upon  an  actual,  a completed,  a closed  transaction. 

Ill  TAX 


INC. 


INDIVIDUALS. 


The  term  “in  trade,”  as  used  in  the  law  and  in  Treasury  Decision  2005,  is  held  to 

1071  mean  the  trade  or  trades  in  which  the  person  making  the  return  is  engaged;  that  is, 
in  which  he  has  invested  money  otherwise  than  for  the  purpose  of  being  employed 

in  isolated  transactions,  and  to  which  he  devotes  at  least  a part  of  his  time  and  attention. 
A person  may  engage  in  more  than  one  trade  and  may  deduct  losses  incurred  in  all  of  them, 
provided,  that  in  each  trade  the  above  requirements  are  met.  As  to  losses  on  stocks,  grain, 
cotton,  etc.,  if  these  are  incurred  by  a person  engaged  in  trade  to  which  the  buying  or  selling 
of  stocks,  etc.,  are  incident  as  a part  of  the  business,  as  by  a member  of  a stock,  grain,  or 
cotton  exchange,  such  losses  may  be  deducted  [under  (4)  ^1056].  A person  can  be  engaged 
in  more  than  one  business,  but  it  must  be  clearly  shown  in  such  cases  that  he  is  actually 
a dealer,  or  trader,  or  manufacturer,  or  whatever  the  occupation  may  be,  and  is  actually 
engaged  in  one  or  more  lines  of  recognized  businesses  before  losses  can  be  claimed  [under 
(4)  ^1066]  with  respect  to  either  or  more  than  one  line  of  business,  and  his  status  as  such 
dealer  must  be  clearly  established.  (T.  D.  2090,  Dec.  14,  1914.) 

1072  (1)  A person  may  have  more  than  one  business  in  the  sense  of  being  engaged  in 
more  than  one  trade,  and  may  [under  (4)  ^1066]  deduct  losses  incurred  in  all  of  them, 

provided  that  in  each  trade  it  can  be  clearly  shown  that  he  is  actually  a dealer,  or  trader, 
or  manufacturer,  or  whatever  the  occupation  may  be. 

Neither  the  investment  by  an  individual  of  money  in  the  stock  of  a company 

1073  not  the  employment  by  the  company  of  his  services  in  any  official  capacity  can 
serve  to  make  the  business  in  which  the  company  was  engaged  a matter  of  his 

individual  trade.  (T.  D.  2135,  Jan.  23,  1915.) 

1 074  Shrinkage  in  Book  Values  [In  connection  with  the  following  read  at  “Inventories” 
at  ^1861.]. — For  the  purpose  of  checking  up  returns  and  ascertaining  the  amount 
of  taxable  income  of  individuals  and  corporations,  you  are  given  the  following  instructions 
and  rules  for  use  in  determining  the  amount  of  deductible  loss  allowable  to  individuals  and 
corporations  * ♦ ♦ . 

The  loss  considered  here  has  in  it  no  element  of  “depreciation”  or  “allowance  for 

1075  wear  and  tear,”  or  “compensation  from  insurance  or  otherwise.”  It  is  to  be  such 
loss  as  is  absolute  and  complete  and  which  has  been  actually  sustained. 

1076  Depreciation  as  an  allowable  deduction  in  ascertaining  annual  net  income  for  the 
income  tax  is  separately  provided  for,  and  is  not  to  be  confused  with  loss.  The 

dejjreciation  provided  to  be  taken  as  a deduction  in  a return  of  income  is  the  value 
assigned  to  the  deterioration  of  physical  improvements  or  assets,  such  as  are  suscepti- 
ble of  having  their  value  lessened  through  wear  and  tear,  use  or  obsolescence. 

The  depreciation  referred  to  in  the  income  tax  law  does  not  relate  to  evidence  of  a 
1 077  right  or  interest  in  property,  and  hence,  any  shrinkage  in  the  value  of  bonds,  stocks 
and  like  securities,  due  to  fluctuations  in  their  market  value,  is  not  deductible 
in  a return  of  income  as  depreciation  or  loss. 

Losses  may  be  sustained  by  individuals  or  corporations  on  personal  or  real  property. 
1 078  * * * Loss  to  be  deductible  must  be  an  absolute  loss,  not  a speculative  or  fluc- 

tuating valuation  of  continuing  investment,  but  must  be  an  actual  loss,  actually 
sustained  and  ascertained  during  the  tax  year  for  which  the  deduction  is  sought  to  be 
made;  it  must  be  incurred  in  trade,  and  be  determined  and  ascertained  upon  an  actual, 
a completed,  a closed  transaction.  (T.  D.  2005,  July  8,  1914.) 

1079  Book  values  which  reflect  a shrinkage  in  the  value  of  assets  are  not  a basis  for 
determining  taxable  income.  (T.  D.  2090,  Dec.  14,  1914.) 

1080  (2)  A loss  is  none  the  less  actual  because  an  individual  can  not  divest  himself  of 
the  possession  of  worthless  stock  by  sale,  but  that  condition  alone  does  not  give 

the  loss  in  question  such  a character  as  appears  to  the  department  to  have  been  contem- 
plated by  the  income-tax  law.  (T.  D.  2135,  Jan.  23,  1915.) 

1081  Loss — Definition. — The  difference  between  “losses  * * ♦ incurred  in  his  busi- 

ness or  trade”  [“if  incurred  in  trade  or  business”]  (4th  deduction  [^[1066])  and  losses 

“in  transactions  entered  into  for  profit  but  not  connected  with  his  business  or  trade” 
[if  incurred  in  any  transaction  entered  into  for  profit,  though  not  connected  with  the 
trade  or  business”]  (5th  deduction  [1[1084]),  is  illustrated  by  the  difference  between  the 
definitions  of  avocation*^:  That  which  takes  one  from  his  regular  calling;  a minor 
occupation;  and  ‘‘vocation’’ : The  occupation  or  pursuit  to  which  one  devotes  his  time  or 
life,  a calling.  It  is  possible  for  a man  to  give  sufficient  time,  attention,  and  capital  to 
the  pursuit  of  different  lines  of  business  to  constitute  more  than  one  avenue  of  “business 
or  trade  or  employment,”  his  business  or  trade. 

Paragraph  4 [^1066]  of  Section  5 (a).  Act  of  September  8,  1916,  provides  for  losses 
1 082  “actually  sustained  during  the  year,  incurred  In  his  business  or  trade,  etc.”,  [“If 
incurred  in  trade  or  business”].  These  would  be  losses  under  the  head  of  vocation. 
Paragraph  5 [1[1084]  of  section  5 (a).  Act  of  September  8,  1916,  provides  for  losses 
1083  actually  sustained  during  the  year  in  transactions  entered  into  for  profit  but  not 


INC. 


112  TAX 


INDIVIDUALS. 


connected  with  his  business  or  trade  [the  trade  or  business];  that  is,  losses  under 
the  head  of  “avocation;”  that  which  takes  one  from  his  regular  calling;  a minor  occupa- 
tion. Losses  under  the  head  of  “avocation”  may  be  deducted  * * ♦ ^ (Art.  8, 

11120-122,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1084  Law  1[127.  Losses  in  Transactions  Entered  into  for  Profit  Outside  of  Business, 
if  not  Compensated  for,  are  Deductible. — “(5)  Losses  sustained  during  the  taxable 

year  and  not  compensated  for  by  insurance  or  otherwise,  if  incurred  in  any  transaction 
entered  into  for  profit,  though  not  connected  with  the  trade  or  business;”  [1[2901.] 

1085  Law  Hi 29.  Property  Losses  Outside  of  Business,  if  not  Compensated  for,  are 
Deductible. — “(6)  Losses  sustained  during  the  taxable  year  of  property  not 

connected  with  the  trade  or  business” 

1086  Law  Hl31.  “if  arising  from  fires,  storms,  shipwreck,  or  other  casualty,  or  from 
theft,  and  if  not  compensated  for  by  insurance  or  otherwise;”  [H2901.] 

Losses  arising  from  fires,  storms,  or  shipwreck,  and  not  compensated  for  by  insur- 

1087  ance  or  otherwise  are  easily  ascertained  and  there  would  not  appear  to  be  any 
chance  of  an  erroneous  construction  as  to  these.  (T.  D.  1989,  June  2,  1914.) 

k'  General  Regulations  on  “Losses.” — [Read  at  H2063  and  at  [H2901.] 
vss 

1088  Law  H132.  Worthless  Debts  are  Deductible. — “(7)  Debts  ascertained  to  be 
worthless  and  charged  off  within  the  taxable  year;” 

Regulations  on  “Worthless  Debts.” — [Read  under  identic  law  provision  at  “Cor- 
porations,” H2090.  Read  also  at  H2906.] 

1089  Law  H133.  Reasonable  Allowance  for  Depreciation  of  Business  Property  is 
Deductible. — “(8)  A reasonable  allowance  for  the  exhaustion  , wear  and  tear  of 

property  used  in  the  trade  or  business,  including  a reasonable  allowance  for  obsolescence;” 
IH2910.] 

1 090  Depreciation  of  Farm  Buildings. — Depreciation  of  farm  buildings,  other  than  a 
dwelling  occupied  by  the  owner,  actually  sustained  wdthin  the  year,  in  excess  of 
repairs  made,  will  be  considered  an  allowable  deduction.  (T.  D.  2090,  Dec.  14,  1914.) 

1091  Depreciation  of  Costumes. — Costumes  purchased  and  used  exclusively  in  the 
production  of  a play  and  which  are  not  adapted  for  occasional  personal  use  and 
are  not  so  used  are  part  of  the  equipment  of  a business,  and  as  such  subject  to  depreciation 
in  value  on  account  of  wear  and  tear  arising  from  their  use  in  the  business,  a reasonable 
allowance  for  such  depreciation  may  be  claimed  in  returns  of  income.  (Art.  8,  Hl24, 
Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 092  Depreciation  of  Good  Will. — Good  will  does  not  represent  a value  attaching  to  physi- 
cal property.  It  is  held  to  be  an  intangible  asset  whose  value,  separate  and  apart 
from  the  business  with  which  it  is  connected,  is  not  capable  of  determination.  For  the 
purpose  of  income  tax  it  is  capable  of  neither  appreciation  nor  depreciation.  An  amount 
claimed  to  represent  its  decline  in  value  is  not  an  allowable  deduction  from  gross  income 
in  computing  the  tax  liability  of  an  individual  or  corporation.  (Art.  8,  Hl23,  Reg.  33, 
Rev.,  Jan.  2,  1918.) 

General  Regulations  on  “Depreciation.” — [Read  under  identic  law  provision  at 
“Corporations,”  H2105.  Read  also  at  H2910.] 

1 093  Law  H134.  A Reasonable  Amount  for  the  Amortization  of  Certain  Assets  (Special 
— Due  to  the  War)  is  Deductible. — “(9)  In  the  case  of  buildings,  machinery, 
equipment,  or  other  facilities,  constructed,  erected,  installed,  or  acquired,  on  or  after 
April  6,  1917,  for  the  production  of  articles  contributing  to  the  prosecution  of  the  present 
war,  and  in  the  case  of  vessels  constructed  or  acquired  on  or  after  such  date  for  the  trans- 
portation of  articles  or  men  contributing  to  the  prosecution  of  the  present  war,  there  shall  be 
allowed  a reasonable  dcduciii^n  for  the  amortization  of  such  part  of  the  cost  of  such  facili- 
ties or  vessels  as  has  been  borne  by  the  taxpayer,  but  not  again  including  any  amount 
otherwise  allowed  under  this  title  or  prev^ious  Acts  of  Congress  as  a deduction  in  computing 
net  income.”  [l!2922.j 

1 094  Law  Hi 35.  A Redetermination  of  the  Amortization  Deduction  May  be  Effected. — 
“At  any  time  within  three  years  after  the  termination  of  the  present  war,  the  Com- 
missioner may,  and  at  the  request  of  the  taxpayer  shall,  reexamine  the  return,  and  if  he  then 

113  TAX 


INC. 


INDIVroUALS. 


finds  as  a result  of  an  appraisal  or  from  other  evidence  that  the  deduction  originally  allowed 
was  incorrect,  the  taxes  Imposed  by  this  title  and  by  Title  III  [war  excess-profits  tax]  for 
the  year  or  years  affected  shall  be  redetermined;  and”  [^2922] 

1095  Law  136.  Adjustment  of  Under-  or  Over-Payment  of  Taxes  Due  to  Redetermina- 
tion of  Amoritzation  Deduction. — “the  amount  of  tax  due  upon  such  redeter- 
mination, if  any,  shall  be  paid  upon  notice  and  demand  by  the  collector,  or  the  amount  of 
tax  overpaid,  if  any,  shall  be  credited  or  refunded  to  the  taxpayer  in  accordance  with 
the  provisions  of  section  252  [^[2488.]”  [^2922] 

1 096  Law  1|137.  A Reasonable  Allowance  for  Depletion  of  Mines,  Oil  and  Gas  Wells, 
Other  Natural  Deposits,  and  Timber,  and  for  Depreciation  of  Improvements  is 
Deductible. — “(10)  In  the  case  of  mines,  oil  and  gas  wells,  other  natural  deposits,  and 
timber,  a reasonable  allowance  for  depletion  and  for  depreciation  of  improvements, 
according  to  the  peculiar  conditions  in  each  case,  based  upon  cost  including  cost  of  develop- 
ment not  otherwise  deducted:”  [^2929] 

1097  Law  ^138.  Basis  in  the  Case  of  Properties  Acquired  Prior  to  March  1,  1913. — 
“Provided,  That  in  the  case  of  such  properties  acquired  prior  to  March  1,  1913, 

the  fair  market  value  of  the  property  (or  the  taxpayer’s  interest  therein)  on  that  date 
shall  be  taken  in  lieu  of  cost  up  to  that  date:” 

1098  Law  11139.  Basis  in  the  Case  of  Mines  or  Wells  Discovered  by  the  Taxpayer 
on  or  After  March  1,  1913. — “Provided  further,  That  in  the  case  of  mines,  oil 

and  gas  wells,  discovered  by  the  taxpayer,  on  or  after  March  1,  1913,  and  not  acquired 
as  the  result  of  purchase  of  a proven  tract  or  lease,  where  the  fair  market  value  of  the 
property  is  materially  disproportionate  to  the  cost,  the  depletion  allowance  shall  be  based 
upon  the  fair  market  value  of  the  property  at  the  date  of  the  discovery,  or  within  thirty 
days  thereafter;” 

1099  Law  11140.  Depletion  and  Depreciation  Allowance  to  be  Made  in  Accordance 
with  Regulations. — “such  reasonable  allowance  in  all  the  above  cases  to  be  made 

under  rules  and  regulations  to  be  prescribed  by  the  Commissioner  with  the  approval 
of  the  Secretary.” 

1 1 00  Law  11141.  Depletion  and  Depreciation  of  Improvements  Allowance  to  be  Appor- 
tioned Between  the  Lessor  and  the  Lessee. — “In  the  case  of  leases  the  deductions 
allowed  by  this  paragraph  shall  be  equitably  apportioned  between  the  lessor  and  lessee;’’ 

1101  Depletion  or  return  of  capital  investment  in  the  case  of  an  individual  owner  or 
lessee  will  be  calculated  in  the  same  manner  as  provided  for  corporate  owners  or 

lessees.  (Art.  8,  1[86,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

Regulations  on  “Depletion  of  Mines,  Wells  and  Timber  Lands.” — [Read  under  identic 
law  provisions  at  “Corporations”  at  1(2167.  Read  at  1(2929.] 

1102  Law  K142.  Certain  Contributions  or  Gifts  Made  by  Individuals  are  Deductible 
to  a Limited  Amount. — “(11)  Contributions  or  gifts  made  within  the  taxable 

year  to  corporations  organized  and  operated  exclusively  for  religious,  charitable,  scientific, 
or  educational  purposes,  or  for  the  prevention  of  cruelty  to  children  or  animals,  no  part 
of  the  net  earnings  of  which  inures  to  the  benefit  of  any  private  stockholder  or  individual, 
or  to  the  special  fund  for  vocational  rehabilitation  authorized  by  section  7 of  the  Voca- 
tional Rehabilitation  Act,  to  an  amount  not  in  excess  of  15  per  centum  of  the  taxpayer’s 
net  income  as  computed  without  the  benefit  of  this  paragraph.  Such  contributions  or 
gifts  shall  be  allowable  as  deductions  only  if  verified  under  rules  and  regulations  pre- 
scribed by  the  Commissioner,  with  the  approval  of  the  Secretary.”  [K2962] 

1 1 03  Contributions  or  gifts,  not  in  excess  of  15  per  cent  of  taxable  net  Income,  made 
within  the  year  to  corporations  or  associations  organized  and  operated  exclusively 
for  religious,  charitable,  scientific,  or  educational  purposes,  or  to  societies  for  the  preven- 
tion of  cruelty  to  children  or  animals,  no  part  of  the  net  income  of  which  inures  to  the 
benefit  of  any  private  stockholder  or  individual. 

1 104  “Taxable  net  income”  [the  taxpayer’s  net  income]  as  used  in  section  5a  [214(a)], 
ninth  [eleventh]  deduction,  is  construed  to  mean  gross  income,  less  deductions  (except 
ninth  [eleventh]  deduction  above)  and  less  excess-profits  tax,  if  any. 

In  connection  with  claim  for  this  deduction  on  returns  of  income  there  shall  be 
1 1 05  stated: 

(a)  The  name  and  address  of  each  organization  to  which  a gift  was  made. 

(b)  The  date  and  amount  of  the  gift  in  each  case. 


INC. 


114  TAX 


INDIVroUALS. 


Where  the  gift  is  other  than  money,  the  basis  for  calculation  of  the  value  of  the 
1106  gift  shall  be  the  fair  market  value  of  the  property  the  subject  of  gift  at  the  time 
of  the  gift.  (Art.  8,  ^87-92,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 107  Receipt  is  acknowledged  of  your  letter  dated  December  5,  1917,  referring  to  con- 
tributions or  gifts  made  by  citizen  and  resident  individuals  of  the  United  States 
to  corporations  or  associations  organized  and  operated  exclusively  for  religious,  charitable 
orscientific  purposes  which  may  be  considered  as  a deduction  for  tax  purposes,  in  accordance 
with  the  provisions  of  the  ninth  paragraph  added  to  Section  5 (a),  Act  of  September  8, 
1916,  by  Section  1201,  Act  of  October  3,  1917. 

1 1 08  You  present  several  inquiries  which  are  repeated  and  answered  in  the  order 
stated  by  you. 

1 109  “Are  gifts  to  foreign  organizations  of  a character  specified  in  the  Law  to  be  also 
deducted?”  Such  contributions  or  gifts  may  be  considered  in  computing  the 
amount  allowable  as  a deduction  under  the  provisions  of  paragraph  nine. 

1110  “Is  the  Red  Cross  to  be  included  as  a charitable  organization?”  It  is  held  that 
the  American  National  Red  Cross  falls  within  the  class  of  associations  enumerated 
in  paragraph  nine. 

1111  “Is  a church  to  be  considered  a religious  institution?  Of  course,  we  known  that 
‘the  Church’  is  a religious  institution,  but  is  any  particular  church  so  considered?” 
It  is  held  that  every  church  constitutes  a religious  corporation  or  association  for 

the  purposes  of  the  deduction  provided  by  the  ninth  paragraph. 

“In  this  connection,  are  donations  made  to  missionary  funds,  to  the  church  build- 

1112  ing  funds  and  for  the  benefit  of  other  activities  of  the  church  to  be  deductible?” 
It  is  held  that  all  such  donations,  being  for  the  benefit  or  furtherance  of  religious 

activities,  constitute  items  which  may  be  considered  in  computing  the  deductions 
provided  by  the  ninth  paragraph.  (Letter  to  The  Corporation  Trust  Company,  signed 
by  Commissioner  Daniel  C.  Roper,  and  dated  December  24,  1917.) 

1113  With  reference  to  the  ninth  paragraph  of  Section  5 of  the  Act  of  September 
8,  1916,  as  am.ended,  how  am  I to  determine  to  what  extent  contributions  or  rifts 

made  to  corporations  or  associations,  organized  exclusively  for  religious,  charitable, 
scientific  or  educational  purposes,  societies  for  the  Prevention  of  Cruelty  to  Children  or 
Animals,  miay  be  claimed  as  a deduction? 

You  should  first  ascertain  what  your  taxable  net  income  would  be  were  you  not 

1114  entitled  to  a deduction  on  account  of  contributions  or  gifts  made  to  such  corpora- 
tions, associations  or  societies,  and  then  if  the  aggregate  of  your  contributions 

and  gifts  made  during  the  year  to  such  organizations  does  not  exceed  15  per  cent  of 
your  taxable  net  income  so  computed,  their  aggregate  amount  may  be  entered  in  the 
space  provided  therefor  under  General  Deductions  on  a personal  return  form.  Is  such 
aggregate  am.ount  exceeds  15  per  cent  of  your  taxable  net  income  so  computed,  the  excess 
cannot  be  claim.cd. 

For  example:  Your  total  taxable  net  Income  amounts  to  $20,000.  Durinjr  the 

1116  year  you  have  contributed  to  the  National  Red  Cross  $1,000,  to  the  li’ouiig  IMen’s 
Christian  Association  $1,000,  toward  the  construction  of  a new  church  $1,000, 

and  to  the  Associated  Charities  of  your  home  city  $500,  a total  of  $3,500.  Fifteen  per 
cent  of  your  total  net  income  amounts  to  $3,000,  therefore,  this  latter  amount  may  be 
claimed  as  a deduction,  and  the  balance  of  your  contributions  and  gifts  may  not  be 
claimed. 

1 1 1 6 During  1917  I contributed  $100  toward  the  support  of  a needy  family.  May 
this  contribution  be  claimed  as  a deduction?  (Answer.)  Contributions  of  gifts 
made  to  individuals  do  not  constitute  allowable  deductions.  (Questions  86  and  87,  1918 
Income  Tax  Primer.) 

1117  Dividends  of  Prior  Years  Received  in  Taxable  Year  may  be  Added  to  Amount 
in  Line  M on  Form  1040  to  Determine  Amount  on  Which  to  Compute  Allowable 

Contributions  of  15%. — Client  has  $25,000  income  line  M,  Form  1040  [total  net  Income 
(without  deducting  contributions)];  also  received  $10,000  block  F column  5 [dividends 
taxable  at  rates  of  prior  years].  Can  he  deduct  $5,250  as  contributions  to  charitable 
organizations?  (Answer.)  Under  circumstances  stated  clients  may  deduct  contributions 
allowable  as  such  not  to  exceed  $5,250.  (Telegram  of  inquiry  from  A.  Iselin  & Co.,  New 
York,  N.  Y.,  and  the  telegraphic  reply  thereto  signed  by  Commissioner  Daniel  C.  Roper, 
and  dated  February  27,  1918.) 

1 1 1 8 Red  Cross  Donations  by  Corporations. — Are  such  contributions  deductible  by 
corporation  on  its  tax  returns?  (Answer.)  Red  Cross  contributions  not  deduc- 
tible by  corporations.  (Part  of  telegram  of  inquiry  from  Loomis,  Suffern  and  Fernald, 
New  York,  N.  Y.,  and  the  answer  thereto  signed  by  Commissioner  Daniel  C.  Roper,  and 
dated  May  23,  1918.) 


INC. 


115  TAX 


INDIVroUALS. 


1119  Law  If  144.  Adjustment  for  Substantial  Losses  Sustained  in  the  Taxable  Year 
1919  Because  of  Material  Reduction  of  Inventory  Values  for  1918,  or  Because 
of  Certain  Rebate  Payments. — “(12)  (a)  At  the  time  of  filing  return  for  the  taxable 

year  1918  a taxpayer  may  file  a claim  in  abatement  based  on  the  fact  that  he  has  sustained 
a substantial  loss  (whether  or  not  actually  realized  by  sale  or  other  disposition)  resulting 
from  any  material  reduction  (not  due  to  temporary  fluctuation)  of  the  value  of  the  inventory 
for  such  taxable  year, 

1 120  Law  11145.  “or  from  the  actual  payment  after  the  close  of  such  taxable  year  of 
rebates  in  pursuance  of  contracts  entered  into  during  such  year  upon  sales  made 
during  such  year. 

1121  Law  If  146.  “In  such  case  payment  of  the  amount  of  the  tax  covered  by  such  claim 
shall  not  be  required  until  the  claim  is  decided,  but  the  taxpayer  shall  accompany 
his  claim  with  a bond  in  double  the  amount  of  the  tax  covered  by  the  claim,  with  sureties 
satisfactory  to  the  Commissioner,  conditioned  for  the  payment  of  any  part  of  such  tax 
found  to  be  due,  with  interest.  If  any  part  of  such  claim  is  disallowed  then  the  remainder 
of  the  tax  due  shall  on  notice  and  demand  by  the  collector  be  paid  by  the  taxpayer  with 
interest  at  the  rate  of  1 per  centum  per  month  from  the  time  the  tax  would  have  been 
due  had  no  such  claim  been  filed. 

1 1 22  Law  ^147.  “If  it  is  shown  to  the  satisfaction  of  the  Commissioner  that  such  sub- 
stantial loss  has  been  sustained,  then  in  computing  the  tax  imposed  by  this  title 
the  amount  of  such  loss  shall  be  deducted  from  the  net  income. 

1 1 23  Law  ^148.  “(b)  If  no  such  claim  is  filed,  but  it  is  shown  to  the  satisfaction  of  the 

Commissioner  that  during  the  taxable  year  1919  the  taxpayer  has  sustained  a 
substantial  loss  of  the  character  above  described  then  the  amount  of  such  loss  shall  be 
deducted  from  the  net  income  for  the  taxable  year  1918  and  the  tax  imposed  by  this  title 
for  such  year  shall  be  redeterm.ined  accordingly.  Any  amount  found  to  be  due  to  the  tax- 
payer upon  the  basis  of  such  redetermination  shall  be  credited  or  refunded  to  the  taxpayer 
in  accordance  with  the  provisions  of  section  252  [^2488].” 

[In  relation  to  the  above  read  at  ^2963.] 

1124  Law  ^156.  Credits  Allowed. — For  Normal  Tax  Only. — “Sec.  216.  That  for  the 
purpose  of  the  normal  tax  only  there  shall  be  allowed  the  following  credits:” 

1125  Law  11157.  Dividends  as  Credit  for  Normal  Tax  Only. — “(a)  The  amount  received 
as  dividends  from  a corporation  which  is  taxable  under  this  title  upon  its  net  income, 

and  amounts  received  as  dividends  from  a personal  service  corporation  out  of  earnings 
or  profits  upon  which  income  tax  has  been  imposed  by  Act  of  Congress;” 

1 1 26  (a)  For  the  purpose  of  the  normal  tax  only,  the  income  embraced  in  a personal 
return  shall  be  credited  with  the  amount  received  as  dividends  upon  the  stock  or 
from  the  net  earnings  of  any  corporation,  joint-stock  company  or  association,  trustee,  or 
insurance  company,  which  is  taxable  upon  its  net  income.  (Art.  9,  1[126,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

1127  Law  1[158.  All  Interest  on  Government  and  War  Finance  Corporation  Bonds 
which  has  been  Included  as  Gross  Income  is  Credited  for  Normal  Tax  Purposes. — 

“(b)  The  amount  received  as  interest  upon  obligations  of  the  United  States  and  bonds 
issued  bv  the  War  Finance  Corporation,  which  Is  included  in  gross  income  under  section 
213  [11975];” 

1128  Law  If  159.  A Specific  Exemption  of  Income  is  Allowed  for  Normal  Tax  Purposes. 
— Single  Persons. — “(c)  In  the  case  of  a sinde  person,  a personal  exemption 

of  ^1,000,  or”  [112970] 

1129  Law  1[160.  Married  Persons  Living  Together  and  Heads  of  Families.— “In  the 
case  of  the  head  of  a family  or  a married  person  living  with  husband  or  wife,  a 

personal  exemption  of  $2,000.”  [1f2969] 

1 130  Head  of  a Family. — A head  of  a family  is  a person  who  actually  supports  and 
maintains  one  or  more  individuals  who  are  closely  connected  with  him  by  blood 
relationship,  relationship  by  marriage,  or  by  adoption,  and  whose  right  to  exercise  family 
control  and  provide  for  these  dependent  individuals  is  based  upon  some  moral  or  legal 
obligation.  (Art.  14,  ^153,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 131  A head  of  a family  Is  a person  who  actually  supports  and  maintains  one  or  more  of 
the  individuals  described  in  Paragraph  153  of  the  regulations  in  one  household.  In 
the  absence  of  continuous  actual  residence  together,  whether  or  not  a person  with  depend- 
ents Is  a head  of  a family  within  the  meaning  of  the  statute  must  depend  on  the  character 
of  the  separation.  If  a child,  or  other  dependent  is  away  only  temporarily  at  school  or 
on  a visit,  the  common  home  being  still  maintained,  the  additional  exemption  applies. 
If,  however,  the  dependent  continuously  makes  his  home  elsewhere  his  benefactor  is  not 
the  head  of  a family,  irrespective  of  the  question  of  support.  (T.  D.  2692,  April  8,  1918.) 

116  TAX 


INC. 


INDIVIDUALS. 


1 1 32  “Living  with  Husband  or  Wife.” — In  the  case  of  a married  man  or  married  woman 
the  joint  exemption  replaces  the  individual  exemptions  only  if  his  wife  lives  with 
him  or  her  husband  lives  with  her.  In  the  absence  of  continuous  actual  residence 
together,  whether  or  not  a man  or  woman  has  a wife  or  husband  living  with  him  or  her 
within  the  meaning  of  the  statute  must  depend  on  the  character  of  the  separation.  If 
merely  occasionally  and  temporarily  a wife  is  away  on  a visit  or  a husband  Js  away  on 
business,  the  joint  home  being  maintained,  the  additional  exemption  applies.  The 
unavoidable  absence  of  a wufe  or  a husband  at  a sanitarium  or  asylum  on  account  of 
illness  does  not  preclude  claiming  the  exemption.  If,  however,  the  husband  voluntarily 
and  continuously  m.akes  his  home  at  one  place  and  the  wife  hers  at  another,  they  are  not 
living  together  for  the  purpose  of  the  statute,  irrespective  of  their  personal  relations. 

Resident  aliens  claiming  exemption  because  of  families  or  wuves  residing  abroad 
1 133  are  not  heads  of  families  or  married  men  or  women  wuth  wives  or  husbands  living 
with  them  within  the  meaning  of  the  statute,  and  they  are  in  no  case  entitled 
to  m.ore  than  their  individual  exemptions  of  $3,000  under  the  earlier  Act  and  $1,000 
under  the  later  act  [$1,000  only,  now].  (T.  D.  2692,  April  8,  1918.) 

1 134  Law  TI161.  One  $2,000  Specific  Exemption  Only. — “A  husband  and  wife  living 
together  shall  receive  but  one  personal  exemption  of  $2,000  against  their  aggre- 
gate net_income;” 

1 135  Husband  and  wife  living  together  are  entitled  to  an  exemption  of  $4,000  [$2,000] 
only  from  the  aggregate  net  income  of  both  which  may  be  deducted  in  making 
the  return  of  such  income  for  taxation.  (Art.  10,  Reg.  33,  Jan.  5,  1914.) 

1 136  Law  ^162.  $2,000  Specific  Exemption  May  Be  Prorated  Between  Husband  and 

Wife. — “and  in  case  they  make  separate  returns,  the  personal  exemption  of  $2,000 
may  be  taken  by  either  or  divided  between  them;” 

1137  The  exemption  allowed  husband  and  wufe  living  together  may  be  taken  by  one  or 
divided  betw'een  them,  in  such  ratio  as  they  may  determine.  (Art.  26,  1[170,  Reg.  33, 
Rev.,  Jan.  2,  1918.) 

1 138  Law  ^163.  Additional  $200  Specific  Exemption  for  Each  Dependent. — “(d)  $200 
for  each  person  (other  than  husband  or  wufe)  dependent  upon  and  receiving  his 
chief  support  from  the  taxpayer,  if  such  dependent  person  is  under  eighteen  years  of  age 
or  is  incapable  of  self-support  because  m.entally  or  physically  defective.”  [^2971] 

1139  Relation  of  Specific  Exemption  to  the  Surtax. — Personal  exemptions  from  tax 
are  granted  in  respect  of  the  normal  income  tax  only.  Where  the  total  of  allow- 
able exemptions  and  credits  exceeds  the  amount  of  net  income,  the  excess  of  such  exemp- 
tions may  not  be  availed  of  as  against  the  additional  tax.  (Art.  14,  11154,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

1 140  Husband  or  Wife  Dying  During  Taxable  Year. — Where  a husband  or  wife  having 
a taxable  income  dies  w’ithin  a calendar  year,  and  the  full  exemption  for  the  calen- 
dar year  is  used  by  the  personal  representative  in  making  return  for  the  deceased,  if  the 
survivor  is  also  required  to  make  a return  at  the  close  of  the  calendar  year  for  Income 
received  within  that  calendar  year  the  full  personal  exemption,  according  to  the  marital 
status  of  the  survivor  at  the  close  of  the  calendar  year,  may  be  claimed  In  a return  of 
income.  [Modified  by  the  instructions  on  Form  1040A — for  calendar  year  1918.  (Page 
1 of  Instructions — VI.)]  (Art.  14,  1[156,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1141  Marital  Status  at  Time  of  Making  Claim  and  at  End  of  Taxable  Year  Governs. — 
d'he  single  or  married  status  of  the  person  claiming  the  specific  exemption  shall 
be  determined  as  of  the  time  of  claiming  such  exemption  in  such  claim  he  made  within 
the  year  for  w'hich  return  is  made,  otherwise  the  status  at  the  close  of  the  year.  [Modified 
by  the  instructions  on  Form  1040A — for  calendar  year  1918.  (Page  1 of  Instructions  — 
VI.)]  (Art.  10,  Reg.  33,  Jan.  5,  1914.)  . 

1 142  Law  1[233.  Returns  by  Individuals. — “Sec.  223.  That  every  individual  having  a 
net  income  for  the  taxable  year  of  $1,000  or  over  if  single  or  if  married  and  not 
living  wdth  husband  or  wife,” 

1 143  Law'  1[234.  “or  of  $2,000  or  over  If  married  and  living  with  husband  )r  wife,” 

1 144  Law  1[235.  “sh''.ll  make  under  oath  [*[1451]  a return  stating  specifically  the  items 
of  his  gross  income  and  the  deductions  and  credits  allowed  by  this  title.” 

[For  “Returns  by  Individuals”  in  Reg.  No.  45,  see  1[3013.] 

INC.  TAX 


INDIVIDUALS. 


1145  Returns  are  required  of  all  unmarried  persons  ♦ * ♦ having  a net  income 

of  $1,000  or  over. 

And  all  married  persons  having  a net  income  of  $2,000  or  over. 

Heads  of  families  who  are  married  will  be  required  to  make  returns  of  income  when 
having  a net  income  of  $2,000  or  over. 

Heads  of  families  who  are  unmarried  will  be  required  to  make  returns  of  income  when 
having  a net  income  of  $1,000  or  over,  though  the  basic  exemption  which  may  be 
claimed  in  a return  of  income  will  be  $2,000.  (Art.  25,  If  169,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 146  Forms  for  Making  Returns. — Forms  of  returns  are  provided  by  the  Commissioner 
of  Internal  Revenue,  and  are  to  be  had  from  the  collectors  of  internal  revenue  of 
the  several  collection  districts.  (Art.  23,  1fl66,  Reg.  33,  Rev.,  Jan.  2,  1918.)  [See  list 
of  forms  at  back  of  book.] 

1147  Manner  of  Reporting  Tax-Free  Covenant  Bond  Interest  in  Block  G and  Rent 
Payments  in  Block  D on  Form  1040. — Reference  is  made  to  your  letter  dated 
February  15,  1918,  in  regard  to  the  execution  of  income  tax  return  Form  1040.  You 
inquire  if  a taxpayer  in  filling  in  Block  G,  interest  on  “tax-free”  covenant  bonds,  is 
required  to  itemize  the  payments  or  only  show  the  total  amount  of  interest  received  dur- 
ing the  calendar  year.  Ifin  reply,  you  are  advised  that  it  is  not  necessary  to  enter  in 
Block  G the  separate  payments  of  interest  on  “tax-free”  covenant  bonds,  but  the  total 
amount  of  interest  received  during  the  calendar  year  from  each  debtor  corporation  should 
be  shown. 

You  also  inquire  if  the  name  and  address  of  each  tenant  must  be  listed  separately 
1 148  under  Block  D,  income  from  rents  and  royalties,  and  you  state  that  in  the  case 
where  a large  office  building  is  owned  by  a taxpayer  it  would  be  difficult  for  him 

to  furnish  the  names  and  addresses  of  all  the  tenants  and  It  would  also  be  difficult  to 

apportion  repairs  and  property  losses.  ^In  reply  to  this  inquiry,  you  are  advised  that 
in  cases  where  a large  office  building  is  owned  by  an  individual,  the  amount  received  from 
each  tenant  should  be  reported  separately  under  Block  D in  cases  where  the  amount  of 
rent  received  from  the  tenant  equals  $800  [$1,000]  or  more,  but  only  the  total  amount  of 
income  received  from  the  tenants  paying  rental  less  than  $800  [$1,000]  Is  required  to  be 
shown.  It  will  not  be  necessary  to  apportion  the  repairs  and  property  losses  with  respect 
to  each  tenant  in  the  building,  but  the  total  thereof  must  be  shown.  (Letter  to  The  Corpo- 
ration Trust  Company,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  March  22, 
1918.) 

1 1 49  Manner  of  Reporting  Profits  and  Losses  in  Block  C on  Form  1040. — Reference 

is  made  to  your  letter  of  February  7,  1918,  in  which  you  state  that  the  Collector’s 

office.  Third  Massachusetts  District,  is  requiring  individuals  who  fill  out  income  tax 
returns,  P'orms  1040,  to  submit  a list  of  all  securities,  together  with  the  information  called 
for  in  C,  on  page  3,  and  you  ask  if  it  is  necessary  to  submit  a list  detailing  each  sale.  ^In 
reply  you  are  advised  that  if  the  profits  or  losses  on  sales  made  through  any  one  broker 
aggregated  [$1,000]  or  more,  you  should  report  the  transactions  on  a separate  line  with 
the  name  and  address  of  the  broker.  The  total  of  other  transactions  should  be  reported, 
but  It  is  not  necessary  to  give  details.  If,  however,  this  office  should  ask  for  further 
information  the  taxpayer  should  be  able  to  furnish  all  the  details  requested.  (Letter  to 
Lee,  HIgginson  & Compan)^  Boston,  Mass.,  signed  by  Deputy  Commssioner  L.  F.  Speer, 
and  dated  March  25,  1918.) 

1 150  Law  ^236.  Joint  or  Separate  Returns  of  Husband  and  Wife. — “If  a husband  and 
wife  living  together  have  an  aggregate  net  income  of  $2,000  or  over,  each  shall 
make  such  a return  unless  the  income  of  each  Is  included  in  a single  joint  return.” 

1151  H the  husband  and  wife  not  living  apart  have  separate  estates,  the  income  from 
both  may  be  made  on  one  return,  but  the  amount  of  Income  of  each,  and  the  full 
name  and  address  of  both,  must  be  shown  in  such  return. 

The  husband,  as  the  head  and  legal  representative  of  the  household  and  general 
1 1 62  custodian  of  its  income,  should  make  and  render  the  return  of  the  aggregate  income 
of  himself  and  wife,  and  for  the  purpose  of  levying  the  income  tax  it  is  assumed 
that  he  can  ascertain  the  total  amount  of  said  income. 

If  a wife  has  a separate  estate  managed  by  herself  as  her  own  separate  property 
1 1 53  ♦ * ♦ , she  may  make  return  of  her  own  income  and  if  the  husband  has  other 

* * * income,  making  the  aggregate  of  both  incomes  more  than  $4,000  [$2,000] 

the  wife’s  return  should  be  attached  to  the  return  of  her  husband,  or  his  income  should  be 
included  in'her  return  in  order  that  a deduction  of  $4,000  [$2,000]  may  be  made  from  the 
aggregate  of  both  Incomes.  The  tax  in  such  case,  however,  will  be  imposed  only  upon 
so  much  of  the  aggregate  income  of  both  as  shall  exceed  $1,000  [$2,000]. 


INC. 


118  TAX 


INDIVIDUALS. 


If  either  husband  or  wife,  separately  has  an  income  equal  to  or  in  excess  of  $3,000, 
1 1 54  [$2,000]  a return  of  annual  net  income  is  required  under  the  law,  and  such  return 
must  include  the  income  of  both,  ¥ * * ^ 

1 155  If  the  aggregate  net  income  of  both  exceeds  $4,000  [$2,000]  an  annual  return  of 
their  combined  incomes  must  be  made  in  the  manner  stated,  * * * ^ They  are 

jointly,  and  separately  liable  for  such  return  and  for  the  payment  of  the  tax.  Art.  10, 
Reg.  33,  Jan.  5,  1914.) 

1 156  Wife’s  Income. — Unless  the  wife  has  a separate  estate  which  requires  her  to  file 
a separate  return  of  income,  or  to  join  with  her  husband  in  a return  which  shall 
set  forth  her  income  separately,  her  husband  should  include  in  his  return  the  income 
accruing  to  the  wife  from  services  rendered  by  her,  or  the  sale  of  product  of  her  labor. 
The  actual  proceeds  coming  into  the  wife’s  possession  during  the  tax  year  constitute  the 
income  to  be  included,  and  not  the  amount  estimated  upon  acceptance  prior  to  payment 
for  articles  sold.  (Art.  26,  1[183,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 1 57  Husband  and  Wife  Filing  Separate. — Where  husband  and  wife  file  separate 
returns  of  income,  one  of  them  being  filed  in  time  and  the  other  delinquent,  such 
returns  are  not  supplemental  of  each  other  and  delinquency  must  be  answered 
for  by  the  one  in  connection  with  whose  return  it  occurred.  (Art.  25,  ^182,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

General  Law  Provisions  and  Applicable  Regulations  Relative  to  Returns. — [Read 
beginning  at  ^1434.] 


1158  Law  1[237.  Duly  Authorized  Agent  May  Make  Return. — “If  the  taxpayer  is  unable 
to  make  his  own  return,  the  return  shall  be  made  by  a duly  authorized  agent  or 
by  the  guardian  or  other  person  charged  with  the  care  of  the  person  or  property  of  such 
taxpayer.”  [^3013.] 

1 1 59  The  return  may  be  made  an  agent  when  by  reason  of  illness,  absence,  or  nonresidence 
the  person  liable  for  said  return  is  unable  to  make  and  render  the  same,  the  agent 
assuming  the  responsibility  of  making  the  return  and  incurring  penalties  provided 
for  erroneous,  false,  or  fraudulent  return.  (Art.  22,  1[165,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 1 60  Fiduciaries  acting  for  minors  or  other  incompetents  will  be  required  to  make 
returns  of  income  according  to  the  marital  status  of  the  beneficiaries,  * * * ^ 

This  return  will  be  on  Form  1040  or  1040  A.  (Art.  27,  If  185,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

A fiduciary  acting  for  a minor  or  insane  person  having  a net  income  of  $1,000  or 
1161  $2,000,  according  to  the  marital  status  of  such  person,  will  be  required  to  file  a 
return  for  such  incompetent  on  Form  1040  and  1040A  and  pay  the  tax  found  by  such 
return  to  be  due,  in  addition  to  the  requirement  in  the  preceding  paragraph  [^1201] 
when  there  is  more  than  one  beneficiary  of  the  income  of  the  same  trust.  (Art.  29,  ^[205, 
Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 1 62  When  by  reason  of  * * * * insanity,  absence,  sickness,  or  other  disability 

the  individual  is  unable  to  make  his  own  .return,  the  same  shall  be  made  by  his 
guardian  or  duly  authorized  agent.  (Art.  17,  Reg.  33,  Jan.  5,  1914.) 

1 163  A committee  of  the  property  of  an  incompetent  person  is  held  to  be  a fiduciary 
for  the  purpose  of  income  tax  and  required  to  make  a return  on  Form  1040, 
revised,  for  the  incompetent  whenever  the  amount  of  income  is  sufficient  to  require  a 
return.  (Art.  29,  1f203,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 1 64  Fiduciaries  acting  for  minors  or  incompetent  persons  are  permitted  to  take  the 
personal  exemption  as  to  income  derived  from  property  of  which  they  have  charge 
in  favor  of  each  ward  or  beneficiary.  (Art.  14,  If  151,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 1 65  In  all  cases  where  fiduciaries  act  for  minors  or  other  incompetents  they  are  held, 
for  the  purpose  of  the  income  tax,  to  be  acting  as  the  agents  of  such  minors  or  other 
incompetents  and  must  pay  all  tax  (normal  and  additional)  chargeable  on  such  income 
in  their  hands  as  though  the  persons  for  whom  they  act  were  acting  for  themselves.  (T.  D. 
2231,  July  26,  1915.) 

1 1 66  When  the  required  return  has  not  been  made  by  a person  acting  as  guardian, 
agent  of  a nonresident  alien,  or  by  one  acting  in  any  other  capacity  in  which  the 


INC. 


119  TAX 


FIDUCIARIES. 


law  makes  it  a duty  for  him  to  represent  the  individual,  notice  of  failure  to  make  such 
return  will  be  served  upon  such  guardian  or  agent. 

The  person  upon  whom  such  notice  is  served  may,  however,  when  the  facts  war- 

1167  rant,  file  evidence  with  the  collector  showing  that  the  individual  for  whom  he  acts 
did  not  receive  an  income  subject  to  tax  during  the  year,  or  that  the  said  guardian 

or  agent  has  filed  the  return  with  some  other  collector.  (Art.  18,  Reg,  33,  Jan.  5,  1914.) 

1168  Law  %239.  Fiduciary  Returns  For,  or  as  For,  an  Individual. — “Sec.  225.  “That 
every  fiduciary  (except  receivers  appointed  by  authority  of  law  in  possession  of 

part  only  of  the  property  of  an  individual  [see  ^1433])  [shall  make  a return,  ^1175] — ” 
[Read  at  113019.] 

1169Law1[21.  The  Term  “Fiduciary”  Defined. — “The  term  ‘fiduciary’  means  a 
guardian,  trustee,  executor,  administrator,  receiver,  conservator,  or  any  person 
acting  in  any  fiduciary  capacity  for  any  person,  trust  or  estate;”  [1[3081.] 

1170  “Fiduciary”  is  a term  which  applies  to  all  persons  or  corporations  that  occupy 
positions  of  peculiar  confidence  toward  others,  such  as  trustees,  executors,  or 

administrators;  and  the  fiduciary  for  income-tax  purposes  is  any  person  or  cor- 
poration that  holds  in  trust  an  estate  of  another  person  or  persons. 

There  may  be  a fiduciary  relationship  between  an  agent  and  a principal,  but  the 

1171  word  “agent”  does  not  denote  a “fiduciary”  within  the  meaning  of  the  income- 

tax  law.  (Art.  29,  11189-190,  Reg.  33,  Rev.,  Jan.  2,  1918.)  [113082.] 

1172  Power  of  Attorney. — A fiduciary  relationship  for  the  purposes  of  the  income  tax 
can  not  be  created  by  a power  of  attorney.  An  agent  having  entire  charge  of 

property  with  authority  to  effect  and  execute  leases  with  tenants  entirely  on  his  own 
responsibility  and  without  consulting  his  principal,  paying  taxes  and  expenses  and  all 
other  charges  in  connection  with  the  property  out  of  funds  in  his  hands  from  collection 
of  rents,  merely  turning  over  the  net  profits  from  the  property  periodically  to  his  prin- 
cipal by  virtue  of  authority  conferred  upon  him  by  a power  of  attorney,  is  not  a fiduciary 
within  the  meaning  of  the  income-tax  law.  In  all  cases  where  no  legal  trust  has  been 
created  in  the  estate  controlled  by  the  agent  and  attorney  the  liability  under  the  law 
rests  with  the  principal.  (Art.  29,  1[191,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

11  73  Agents. — Agents  not  acting  in  a fiduciary  capacity  have  no  responsibility  with 
reference  to  withholding  the  tax  on,  or  m.aking  a return  of  income  turned  over  to 
resident  aliens  or  citizens  of  the  United  States;  * * ♦ , [Por  return  by  agent  as 

attorney-in-fact  see  If  1158.]  (T.  D.  2090,  Dec.  14,  1914.) 

1 1 74  A person  can  not,  by  a power  of  attorney,  delegate  to  another  a duty  which  he 
himself  could  not  perform,  * * * a person  holding  a power  of  attorney  from 

another  is  without  authority  to  file  [a]  certificate  as  a fiduciary.  ^ However,  for  income- 
tax  purposes  he  is  authorized  to  file  any  certificate  which  his  principal,  as  such,  would 
be  entitled  to  file.  (T.  D.  2090,  Dec.  14,  1914.) 

1 1 75  Law  1[240.  Every  Fiduciary  to  Make  Return. — “[Every  fiduciary]  shall  make 
under  oath  [If  1451]  a return  for  the  individual,  estate  or  trust  for  which  he  acts.” 

1 1 76  Law  1f245.  Fiduciary  to  Make  Return  Under  Oath  as  to  Correctness. — “The 
fiduciary  shall  make  oath  that  he  has  sufficient  knowledge  of  the  affairs  of  such 
individual,  estate  or  trust  to  enable  him  to  make  the  return,  and  the  same  is,  to  the  best 
of  his  knowledge  and  belief,  true  and  correct.” 

1177  And  the  said  return  shall  be  signed  and  sworn  to  by  the  fiduciary,  if  an  individual, 
making  same,  and  his  full  address  must  be  stated.  ^ If  the  fiduciary  is  an  organiza- 
tion, the  return  shall  be  signed  and  sworn  to  by  the  president,  secretary,  or  treasurer  of 
said  organization.  (Art.  73,  Reg.  33,  Jan.  5,  1914.) 

1 178  Notice  of  failure  to  file  a return  as  required  shall  be  served  upon  the  fiduciary. 
(T.  D.  2231,  July  26,  1915.) 

1179  Law  If  185.  Responsibility  for  Making  Return  Rests  with  Fiduciary. — “(b)  The 
fiduciary  shall  be  responsible  for  making  the  return  of  income  for  the  estate  or 

trust  for  which  he  acts.”  [1f2991] 

General  Law  Provisions  and  Applicable  Regulations  Relative  to  Returns. — [Read 
beginning  at  1[1434.] 

1180  Income  Accruing  Prior  to  Death  to  Decedent  Dying  During  His  Taxable  Year. — 
If  the  net  income  of  a decedent  from  January  1 to  jhe  date  of  his  death  within 

that  year  as  $1,000  or  over,  if  unmarried,  or  $2,000  or  over  if  married,  a return  for  such 

INC.  120  TAX 


FIDUCIARIES. 


decedent  must  be  made  by  the  executor  or  administrator,  and  such  executor  or  adminis- 
trator may  claim  all  deductions  and  exemptions  to  which  the  decedent  would  have  been 
entitled  under  the  law.  (Art.  4,  *[[23,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1181  Where  a person  having  a taxable  income  dies  within  the  calendar  year  his  per- 
sonal representative  in  making  return  for  him  will  be  entitled  to  claim  full  ex- 
emption granted  by  the  statutes  for  the  calendar  year.  (Art.  14,  ^152,  Reg.  33,  Rev.,  Jan. 
2,  1918.) 

1 1 82  Liability  for  the  tax  due  from  a deceased  person,  or  from  his  estate,  also  attaches 
to  the  estate  itself,  and  when  by  reason  of  distribution  of  the  estate  and  discharge 
of  the  executor  or  administrator  it  shall  appear  that  collection  of  the  tax  can  not  be  made 
from  the  executor  or  administrator,  the  collector  will^make  demand  on  the  distributees 
for  their  proportionate  share  of  the  tax  due  and  unpaid.  (Art.  29,  1[198,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

1183  Appraised  Value  of  Property  at  Time  of  Death  of  Owner,  if  Subsequent  to  March 
1,  1913,  the  Basis  for  Determining  Gain  or  Loss  on  Subsequent  Disposition. — 

Your  Mimeograph  Letter  to  Collectors,  dated  August  14,  1914,  states  no  apprecia- 
tion in  value  of  assets  due  to  appraisal  or  adjustment  is  taxable  income  until  such  apprecia- 
tion has  been  converted  into  cash.  T.  D.  2090  [1[931]  states  if  property  acquired  by  gift 
is  sold  at  price  greater  than  appraised  value  at  time  property  acquired  by  gift,  such  gain 
is  taxable  income.  We  assume  from  these  rulings  and  request  your  confirmation  by  wire, 
collect,  that  when  individual  dies  after  March  1,  1913,  leaving  property,  all  gains  or  losses 
on  subsequent  sales  thereof  should  be  computed  from  value  at  date  of  death,  not  date 
of  his  acquisition,  and  that  executor  should  make  no  return  of  book  gains  or  losses  up  to 
date  of  death.  Also  that  on  transfer  of  property  in  question  by  his  executor  to  legatee 
or  to  trustee  under  will  or  from  one  trustee  to  succeeding  trustee  no  tax  is  due  though 
there  be  book  gain  at  date  of  such  transfer.  (Telegram  to  the  Commissioner  of  Internal 
Revenue  from  Ropes,  Gray,  Boyden  and  Perkins  of  Boston,  dated  January  31,  1917.) 
{Answer.)  When  individual  dies  after  March  1,  1913,  leaving  property,  all  gains 

or  losses  on  subsequent  sales  should  be  computed  on  basis  of  appraised  value  at 
date  of  death  and  executors  should  not  make  return  of  book  gains  or  losses  either 
up  to  date  of  death  or  on  transfer  of  property  to  legatee  or  to  trustee  under  will  or  from 
one  trustee  to  succeeding  trustee,  the  appraised  value  at  date  of  death  remaining  as  basis 
for  all  subsequent  realization  of  losses  or  gains  in  cash.  (Telegram  to  Ropes,  Gray, 
Boyden  and  Perkins,  Boston,  Mass.,  signed  by  Commissioner  W.  H.  Osborn,  and  dated 
February  3,  1917.)  [Read  1[935.] 

1184  Taxability  of  Income  Accrued  to  Decedent  Dying  after  March  1,  1913,  but  Befo  , 
October  3,  1913.— The  appended  decision  [Feb.  8,  1917]  of  the  Circuit  Court 

Appeals,  Second  Circuit,  in  the  case  of  Nicholas  F.  Brady,  et  al.  v.  Charles  W.  Anderso^> 
collector  of  internal  revenue,  is  published  for  the  information  of  internal-revenue  officers 
and  others  concerned.  The  United  States  Supreme  Court  on  May  21,  1917,  refused  to 
grant  a writ  of  certiorari  in  this  case.  (T.  D.  2494,  June  2,  1917.) 

United  States  Circuit  Court  of  Appeals,  for  the  Second  Circuit. 

(240  Fed.  665) 

WARD,  Circuit  Judge: 

This  is  an  action  against  the  Collector  of  Internal  Revenue  by  the  executors  of 
1 1 85  Anthony  N.  Brady,  deceased,  to  recover  taxes  assessed  by  the  Commissioner  of 
Internal  Revenue  and  paid  by  them  under  protest  upon  Income  received  by  Brady 
during  his  lifetime  before  the  income  tax  act  of  October  3,  1913,  imposing  a tax,  had  been 
passed. 

The  Sixteenth  Amendment,  by  virtue  of  which  the  statute  was  enacted,  was  ratified 
1 186  February  28,  1913,  and  the  Supreme  Court  has  for  that  reason  held  that  Congress 
had  power  to  make  it  retroactive  to  March  1,  1913.  Brushaber  v.  Union  Pacific 
R.  R.  Co.,  240  U.  S.  1,  20  [112685]. 

Anthony  N.  Brady  died  July  22,  1913,  and  his  executors,  in  accordance  with  the 
1187  requirement  of  the  Commissioner  of  Internal  Revenue,  made  a return  of  the  income 
received  by  him  between  March  1,  when  the  act  went  into  effect,  and  July  22, 
1913,  when  he  died.  The  Commissioner  assessed  a tax  of  $61,654.72. 

The  case  having  come  on  for  trial  before  Grubb,  J.,  and  each  side  having  moved 
1 1 88  for  the  direction  of  a verdict,  he  directed  a verdict  for  the  defendant.  This  Is  a 
writ  of  errof  to  the  judgment  entered  thereon. 

The  questions  presented  are  purely  of  law,  involving  only  the  construction  of 
1 1 89  the  statute.  We  confine  ourselves  to  the  consideration  of  the  provisions  relating 
to  citizens  and  residents  of  the  United  States. 


INC. 


121  TAX 


FIDUCIARIES. 


1 1 90  Section  II  of  the  act  reads  as  follows: 

*‘A.  Subdivision  1.  That  there  shall  be  levied,  assessed,  collected  and  paid  annually 
upon  the  entire  net  income  arising  or  accruing  for  all  sources  in  the  preceding  calendar 
year  to  every  citizen  of  the  United  States,  whether  residing  at  home  or  abroad,  and  to 
every  person  residing  in  the  United  States,  though  not  a citizen  thereof,  a tax  of  1 per  centum 
per  annum  upon  such  income,  except  as  hereinafter  provided;  and  a like  tax  shall  be  assessed 
levied,  collected  and  paid  annually  upon  the  entire  net  income  from  all  property  owned 
and  of  every  business,  trade,  or  profession  carried  on  in  the  United  States  by  persons 
residing  elsewhere. 

:<c4c:tc4c:ic:ic4;:lc4t:)c4i 

D.  The  said  tax  shall  be  computed  upon  the  remainder  of  said  net  income  of  each 
person  subject  thereto,  accruing  during  each  preceding  calendar  year  ending  December 
thirty-first:  Provided,  however.  That  for  the  year  ending  December  thirty-first,  nineteen 
hundred  and  thirteen,  said  tax  shall  be  computed  on  the^  net  income  accruing  from  March 
first  to  December  thirty-first,  nineteen  hundred  and  thirteen,  both  dates  inclusive,  after 
deducting  five-sixths  only  of  the  specific  exemptions  and  deductions  herein  provided  for. 
On  or  before  the  first  day  of  March,  nineteen  hundred  and  fourteen,  and  the  first  day  of 
March  in  each  year  thereafter,  a true  and  accurate  return,  under  oath  or  affirmation 
shall  be  made  by  each  person  of  lawful  age,  except  as  hereinafter  provided,  subject  to  the 
tax  imposed  by  this  section,  and  having  a net  income  of  $3,000  or  over  for  the  taxable 
year,  to  the  collector  of  internal  revenue  for  the  district  in  which  such  person  resides  or 
has  his  principal  place  of  business,  or,  in  the  case  of  a person  residing  in  a foreign  country, 
in  the  place  where  his  principal  business  is  carried  on  within  the  United  States,  in  such 
form  as  the  Commissioner  of  Internal  Revenue,  with  the  approval  of  the  Secretary  of  the 
Treasury,  shall  prescribe,  setting  forth  specifically  the  gross  amount  of  income  from  all 
separate  sources  and  from  the  total  thereof,  deducting  the  aggregate  items  or  expenses 
and  allowance  herein  authorized;  guardians,  trustees,  executors,  administrators,  agents, 
receivers,  conservators,  and  all  persons,  corporations,  or  associations  acting  in  any  fiduciary 
capacity,  shall  make  and  render  return  of  the  net  income  of  the  person  for  whom  they 
act,  subject  to  this  tax,  coming  into  their  custody  or  control  and  management,  and  be 
subject  to  all  the  provisions  of  this  section  which  apply  to  individuals.  * * ♦ 

E * ♦ * Nothing  in  this  section  shall  be  construed  to  release  a taxable  person 
from  liability  for  income  tax,  nor  shall  any  contract  entered  into  after  this  Act  takes  effect 
be  valid  in  regard  to  any  Federal  income  tax  imposed  upon  a person  liable  to  such  payment. 

* « « 

The  provisions  of  this  section  relating  to  the  deduction  and  payment  of  the  tax  at  the 
source  of  income  shall  only  apply  to  the  normal  tax  hereinbefore  imposed  upon  individuals. 

iti^********** 


G.  (a)  That  the  normal  tax  hereinbefore  imposed  upon  individuals  likewise  shall 
be  levied,  assessed,  and  paid  annually  upon  the  entire  net  income  arising  or  accruing 
from  all  sources  during  the  preceding  calendar  year  to  every  corporation,  joint-stock 
company  or  association,  and  every  insurance  pmpany,  organized  in  the  United  States, 
no  matter  how  created  or  organized,  not  mcluding  partnerships;  but  if  organized,  author- 
ized, or  existing  under  the  laws  of  any  foreign  country,  then  upon  the  amount  of  net  income 
accruing  from  business  transacted,  and  capital  invested  within  the  United  States  during 
such  year.  * ♦ * 


1191  The  plaintiffs  contend  that  the  tax  is  against  persons  who  are  citizens  or  residents 
of  the  United  States. 

1192  The  Government  contends  that  the  tax  is  upon  the  property  and  not  upon  the 
persons,  which  was  the  view  taken  by  the  trial  judge. 

1 193  The  plaintiffs  argue  that  as  Brady,  having  died  July  22,  was  neither  a citizen  nor 
a resident  of  the  United  States  October  3,  1913,  at  the  time  the  act  was  passed 
its  language  does  not  authorize  collection  of  any  tax  upon  income  received  by  him.  On 
the  other  hand,  the  Government  says  that  as  the  tax  is  upon  the  property,  it  makes  no 
difference  whether  Brady  was  living  or  dead  at  that  time._ 

In  our  opinion  the  tax  is  against  citizens  and  residents^  of  the  United  States  per- 
1194  sonally.  They  are  chargeable  in  respect  to  income  received  by  them.  The  state- 
ment that  the  tax  is  upon  this  income  does  not  create  an  obligation  in  rem.  It 
is  only  a way  of  saying  that  the  owner  is  taxable  with  reference  to  the  income.  Taxable 
persons  are  spoken  of  throughout  the  act. 

The  effect  of  making  the  act  retroactive  is,  in  our  opinion,  to  apply  it  to  Brady 
1 195  exactly  as  if  it  had  been  enacted  March  1,  1913,  and  as,  by  reason  of  his  death, 
he  cannot  make  a return,  his  executors,  into  whose  hands  his  estate  has  come,  must 
do  so.  The  judgment  is  affirmed.  (240  Fed.  665.)  [T.  D.  2494,  June  2,  1917.] 


1196  Law  ^241.  Return  by  Fiduciary  when  Acting  for  an  Individual.—  (1)  [I’he  fiduciary 
shall  make  under  oath  a return  for  the  individual  for  whom  he  acts]  “if  the  net 
income  of  such  individual  is  $1,000  or  over  if  single  or  if  married  and  not  living  with  hus- 

INC.  122  TAX 


FIDUCIARIES. 


band  or  wife  or  $2,000  or  over  if  married  and  living  with  husband  or  wife,  or”  [For  guardians, 
other  fiduciaries  and  agents  acting  as  attorneys-in-fact,  read  at  ^1158.]  [^3019.] 

1197  Fiduciaries  are  required  to  make  returns  of  income  on  Income  Tax  Form  1041 
whenever  the  interest  of  any  beneficiary  in  the  net  income  of  an  estate  or  trust 
for  which  the  fiduciary  acts  is  $1,000  or  over  for  an  unmarried  beneficiary,  and  in  case 
there  are  married  beneficiaries,  then  a return  will  be  required  whenever  the  interest  of 
any  such  married  beneficiary  is  $2,000  or  over.  (Art.  27, 11186,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 1 98  In  reply  you  are  advised  that  fiduciaries  come  within  the  provisions  of  section  28, 
added  to  the  Act  of  September  8,  1916,  by  Section  1211  of  the  War  Revenue  Act 
of  October  3,  1917,  and  will  be  required  to  file  the  return  of  information  as  provided  therein, 
and  will  be  required  to  file  a return  on  Form  1041  as  heretofore  in  each  case  whether  the 
amount  paid  to  any  one  beneficiary  equals  $1,000  or  $2,000  according  to  the  marital  status 
of  the  beneficiary.  Where  there  are  several  beneficiaries  of  an  estate,  the  lowest  exemption 
to  which  any  one  beneficiary  is  entitled  would  determine  the  liability  of  the  fiduciary 
for  filing  a return.  The  return  should  clearly  state  the  name  and  address  of  each  bene- 
ficiary and  the  amount  of  income  paid  to  each. 

There  is  no  liability  on  the  part  of  the  fiduciary  to  deduct  and  withhold  any  tax 
1 1 99  from  income  shown  by  this  return,  except  where  the  beneficiary  is  a nonresident 
alien  individual  as  to  the  United  States,  in  which  case  he  will  deduct  and  withhold  a 
normal  tax  of  [8]%,  and  the  distributive  share  of  citizen  or  resident  beneficiaries  shall  be 
accounted  for  and  the  entire  tax  will  be  collected  on  their  personal  returns.  (Letter  to  The 
Corporation  Trust  Company,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated 
November  27,  1917.) 

1 200  In  reply  you  are  advised  that  the  reason  for  the  reference  to  married  and  unmarried 
in  connection  with  the  making  of  returns  In  section  3 (b)  of  the  Act  of  October  3, 
1917,  in  the  case  of  the  estate  income  is  that  guardians  or  trustees  are  given  the  privilege, 
Section  7,  Act  of  September  8,  1916,  as  amended,  of  claiming  the  exemption  to  which  their 
wards  or  beneficiaries  are  entitled,  so  that  in  the  case  of  the  trust,  the  income  of  which 
is  distributed  annually,  the  return  required  of  the  trustee  would  be  in  accordance  with  the 
specific  exemption  to  which  the  respective  beneficiaries  would  be  entitled,  except  where  more 
that  one  beneficiary  is  to  be  shown  on  the  same  return,  and  in  that  case  the  lowest  exemption 
would  govern  for  the  purpose  of  making  returns.  (Letter  to  The  Corporation  Trust 
Company,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  November  23,  1917.) 

Returns  by  Fiduciaries  of  Information  at  the  Source.  — [Read  at  1fl314.] 

1201  Return  in  Cases  of  More  than  One  Trust  or  Estate. — A fiduciary  acting  for  a 
beneficiary  in  more  than  one  estate  or  trust  is  required  to  account  for  each  estate 
separately  when  the  amounts  are  such  as  to  require  the  filing  of  a return,  and  also  a return 
of  information.  (Art.  29,  1[204,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 202  Where,  In  the  case  of  more  than  one  trust,  the  creator  of  the  trust  in  each  instance, 
is  the  same  person  and  the  trustee  in  each  instance  is  the  same,  the  trustee  should 
make’*_a  single  return  on  Form  No.  1041  for  all  of  the  trusts  in  his  hands,  notwithstanding 
the  fact  that  they  arise  from  different  instruments.  When  a trustee  holds  trusts  created 
by  different  persons  for  the  benefit  of  the  same  beneficiary,  he  should  make  return  for  each 
trust  separately  on  Form  No.  1041.  This  ruling  is  based  on  the  identity  of  the  creator 
and  the  identity  of  the  trustee  of  the  various  trusts,  and  not  upon  the  identity  of  the 
beneficiary.  (Art.  29,  1(202,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1203  Return  of  Undistributed  Distributable  Income. — * ♦ ♦ fiduciaries  having 
control  of  any  portion  of  income  accruing  during  the  year  to  known  beneficiaries, 

other  than  Trust  Estates  as  provided  in  T.  D.  2231,  but  not  distributed  or  paid  to  the 
beneficiaries  during  the  year,  shall,  in  rendering  their  annual  return  (Form  1041),  give 
the  name  and  address  of  each  of  said  beneficiaries  having  a distributive  interest  in  said  in- 
come, and  shall  furnish  all  the  information  called  for  in  such  returns.  * ♦ * j). 

2289,  Jan.  28,  1916.) 

1204  This  office  is  in  receipt  of  your  letter  of  January  17,  1916,  as  follows:  “Is  a return 
of  any  kind  to  be  made  for  the  year  1915  by  a fiduciary  under  the  following  case: 

In  a trust  estate  where  the  beneficiaries  and  their  respective  interests  in  the  income  there- 
from are  definitely  known  and  where  the  interest  of  each  of  the  beneficiaries  in  the  incom; 
of  the  trust  since  the  beginning  thereof  in  March,  1915,  until  December  31,  1915,  is  less 
than  [$1,000]  or  (excluding  income  from  bonds  issued  by  a state  or  any  political  subdivision 
thereof)  and  where  the  total  income  of  the  trust  for  that  period  is  less  than  [$5,000],  Irre- 
spective of  the  fact  whether  all  of  said  income  of  the  trust  remains  undistributed  in  the 
hands  of  the  fiduciary  or  has  been  distributed  in  part  to  the  beneficiaries?”  [Answer.] 

123  TAX 


INC. 


FIDUCIARIES. 


Your^question  is  answered  in  the  negative.  Procedure  will  be  in  accordance  with  T.  D. 
2289.  (Letter  to  The  Corporation  Trust  Company,  signed  by  the  Acting  Commissioner 
David  A.  Gates,  and  dated  February  3,  1916.) 

I 206  Must  trustee  make  income  tax  return  where  amount  * * * is  less  than  [|1, 000] 

dollars  for  any  beneficiary,  all  beneficiaries  being  ascertained  and  entitled  to  all 
income,  and  at  end  of  year  total  income  undistributed,  including  dividends,  is  less  than 
twenty  thousand  dollars?  [Answer.]  Your  telegram  January  17.  No  fiduciary  return 
required  where  all  income  of  trust  estate  accrues  to  known  beneficiaries  and  no  bene- 
ficiary’s interest  * * * [$1,000]  dollars  or  over  for  calendar  year  [unless  a beneficiary 

be  a nonresident  alien]. 

Does  Treasury  Decision  2231  [^1233  and  ^1234]  apply  to  trusts  where  beneficiary 

1206  is  known  and  is  entitled  to  all  income  or  does  it  apply  only  to  trusts  where  the 
beneficiaries  are  either  undetermined  or  are  not  entitled  to  receive  all  income 

as  in  a trust  for  accumulation?  [Answer.]  Treasury  Decision  2231  applies  only  where 
beneficiaries  or  their  interest  in  income  not  determined  at  end  of  year  or  where  trust  pro- 
vides for  accumulation.  (From  a letter  to  Commissioner  Osborn  from  W.  F.  Taylor 
of  Carter,  Ledyard  & Milburn,  New  York,  dated  January  17,  1916,  and  from  the  Depart- 
ment’s telegram  in  answer  thereto  dated  February  1,  1916,  and  signed  by  Acting  Com- 
missioner David  A.  Gates.) 

1207  Law  11184.  Income  Received  by  a Fiduciary,  which  is  Distributable  to  Bene- 
ficiaries is  Taxable. — [The  taxes  imposed  by  sections  210  and  211  apply  to]  “(4) 

Income  which  is  to  be  distributed  to  the  beneficiaries  periodically,  whether  or  not  at  regular 
intervals,  and  the  income  collected  by  a guardian  of  an  infant  to  be  held  or  distributed  as 
the  court  may  direct.”  [112991] 

1208  Law  1[192.  Beneficiaries  Liable  on  Distributable  Income.— “(d)  In  cases  under 
paragraph  (4)  [1]1207]  of  subdivision  (a),” 

1209  Law  1[193.  Legatees  Liable  on  Amount  Properly  Paid  or  Credited  lo  Them  During 
Period  of  Administration. — “and  in  the  case  of  any  income  of  an  estate  during  the 

period  of  administration  or  settlement  permitted  by  subdivision  (c)  [1[1249]  to  be  deducted 
from  the  net  income  upon  which  tax  is  to  be  paid  by  the  fiduciary,” 

1210  Law  If  194.  Distributable  Income  to  be  Included  in  Beneficiary’s  Return. — “the 
tax  shall  not  be  paid  by  the  fiduciary,  but  there  shall  be  included  in  computing 

the  net  income  of  each  beneficiary  his  distributive  share,  whether  distributed  or  not,  of 
the  net  income  of  the  estate  or  trust  for  the  taxable  year,  or,” 

1211  Law  If  195.  “if  his  net  income  for  such  taxable  year  is  computed  upon  the  basis 
of  a period  different  from  that  upon  the  basis  of  which  the  net  income  of  the  estate 

or  trust  is  computed,  then  his  distributive  share  of  the  net  income  of  the  estate  or  trust 
for  any  accounting  period  of  such  estate  or  trust  ending  within  the  fiscal  or  calendar  year 
upon  the  basis  of  which  such  beneficiary’s  net  income  is  computed.” 

[In  connection  with  the  above  read  at  1f2991.] 

1212  Unless  the  beneficiary  Is  under  some  disability  which  requires  the  fiduciary  to  act, 
the  beneficiary  will  make  his  own  return  and  account  for  the  tax  upon  his  entire 

net  income.  (T.  D.  2090,  Dec.  14,  1914.) 

1213  When  Fiduciary  May  Make  Return  for  Beneficiary. — As  each  such  fiduciary  acts 
solely  in  behalf  of  the  beneficiaries  of  the  trust,  the  annual  return  required  in  such 

cases  has  reference  only  to  the  income  accruing  and  payable  through  said  fiduciary,  and  not 
to  the  income  of  the  beneficiary  derived  from  other  sources.  If,  however,  such  fiduciary 
is  legally  authorized  to  act  for  such  beneficiary  as  agent  or  attorney  in  fact,  [read  at  If  1158] 
he  may  in  such  case  also  make  for  the  beneficiary  the  personal  annual  return  required  by 
law.  (Art.  72,  Reg.  33,  Jan.  5,  1914.) 

1 214  Law  If  196.  Credits  Allowed  to  Beneficiaries  when  Making  Returns  Including 
Distributable  Income. — “In  such  cases  the  beneficiary  shall,  for  the  purpose  ot 

the  normal  tax,  be  allowed  as  credits  in  addition  to  the  credits  allowed  to  hirn  under 
section  216  [1fll24],  his  proportionate  share  of  such  amounts  specified  in  subdivisions  (a) 
[dividends,  ^1125]  and  (b)  [interest  on  Government  bonds  Included  in  gross  income  [111127] 
of  section  216  as  are  received  by  the  estate  or  trust.”  [1f2994l 

Their  Proportionate  Shares  of  the  Net  Loss  Suffered  by  an  Estate  or  Trust  During 
Certain  Taxable  Years  May  be  Deducted  by  Beneficiaries.— [Read  at  If  1921.] 

1215  Law  1f242.  Return  by  Fiduciary  when  Acting  for  an  Estate  or  Trust.— [That 
every  fiduciary  (except  receivers  appointed  by  authority  of  law  in  possession  of 

INC,  124  TAX 


FIDUCIARIES. 


part  only  of  the  property  of  an  individual)  shall  make  under  oath  a return  for  the  individual 
[T[1196],  estate  or  trust  for  which  he  acts]  “(2)  if  the  net  income  of  such  estate  or  trust  is 
$1,000  or  over  or  if  any  beneficiary  of  such  estate  or  trust  is  a nonresident  alien,”  [^3019] 

1216  Fiduciaries  * * * will  be  required  to  make  returns  of  income  * * * In 

all  cases  of  return  under  section  2 (b),  Act  of  September  8,  1916,  as  amended, 

w'hen  the  income  of  the  estate  or  trust,  as  an  entity,  is  $1,000  or  over.  This  return  will  be 
on  Form  1040  or  1040  A.  (Art  27,  ^185,  Reg.  33,  Rev.  Jan.  2,  1918.) 

1217  Law  ^180.  Income  of  Estates  and  Trusts  is  Taxable. — “Sec.  219.  (a)  That  the 

tax  imposed  by  sections  210  [normal  tax  on  individuals]  and  211  [surtax]  shall 

apply  [to  the  income  of  estates  or  of  any  kind  of  property  held  in  trust,  including — ” 

[Read  at  ^[2994.] 

1218  Law  1]  18 1.  Income  Received  by  Estate  During  Period  of  Settlement  is  Taxable. — 
“(1)  Income  received  by  estates  of  deceased  persons  during  the  period  of  admin- 
istration or  settlement  of  the  estate;” 

1219  Under  the  provisions  of  section  2 (b)  it  is  held  that  estates  during  the  period  of 
administration  have  but  one  beneficiary,  and  that  beneficiary  is  the  estate.  There- 
fore a return  on  Form  1040  or  1040A,  subject  to  all  the  deductions  and  exemption,  shall 
be  made  by  the  executor  or  administrator  for  such  beneficiary  and  the  entire  tax  paid 
thereon.  (Art.  29,  If  193,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1220  Executors  and  administrators  whose  duty  consists  of  administering  on  an  estate 
for  the  purposes  of  its  distribution  to  heirs  or  legatees  are,  during  the  period  of 

such  administration,  held  to  stand  in  the  stead  of  their  principal,  and  under  the  pro- 
visions of  section  2 (b),  Act  of  September  8,  1916,  are  required  to  make  returns  of 
income  for  the  estate  and  to  pay  the  tax  shown  by  such  return  to  be  due.  (Art.  4,  ^24, 
Reg.  33,  Rev.,  Jan.  2,  1918.) 

1221  Where,  during  the  period  of  administration,  an  executor  converts  the  estate  In  his 
possession  as  such  executor  into  money  for  the  purpose  of  settling  the  estate  and 

closing  the  administration  and  in  which  conversion  a profit  is  realized  which  with  other 
income  exceeds  $1,000,  a return  of  income  should  be  made  by  the  executor  covering  the 
period  of  administration  in  which  should  be  included  all  gains,  profits,  and  income  of  the 
estate  during  such  period,  and  he  should  pay  the  tax  found  by  such  return  to  be  due. 
The  income  of  the  estate  being  thus  freed  of  income-tax  liability  may  thereafter  be  dealt 
with  without  further  regard  to  income-tax  requirements.  (Art.  29,  ^195,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

1222  Where  Income  under  the  provisions  of  section  2 (b),  Act  of  September  8,  1916,  is 
accounted  for  in  a return  of  income  by  the  executor,  administrator,  or  trustee, 

as  the  case  may  be,  and  the  tax  shall  have  been  assessed  and  paid  under  such  return, 
such  income  is  thereby  freed  of  all  tax  liability  and  may  be  thereafter  dealt  with  without 
further  regard  to  the  provisions  of  the  Income-tax  law.  (Art.  29,  If  192,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

1223  Final  Return  on  Final  Accounting. — Administrators  or  executors  may,  immediately 
after  their  discharge,  upon  final  accounting,  file  with  the  proper  collector  of  internal 

revenue  a return  of  income  for  the  income  of  the  estate  for  the  calendar  year  in  which  the 
administration  was  closed,  and  should  pay  the  tax  found  by  such  return  to  be  due  immed- 
iately upon  receipt  of  notice  and  demand  for  the  amount  of  such  tax.  There  should  be 
attached  to  this  return  a copy  of  the  certificate,  under  seal,  setting  forth  the  fact  of  final 
accounting  and  discharge  of  the  executor  or  administrator.  The  liability  for  return  is 
fixed  by  the  law  as  of  December  31,  and  return  will  be  required  in  accordance  with  the 
provisions  of  law  existing  on  that  date. 

An  ancillary  administrator  is  held  to  be  merely  an  agent  of  the  domiciliary  admln- 
1 224  istrator  and  should  transmit  to  him  all  information  as  to  income  of  the  estate 
received  by  the  ancillary  administrator,  to  the  end  that  the  original  administrator 
may  make  a return  covering  the  entire  income  of  the  estate.  (Art.  26,  If  179-180,  Reg.  33. 
Rev.,  Jan.  2,  1918.) 

1225  Liability  for  Pa^pient  of  Tax  Attaches  to  the  Person  of  the  Executor  or  Admin- 
is^ator. — Liability  for  payment  of  income  tax  attaches  to  the  person  of  an  executor 
or  administrator  for  income  tax  up  to  and  including  the  date  of  his  discharge,  regardless 
of  the  fact  that  the  time  in  which  claim  is  made  and  filed  against  the  estate  has  expired 
or  where,  prior  to  distribution  and  discharge,  the  executor  or  administrator  had  notice 
of  his  obligations  to  the  Federal  Government  or  where  he  failed  to  exercise  due  diligence 
in  determining  whether  or  not  such  obligations  existed.  (Art,  29,  ^197,  Reg.  33,  Rev., 
Jan.  2,  1918.) 


INC. 


125  TAX 


FIDUCIARIES. 


1226  Inspection  by  Beneficiaries  of  Returns  Made  by  Fiduciaries. — An  executor  acts 
for  his  principal  and  not  for  the  beneficiaries  of  the  estate  of  his  principal. 

Beneficiaries  are  not  entitled,  as  such,  to  an  inspection  of  returns  of  income  filed  by 
such  executor.  (Art.  26,  11184,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1227  Law  1[182.  Income  Accumulated  in  Trust  is  Taxable. — [111217.  The  taxes  imposed 
by  sections  210  and  211  apply  to]  “(2)  Income  accumulated  in  trust  for  the  benefit 

of  unborn  or  unascertained  persons  or  persons  with  contingent  interests;”  [1[2991.] 

1 228  Estates. — (b)  The  income  of  estates,  in  process  of  administration  or  in  trust  for 
accumulation  of  income,  is  taxed  as  for  an  unmarried  person.  (Art.  3,  1[7,  Reg. 
33,  Rev.,  Jan.  2,  1918.) 

1229  Stock  dividends  paid  from  earnings  or  profits  accumulated  after  March  1,  1913, 
received  by  a fiduciary  and  retained  as  an  accretion  to  the  estate  under  the  terms 

of  the  will  or  trust  are  held  to  be  income  to  the  estate  and  taxable  as  such  to  the  estate. 

Income  accumulated  in  trust  for  unascertained  persons  or  persons  with  contingent 

1230  interests  is  held  to  be  income  accruing  to  the  estate  and  is  taxable  to  the  estate. 
(Art.  29,  11206-207,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1231  Law  11183.  Income  Held  for  Future  Distribution  under  Terms  of  Will  or  Trust  is 
Taxable. — [1[1217.  The  taxes  imposed  by  sections  210  and  211  apply  to]  “(3) 

Income  held  for  future  distribution  under  the  terms  of  the  will  or  trust;  and”  [1[2991.] 

1 232  Income  held  for  future  distribution  under  the  terms  of  the  will  or  trust  shall  be  like- 
wise taxed  except  when  returned  by  the  beneficiary  for  the  purpose  of  the  tax. 
(Art.  29,  11208,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 233  The  income  of  trust  estates,  as  any  other  income  is  subject  to  the  income  tax. 

* * * Any  part  of  the  annual  income  of  trust  estates  not  distributed  or  dis- 

tributable to  known  beneficiaries — see  T.  D.  2289,  (1[1203)  becomes  an  entity  and,  as  such, 
is  liable  to  the  normal  and  additional  tax,  which  must  be  paid  by  the  fiduciary.  When  the 
beneficiary  is  not  in  esse  and  the  income  of  the  estate  is  retained  by  the  fiduciary  such 
income  will  be  taxable  to  the  estate  as  for  an  individual  and  the  fiduciary  will  pay  the 
tax  both  normal  and  additional.  * * * When  the  gross  net  income  not  distributed 
and  remaining  in  the  hands  of  a fiduciary  is  less  than  [$5,000],  the  estate  will  be  listed  as  a 
beneficiary  and  only  the  normal  income  tax  will  be  assessable  and  such  tax  will  be  paid 
by  the  fiduciary.  When  the  gross  net  income  not  distributed  and  remaining  in  the  hands 
of  a fiduciary  exceeds  [$5,000],  such  income  is  subject  to  both  the  normal  and  additional 
tax  and  the  estate  will  be  listed  as  a beneficiary  and  both  the  normal  and  additional  tax 
will  be  paid  by  the  fiduciary.  (T.  D.  2231,  July  26,  1915.) 

1 234  Returns  of  Income  Accruing  to  Trust  Estates. — Fiduciaries  shall,  on  or  before 
March  [15]  of  each  year,  make  and  render  a return,  in  form  prescribed  by  the 

Commissioner  of  Internal  Revenue  [Form  1041]  of  the  income  coming  into  their  custody 
or  control  and  management  from  each  trust  estate  when  the  annual  interest  of  any  bene- 
ficiary in  the  income  of  said  trust  estate  subject  to  the  normal  tax  is  in  excess  of  [$1,000  or 
$2,000],  and  also  when  the  undistributed  income  of  the  estate  (as  an  entity  or  beneficiary 
inland  of  itself  for  tax  purposes),  shall  exceed  [$1,000].  In  such  cases  the  estate  shall  be 
reported  as  a beneficiary  for  the  undistributed  income.  (T.  D.  2231,  July  26,  1915.) 

1 235  Dividends  Declared  from  Surplus  Earned  and  Accumulated  Dming  Life  of  Dece- 
dent and  Subsequent  to  March  1,  1913,  are  Taxable  in  Hands  of  Executor  in  Year 

Received. — This  office  is  in  receipt  of  your  letter  of  October  11,  1915,  requesting,  as  attor- 
neys for , executor  of  the  estate  of  A , a reconsideration  by  this  office  of 

its  holding  September  25,  1915,  in  letter  to  the  Collector  for  the  Second  District  of  New 
York  in  matter  of  assessment  of  tax  upon  certain  dividends  received  by  the  executor  as 
trustee  in  September  and  December,  1913,  not  included  in  his  return  as  income. 

It  appears  that  the  dividends  in  question  were  declared  and  paid  in  1913  from  the 

1236  surplus  of  a bank,  accumulated  during  a period  of  several  years.*  The  dividends 
amounted  to  $20,000  and  $13,666.68  was  excluded  from  the  return  under  the  theory 

and  belief  that  the  amount  so  excluded  was  capital  and  did  not  have  the  status  of  income 
for  the  purposes  of  the  income  tax  for  the  reason  that  this  proportion  of  the  dividends  was 

earned  by  the  bank,  a corporation,  prior  to  the  death  of , a stockholder 

of  the  bank.  You  cite,  as  authority.  Matter  of  Osborne,  209  N.  Y.  App.,  450. 

You  are  advised  that  the  case  has  been  reviewed  and  the  decision  of  this  office, 

1237  September  25,  1915,  is  affirmed. 

The  dividends  in  question,  being  a distribution  in  1913  of  corporate  profits,  had 
1 238  the  status  of  income  for  income  tax  purposes  to  the  stockholders  of  the  corporation.* 
•For  taxable  status  of  dividends  under  present  law  see  1[770. 

126  TAX 


INC, 


FroUClARIES. 


1 239  The  principle  of  decision  in  Matter  of  Osborne,  209  N.  Y.  App.,  450,  is  that  so  far  as 
possible  (in  the  absence  of  testamentary  direction  to  the  contrary),  the  corpus  of  a 
trust  fund  in  which  life  tenants  and  remaindermen  are  interested  should  be  kept 
at  the  value  it  possessed  when  the  fund  was  originally  created.  The  court  did  not  attempt 
to  change  the  rule  that  a dividend,  however  evidenced  and  paid,  declared  and  paid  from 
corporate  surplus,  has  the  status  of  income,  but  only  that  in  holding  evenly  the  balance 
‘between  life  tenants  and  remaindermen  “the  court  should  look  into  the  fact,  circumstances 
and  nature  of  the  transaction  and  determine  the  nature  of  the  dividend  and  the  rights  of 
the  contending  parties  according  to  justice  and  equity.” 

Trustees  are  required  to  make  return  and  pay  tax  for  the  persons  for  whom  they  act. 

1 240  Where  they  act  for  and  make  distribution  within  a taxable  period  to  an  individual 

they  are  required  to  make  return  * * * ^ Where  they  act  for  an  individual 

not  determined,  or  for  an  individual  not  entitled  to  receive  within  the  taxable  period,  they 
are  held  to  have  the  status,  for  the  purposes  of  the  income  tax,  not  only  as  a fiduciary  but 
also  that  of  agency  for  such  beneficiary,  and  as  such  fiduciary  and  agent  are  required  to  make 
return  and  pay  the  tax  upon  the  amount  received  and  held.  For  the  purpose  of  the  income 
tax  the  effect  of  accumulation  in  the  hands  of  a trustee  is  held  to  be  the  equivalent  of 
distribution  in  the  sum  of  the  accumulation. 

In  this  case  the  fiduciary  received  within  the  taxable  period,  retained  and  did  not 

1241  distribute,  the  sum  of  $39,154.50.  All  this  sum  had  the  status  of  “gains,  profits 
and  income”  under  the  Act  of  October  3,  1913,  and,  therefore,  under  the  provisions 

of  T.  D.  2231  [paragraph  1233],  is  taxable  to  the  trustee.  [Letter  to  Bowers  & Sands,  New 
York,  N.  Y.,  signed  by  Deputy  Commissioner  L.  F.  Speer,  and  dated  October  19,  1915.) 

1242  Obligation  of  a Receiver  for  an  Individual  to  Make  Return  and  Pay  Tax. — [Read  the 
provision  at  ^1168.]  This  office  is  in  receipt  of  your  letter,  February  1,  1917,  further 

with  reference  to  the  question  submitted  in  your  letter  of  January  22,  1917,  as  to  the 
duty  of  a receiver  under  interlocutory  orders  of  the  United  States  District  Court  to  make 
return  for  and  pay  tax  on  the  income  received  by  him  on  funds  which  he  holds  in  trust  as 
receiver  under  an  appointment  as  aforesaid.  ^Under  the  second  case,  stated  in  Section 

2 (b).  Act  of  September  8,  1916 — “The  income  of  * * * any  kind  of  property  held  in 

trust  * * * (except  when  the  income  is  returned  for  the  purpose  of  the  tax  by  the 

beneficiary)”  is  subject  to  the  normal  and  additional  tax,  the  tax  to  be  assessed  to  the 
trustee.  Under  the  provisions  of  Section  7 (a)  of  the  Act  the  receiver  will  be  permitted 
to  deduct,  as  an  exemption,  [$1,000]  in  his  return.  This  return  is  to  be  made  on  Income 
Tax  Form  1040.  HThe  receiver  is  indemnified  by  the  Act  against  the  claims  or  demands 
of  every  beneficiary  for  all  payments  of  taxes  which  he  shall  be  required  to  make  under 
the  provisions  of  the  Act  of  September  8,  1916,  and  he  shall  have  credit  for  the  amount  of 
such  payments  against  the  beneficiary  or  principal  in  any  accounting  which  he  makes  as 
such  receiver.  IfThe  income  being  thus  freed  of  tax  liability  imposed  by  the  statute,  it 
may  thereafter  be  dealt  with  by  the  receiver  without  further  regard  to  the  requirements  of 
the  tax  statute.  (Letter  to  William  Beverly  Winslow,  New  York,  N.  Y.,  signed  by  Deputy 
Commissioner  L.  F.  Speer,  and  dated  February  9,  1917.) 

1 243  Receivers  who,  as  officers  of  a court,  stand  in  the  stead  of  some  principal  are  required 
to  account  for  income  tax  as  the  principal  would  have  been  required  to  account. 
(Art.  26,  1[181,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 244  Law  If  189.  Taxes  to  be  Paid  by  Fiduciary  on  Income  (1)  Received  During  Period 
of  Settlement,  (2)  Accumulated  in  Trust,  and  (3)  Held  for  Future  Distribution 
under  Terms  of  Will  or  Trust. — “(c)  In  cases  under  paragraph  (1)  [^1218],  (2)  [^1227],  or 
(3)  [1fl231]  of  subdivision  (a)  the  tax  shall  be  imposed  upon  the  net  income  of  the  estate 
of  trust  and  shall  be  paid  by  the  fiduciary,”  [^2991.] 

1 245  Deed  of  Trust  to  be  Irrevocable. — A deed  of  trust  must  be  absolute  so  far  as  the 
conveyance  of  title  is  concerned  and  irrevocable  by  the  donor,  otherwise  the  income 
from  the  property  in  question  will  accrue  to  the  donor  and  must  be  accounted  for  by  him. 
(Art.  29,  11194,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1246  Fiduciaries  are  Indemnified. — [There  is  no  definite  provision  to  this  effect  in  the 
present  law  as  there  was  in  the  old  law_  except  as  applied  to  amounts  withheld  at 

the  source,  for  which  see  1[729,  noting  the  use  of  the  word  “section.”]  All  fiduciaries  are 
indemnified  against  the  claims  or  demands  of  every  beneficiary  for  all  payments  of  taxes 
which  they  shall  be  required  to  make  under  the  provisions  of  this  title  and  they  shall  have 
credit  for  such  payments  in  any  accounting  which  they  make  as  such  fiduciaries.  [Art. 
29,  11209,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1247  Law  11186.  How  Net  Income  of  an  Estate  or  Trust  is  to  be  Computed. — “The  net 
income  of  the  estate  or  trust  shall  be  computed  in  the  same  manner  and  on  the 

same  basis  as  provided  in  section  212  [1|754],”  [U2991.] 

127  TAX 


INC. 


FIDUCIARIES. 


1248  Law  11 1 87.  A dditional  Deduction  Because  of  Payments  Made  for  Religious,  Chari- 
table, Educational,  etc.,  Purposes,  Pursuant  to  Terms  of  Will  or  Deed  of  Trust. — 

“except  that  there  shall  also  be  allowed^as  a deduction  (in  lieu  of  the  deduction  authorized 
by  paragraph  (11)  [^1102]  of  subdivision  (a)  of  section  214)  any  part  of  the  gross  income 
which,  pursuant  to  the  terms  of  the  will  or  deed  creating  the  trust,  is  during  the  taxable 
year  paid  to  or  permanently  set  aside  for  the  United  States,  any  State,  Territory,  or  any 
political  subdivision  thereof,  or  the  District  of  Columbia,  or  any  corporation  organized 
and  operated  exclusively  for  religious,  charitable,  scientific,  or  educational  purposes,  or  for 
the  prevention  of  cruelty  to  children  or  animals,  no  part  of  the  net  earnings  of  which  inures 
to  the  benefit  of  any  private  stockholder  or  individual;” 

1 249  Law  ^190.  Additional  Deduction  of  Amounts  Properly  Paid  or  Credited  to  Legatee 
During  Period  of  Administration. — “except  that  in  determining  the  net  income  of 
the  estate  of  any  deceased  person  during  the  period  of  administration  or  settlement  there 
may  be  deducted  the  amount  of  any  income  properly  paid  or  credited  to  any  legatee,  heir 
or  other  beneficiary.” 

1 250  Other  Items  of  Expense  Deductible  and  not  Deductible. — Expenses  of  adminis- 
tration of  an  estate,  such  as  court  costs,  attorney’s  fees,  executor’s  commissions, 
etc.,  are  chargeable  against  the  corpus  of  the  estate  and  are  not  allowable  deductions 
in  a return  of  income.  (Art.  8,  ^102,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1251  Referring  to  the  difference  between  the  expenses  of  administration  of  estates 
set  forth  as  not  allowable  deductions  in  T.  D.  2090  [Reg.  33,  Rev.  ^1250]  and  the 

expenses  itemized  as  allowable  deductions  on  Form  1041,  Revised  [old  Form],  the  dis- 
tinction is  sought  to  be  made  between  such  first  expenses  as  are  properly  chargeable 
against  an  estate,  as  an  entity,  and  such  other  expenses,  incident  to  administration,  as 
may  arise  from  the  nature  of  the  properties  and  the  details  of  business  management. 

Among  the  former,  T.  D.  2090  cites  court  costs,  attorneys’  fees,  executors’  com- 

1252  missions  [see  paragraph  1255],  etc  , and  am.ong  the  latter  may  be  cited  the  usual 
and  necessary  expenses  of  carrying  on  a business,  including  salaries,  wages,  rentals 

paid,  and  such  repairs  to  business  properties  as  do  not  constitute  permanent  Improvements 
or  betterments  which  increase  the  value  of  the  property  or  estate.  The  former  is  meant 
to  apply  to  expenses  that  reduce  the  estate  in  the  administrator’s  hands,  and  the  latter 
to  legitimate  expenses  that  reduce  the  income  accruing  to  beneficiaries,  but  not  the  estate 
itself.  (T.  D.  2135,  Jan.  23,  1915.) 

1 253  * * * The  Intent  and  purpose  of  this  regulation  is  to  deny  to  fiduciaries  the  right 

of  claiming  a deduction  for  depreciation  in  returns  for  the  income  tax  of  bene- 
ficiaries when  in  fact  no  depreciation  reserve  is  established  nor  is  authorized  to  be  estab- 
lished but  the  amount  claimed  as  a deduction  for  depreciation  is  actually  paid  to  the 
beneficiary  as  income.  * * * , 

Nothing  in  this  regulation  shall  be  construed  to  deny  the  right  of  trustees  to  make 
1 254  deductions  from  gross  income  for  expenses  actually  incurred  for  repairs  and  such 
other  necessary  expenses,  other  than  betterments,  as  may  be  required  to  preserve 
the  corpus  of  the  estate  in  accordance  with  the  facts,  actual  application  or  reservation 
of  the  necessary  amounts  or  proper  provisions  of  the  trust,  the  requirements  of  law  or 
the  order  of  a court  of  competent  jurisdiction.  (T.  D.  2267,  Nov.  5,  1915.) 

1 255  In  all  cases  It  should  be  definitely  ascertained  by  a fiduciary  whether,  under  state 
laws,  the  terms  of  a will  or  by  the  decree  of  a court,  the  commissions  in  question  are 
deductible  from  the  corpus  of  the  estate  or  from  the  income  accruing  to  the  beneficiaries  of  the 
estate,  and  his  action  in  the  matter  should  be  guided  entirely  by  the  facts  thus  ascertained. 
If  the  commissions  are  properly  deductible  from  the  corpus  of  the  estate  they  should 
not  be  included  in  the  fiduciary  return  on  office  Form  1041,  Revised,  as  allowable  deduc- 
tions against  the  interests  of  the  beneficiaries.  If,  on  the  other  h and,  the  commissions, 
are  to  be  deducted  from  the  income  of  the  estate  distributable  among  the  beneficiaries 
the  amount  should  be  entered  on  Form  1041,  Revised,  as  a legitimate  and  necessary 
expense,  properly  deductible  from  the  income  of  the  estate.  (Extract  from  letter  to 
The  Corporation  Trust  Company,  signed  by  Acting  Commissioner  David  A.  Gates,  and 
dated  March  2,  1915.) 

1256  Inheritance  Taxes  are  Not  Deductible. — This  office  is  in  receipt  of  your  letter  of 
February  4,  1916,  and  in  reply  you  are  advised  that  a collateral  inheritance  tax 
levied  under  the  laws  of  the  State  of  New  York,  being,  as  it  is,  a charge  against  the  corpus 
of  the  estate,  does  not  constitute  such  an  item  as  can  be  allowed  as  a deduction  in  com- 
puting income  tax  liability  to  either  the  estate  or  a beneficiary  thereof.  (Letter  to  Charles 
J.  McDermott,  2 Rector  Street,  New  York,  N.  Y.,  signed  by  Deputy  Commissioner 
G.  E.  Fletcher,  and  dated  February  10,  1916.) 


INC, 


128  TAX 


FIDUCIARIES. 


1 257  Depreciation  Deduction  in  Return  of  Trust  Estates. — In  the  case  of  a trust  estate 
where  the  terms  of  the  will  or  trust  or  the  decree  of  a court  of  competent  juris- 
diction provides  for  keeping  the  corpus  of  the  estate  intact,  and  where  physical  property 
forming  a part  of  the  corpus  of  such  estate  has  suffered  depreciation  through  its  employ- 
ment in  business,  a deduction  from  gross  income  for  the  purpose  of  caring  for  this  depreci- 
tion,  where  the  deduction  is  applied  or  held  by  the  fiduciary  .for  making  good  such  depre- 
ciation, may  be  claimed  by  the  fiduciary  in  his  return  of  income.  Fiduciaries  should 
set  forth  in  connection  with  their  returns  the  provision  of  law,  trust,  or  decree  requiring 
such  depreciation  deduction  where  any  exists  or  when  actual  depreciation  occurs,  the 
amount  thereof,  and  that  the  same  has  been  or  will  be  preserved  and  applied  as  such. 
All  amounts  paid  by  fiduciaries  to  beneficiaries  of  trust  estates  from  the  income  of  such 
trust  estates,  whether  from  reserves  or  otherwise,  are  held  to  be  .distributions  of  income 
and  will  be  treated  for  income-tax  purposes  in  accordance  with  the  provisions  of  law 
and  regulations  applicable  to  income  of  such  beneficiaries.  (Art.  29,  ^199,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

1258  Law  1fl91.  Credits  Allowed  to  Estate  or  Trust  for  Normal  Tax. — “In  such  cases 
the  estate  or  trust  shall,  for  the  purpose  of  the  normal  tax,  be  allowed  the  same 

credits  as  are  allowed  to  single  persons  under  Section  216  [^1124].” 

1259  Law  ^243.  Contents  of  Return  by  Fiduciaries.— “stating  specifically  the  items 
of  the  gross  income  and  the  deductions  and  credits  allowed  by  this  title.’' 

1260  Law  ^188.  Beneficiaries’  Distributive  Shares  to  be  Listed. — “and  in  cases  under 
paragraph  (4)  of  subdivision  (a)  of  this  section  the  fiduciary  shall  include  in  the 

return  a statement  of  each  beneficiary’s  distributive  share  of  such  net  income,  whether 
or  not  distributed  before  the  close  of  the  taxable  year  for  which  the  return  is  made.” 

[See  “Returns  by  Fiduciaries,”  ^3019.] 

1261  How  Fiduciaries  Should  Enter  on  Form  1041  the  Undistributed  Distributable 
Income  at  the  Close  of  the  Year  to  Known  Beneficiaries. — [This  paragraph  refers 

to  Form  1041  as  it  was  prior  to  the  passage  of  the  Act  of  September  8,  1916.]  This  office 
is  in  receipt  of  your  letter  of  February  15,  1916,  in  which  you  state:  “In  making  up 
returns  of  annual  net  income  for  fiduciaries  we  note  that  line  5 of  Form  1041  (revised) 
recites  ‘amount  of  income  of  the  estate  or  trust  * * * ^nd  which  was  paid  to  bene- 

ficiaries of  the  estate  or  trust  as  listed  in  columns  1 and  3 below.’  Also  the  columns  on 
page  3 recite  *Patd  to  beneficiaries,’  etc.  Invariably  fiduciaries  have  undistributed  income 
on  December  31st  and  it  seems  impossible  to  make  returns  on  Form  1041  (revised)  with- 
out making  some  change  in  the  wording.”  [Answer.]  You  ask  how  the  listing  on  page 
1 of  the  return  form  should  be  made.  The  name  of  the  beneficiary  should  be  entered 
twice.  Opposite  one  such  entry  should  be  placed  the  amount  actually  paid  and  opposite 
the  other  the  amount  retained.  (Letter  to  Curtis,  Mallet-Prevost  & Colt,  30  Broad 
Street,  New  York,  N.  Y.,  signed  by  Deputy  Commissioner  L.  F.  Speer,  and  dated  Feb- 
ruary 18,  1916.) 

1262  Returns  by  Fiduciaries  and  Beneficiaries  of  Dividends  Received  1917  which  are 
Apportionable  to  Prior  Years. — First  Question:  Should  share  of  each  beneficiary 

in  dividends  accumulated  prior  to  nineteen  seventeen  as  stated  in  Schedule  E on  page 
three  of  form  ten  forty-one  be  listed  in  table  of  distribution  of  net  income  on  page  four 
of  ten  forty-one.'*  (Answer.)  Share  of  each  beneficiary  in  dividends  taxable  at  rates 
applicable  to  years  prior  to  nineteen  seventeen  should  be  shown  on  page  four  Form  1041 
in  table  of  distribution. 

1 263  Second  Question:  Should  such  shares  in  earlier  dividends  be  included  In  total 
. share  of  each  beneficiary  in  net  income  in  determining  whether  trustee  must  file 
i Form  1041?  (Answer.)  Share  in  such  dividends  must  be  included  in  total 
share  of  each  beneficiary  in  net  income  in  determining  trustee’s  liability  for  return  Form 
1041.^ 

Third  Question:  In  computing  net  Income  of  individual  beneficiary  to  determine 
1 264.whether  he  should  file  return,  should  amount  of  dividends  accumulated  in  years 
prior  to  nineteen  seventeen  be  Included?  First  sentence  of  instructions  numbered 
one  on  page  one  of  Form  1040  seems  to  imply  they  should  be  excluded  in  figuring  net 
income.  (Answer.)  Such  dividends  must  be  taken  into  consideration  in  computing 
individual’s  net  income  for  purpose  determining  liability  for  return  Form  1040.  (Tele- 
gram from  Hutchins  & Wheeler,  Boston,  Mass.,  and  the  telegram  in  reply  thereto  signed 
by  Commissioner  Daniel  C.  Roper,  and  dated  March  8,  1918.) 

[Re  above:  Certain  1918  stock  dividends  are  to  be  allocated  to  prior  years.] 

1265  Law ‘[244  Return  by  One  of  Two  or  More  Joint  Fiduciaries. — “Under  such 
regulations  as  the  Coiur.issioiu-r  with  the  approval  of  the  Secretary  may  prescribe, 
a return  made  by  one  of  two  or  more  joint  fiduciaries  and  filed  in  the  office  of  the  collector  of 
the  district  where  such  fiduciary  resides  shall  be  sufficient  compliance  with  the  above 
requirement.” 


INC. 


129  TAX 


PARTNERSHIPS  AND  PERSONAL  SERVICE  CORPORATIONS. 


1266  A return  by  one  of  two  or  more  Joint  fiduciaries  in  the  form  prescribed  filed  in  the 
district  in  which  such  fiduciary  resides  shall  be  a sufficient  compliance  with  the 
requirement  for  fiduciary  return.  (Art.  29,  ^188,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 267  Law  1[246.  Law  Provisions  Applicable  to  Individuals  Anply  to  Fiduciaries. — 
“Fiduciaries  required  to  make  returns  under  this  Act  shall  be  subject  to  all  the 
provisions  of  this  Act  which  apply  to  individuals.” 

1 268  Fiduciaries  will  be  subject  to  all  the  provisions  of  law  which  apply  to  in- 
dividuals who  are  required  to  make  returns  of  income.  A fiduciary  making 
return  shall  make  oath  that  he  has  sufficient  knowledge  of  the  affairs  of  the  person, 
trust,  or  estate  for  whom  or  which  he  acts  to  enable  him  to  make  such  return,  and  that 
the  same  is,  to  the  best  of  his  knowledge  and  belief,  true  and  correct.  (Art.  29,^188, 
Reg.  33,  Rev.,  Jan.  2,  1918.) 

General  Law  Provisions  and  Applicable  Regulations  Relative  to  Returns. — [Read 
beginning  at  ^1434.] 


[For  “Partnerships  and  Personal  Service  Corporations”  in  Reg.  No.  45,  read  at  ^2978.] 

1 269  Law  If  168.  Common-Law  Partnerships  Are  Not  Taxable  As  Such. — “Sec.  218, 
(a)  That  individuals  carrying  on  business  in  partnership  shall  be  liable  for  income 
tax  only  in  their  individual  capacity.”  [^2978] 

1270  Partnerships,  as  such,  are  exempt  from  income  tax  on  their  net  income.  (Art.  3, 
Ifll,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 27 1 ^Common-law  partnerships  are  not  associations  within  the  meaning  of  income 

tax  law  * * * ^ (Art.  63,  11306,  Reg.  33,  Rev.,  Jan.  2,  1918  ) 

1272  Hawaiian  Partnerships  Composed  of  Corporations. — [Such  partnerships,  permitted 
under  the  laws  of  Hawaii,  were  held  to  be  partnerships  for  Federal  income  tax  pur- 
poses rather  than  joint-stock  associations  in  Haiku  Sugar  Company,  et  al.,  vs.  Johnstone. 
Circuit  Court  of  Appeals,  Ninth  Circuit.  April  1,  1918  (249  Fed.  103).  However,  “joint- 
stock  associations”  are  no  longer  included  in  the  definition  of  “corporations.”  The  wording 
now  Is  “associations”  and  “joint-stock  companies.”] 

1273  Private  Banks  as  Partnerships. — Private  banks  which  do  not  have  this  formal 
organization  [paragraph  1732]  but  which  transact  business,  not  in  the  name  of  the 

bank,  but  in  the  name  of  the  individuals  who  compose  the  firm,  as  John  Smith  & Co., 
are  held  to  be  co-partnerships  * * * . In  such  cases  the  individuals  who  compose 

the  firm,  if  they  have  net  incomes  in  excess  of  [$1,000  or  $2,000]  will  be  required  to  make 
individual  returns  on  Form  1040,  accounting  for  therein  their  respective  incomes  arising 
and  accruing  from  the  earnings  of  the  bank.  (Mimeograph  letter  No.  1271  to  Collectors, 
Oct.  19,  1915.) 

1274  Limited  Partnerships  of  the  Pennsylvania  Type  Are  Considered  As  Associations 
and  Liable  to  All  the  Provisions  of  Law  Applicable  to  Corporations. — Section  10 

(a)  of  the  Income  Tax  Act  of  September  8,  1916,  as  amended,  provides  for  a tax  upon  the 
net  income  of  “every  corporation,  joint-stock  company  or  association,  or  insurance  company, 
organized  in  the  United  States,  no  matter  how  created  or  organized,  but  not  including 
partnerships.”  Section  4 of  the  War  Income  Tax  Act  of  October  3,  1917,  and  Section  407 
of  the  Capital  Stock  Tax  Act  of  September  8,  1916,  contain  language  similar  in  effect. 
Section  200  of  the  War  Excess-Profits  Tax  Act  of  October  3,  1917,  specifying  that  when 
used  therein  “the  term  ‘corporation’  includes  joint-stock  companies  or  associations  and  in- 
surance companies,”  provides  for  a tax  “upon  the  income  of  every  corporation,  partner- 
ship, or  individual.” 

Article  62  of  the  Income  Tax  Regulations  classes  limited  partnerships  as  corpo- 

1275  rations  for  the  purpose  of  the  income  tax  and  requires  income  from  the  earnings 
of  such  partnerships  to  be  treated  like  dividends  on  corporate  stock.  Article  2 

of  the  Excess-Profits  Tax  Regulations  extends  the  term  “corporation”  to  include  limited 
partnerships. 

So  far  as  limited  partnerships  of  the  type  of  partnerships  with  limited  liability  or 

1276  partnership  associations  authorized  by  the  statutes  of  Pennsylvania  and  of  a few 
other  States  are  concerned,  no  reason  exists  for  changing  the  regulations.  Such 

so-called  limited  partnerships,  offering  opportunity  for  limiting  the  liability  of  all  the 
members,  providing  for  the  transferability  of  partnership  shares,  and  capable  of  holding 
real  estate  and  bringing  suit  in  the  common  name,  are  more  truly  corporationsor  joint-stock 
companies  than  partnerships. 


INC, 


130  TAX 


PARTNERSHIPS  AND  PERSONAL  SERVICE  CORPORATIONS. 


But  the  regulations  require  revision  with  respect  to  limited  partnerships  of  the 

1277  type  authorized  by  the  statutes  of  New  York  and  of  most  of  the  States.  Such 
limited  partnerships,  which  cannot  limit  the  liability  of  the  general  partners,  although 

the  special  partners  enjoy  limited  liability  so  long  as  they  observe  the  statutory  conditions, 
which  are  dissolved  by  the  death  or  attempted  transfer  of  the  Interest  of  a general  partner, 
and  which  cannot  take  real  estate  or  sue  in  the  partnership  name,  are  so  like  common  law 
partnerships  as  to  render  inadvisable  the  differentiation  hitherto  existing  in  the  regulations. 
The  same  considerations  apply  to  the  classification  of  limited  partnerships  for  the 

1278  purpose  of  the  capital  stock  tax.  It  is  immaterial  that  partnerships  with  limited 
liability  of  the  Pennsylvania  type  may  not  issue  stock.  They  have  capital  stock  and 

the  Interests  of  the  members  are  shares  within  the  meaning  of  the  statute,  stock  certificates 
being  mere  evidences  of  ownership. 

Therefore,  for  the  purpose  of  the  Income  tax,  the  war  income  tax,  the  excess-profits 

1279  tax  and  capital  stock  tax,  limited  partnerships  of  the  Pennsylvania  type  of  partner- 
ships with  limited  liability  are  corporations  or  joint-stock  companies,  and  limited 

partnerships  of  the  New  York  type  are  partnerships.  Article  62  of  the  Income  Tax 
Regulations  and  Article  2 of  the  Excess-Profits  Tax  Regulations  are  modified  accordingly. 
However,  in  doubtful  cases  lim.ited  partnerships  will  be  treated  as  corporations  unless  they 
submit  satisfactory  proof  that  they  are  not  in  effect  so  organized.  (T.  D.  2711,  May  9, 
1918.)  [1i3077  and  1(3078.] 

1280  Law  1]  169.  Distributive  Share  of  Partnership’s  Net  Income,  Whether  Distributed 
or  Not,  To  Be  Accounted  For  By  Each  Partner. — “There  shall  be  included  in  com- 
puting the  net  income  of  each  partner  his  distributive  share,  whether  distributed  or  not 
[1|1289],  of  the  net  income  of  the  partnership  for  the  taxable  year,  or,”  [K2978.] 

1281  La w K 1 7 0.  Partner’s  Accounting  Peiiod  Differing  From  That  of  the  Partnership. — 
“if  his  net  Income  for  such  taxable  year  is  computed  upon  the  basis  of  a period 

different  from  that  upon  the  basis  of  which  the  net  income  of  the  partnership  is  computed, 
then  his  distributive  share  of  the  net  income  of  the  partnership  for  any  accounting  period 
of  the  partnership  ending  within  the  fiscal  or  calendar  year  upon  the  basis  of  which  the 
partner’s  net  income  is  computed.”  [1f2978.] 

1 282  It  is  held  that  the  Income  of  a partnership  accrues  to  the  individual  partner  at 
the  tim.e  his  distributive  interest  is  determined.  In  the  returns  of  income  made  by 
individuals  ♦ * * there  should  be  included  such  incomes  accruing  from  the  business 

of  partnerships  for  the  business  years  of  the  partnerships  as  may  have  been  definitely 
ascertained  by  means  of  a book  balance,  whether  distributed  or  not.  Members  of  partner- 
ships * * * should  include  in  their  returns  of  income  their  interest  in  partnership 

profits  ascertained  at  the  end  of  the  business  year  falling  within  the  ♦ * * year  for 

which  the  individual  return  is  being  rendered.  (Art.  4,  U4S,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 283  The  partners  are  required  to  Include  their  respective  shares  of  partnership  Income 
(whether  distributed  or  not)  in  the  returns  required  of  each  partner.  (Art.  3,  1[11, 
Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 284  Partnerships  as  such  are  required  to  * * * render  a correct  return  of  the  earn- 

ings, profits,  and  Income  of  the  partnership,  except  income  exempt  from  tax  under 
section  4 of  the  income-tax  law,  setting  forth  the  item  of  gross  Income  and  the  deductions 
and  credits  allowed  by  law  as  for  an  Individual,  citizen,  or  resident  alien,  and  the  names 
and  addresses  of  the  individuals  who  would  be  entitled  to  the  net  earnings,  profits,  and  in- 
come, if  distributed.  In  computing  its  profits,  for  the  purpose  of  the  income  tax  and  return 
as  aforesaid,  a partnership  shall  not  deduct  premiums  on  life-insurance  policies  covering 
the  lives  of  members  of  the  partnership,  its  employees,  or  those  financially  interested  in 
the  business  or  trade  conducted  by  the  partnership  or  otherwise.  Individuals  entitled  to 
share  in  partnership  net  income  are  required  to  Include  in  their  returns  of  income  their 
respective  shares  of  such  partnership  net  income,  whether  distributed  or  not.  In  reporting 
their  share  of  partnership  net  income  the  partners  will  exclude  such  part  thereof,  as  may 
have  been  received  by  the  partnership  from  sources  exempt  from  tax  under  provisions 
of  section  4,  act  of  September  8,  1916,  as  amended,  and  which  shall  have  been  included 
by  the  partnership  in  its  statement  of  net  income  distributed  to  the  partners.  The  partners 
shall  include  in  their  returns  of  income  their  proportionate  share  of  partnership  net  income 
derived  from  dividends,  but  the  amount  of  such  dividends  so  received  shall  be  allowed  as 
a credit  for  the  purpose  of  computing  the  normal  income  tax.  (Art.  30,  1[211,  Reg.  33 
Rev.,  Jan.  2,  1918.) 

1286  Partners  Should  Return  Their  Respective  Interests  in  the  Firm’s  Accounts  Re- 
ceivable.— This  office  acknowledges  receipt  of  your  letter  of  February  23,  1916,  in 
which  you  request  to  be  advised  upon  the  following  statement  of  facts:  “A  firm  of  lawyers 

131  TAX 


INC. 


PARTNERSHIPS  AND  PERSONAL  SERVICE  CORPORATIONS. 


has,  during  1915,  entered  upon  its  books  legal  charges  to  clients  amounting  to  a certain 
sum.  Part  of  these  accounts  have  been  paid.  The  remainder  constitute  debts  due  the 
partnership.  Should  income  tax  returns  of  individual  partners  be  based  upon  the  cash 
receipts  of  the  firm  from  such  accounts  (whether  distributed  or  not),  or  upon  the 
total  charges  thus  entered  upon  the  books?”  [iVnswer.]  In  reply  you  are  informed 
that  the  distributive  interests  of  the  partners  in  the  firm’s  net  incom.e,  as  shown  by  the 
books  when  closed,  should  be  reported  in  their  returns,  and  not  their  distributive  interests 
in  so  much  of  the  net  income  as  represented  actual  cash  receipts.  (Letter  to  Green, 
Hinckley  & Allen,  Providence,  R.  I.,  signed  by  Deputy  Commissioner  L.  F.  Speer,  and 
dated  Feb.  28,  1916.) 

1 286  Insurance  Premiums. — Insurance  premiums  paid  on  life-insurance  policies  covering 
the  lives  of  officers,  employees,  or  those  financially  interested  in  any  business  con- 
ducted as  a partnership  or  by  an  individual  shall  not  be  deducted  in  computing  the  net 
income  of  such  individual  or  in  computing  the  profits  of  such  partnership  for  the  purpose 
of  paragraph  (e)  of  section  8 of  the  act  of  September  8,  1916,  as  amended.  (Art.  30,  ^^212, 
Reg.  33,  Pvcv.,  Jan.  2,  1918.) 

1 287  Net  Losses  Suffered  By  Partnerships. — Where  the  result  of  partnership  operation 
is  a net  loss,  the  loss  will  be  divisible  between  the  partners  in  the  same  proportion 
as  net  income  would  have  been  divisible,  and  may  be  used  by  the  Individual  partners  in 
their  returns  of  income.  (Art.  30,  ^213,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

Benefit  of  the  Special  “Net  Loss”  Provision  Accrues  to  Members  of  a Partnership. — 

[Read  at  ^1921.] 

1 288  Undistributed  Distributable  Interests  Once  Taxed  Are  Not  Taxed  Again  V/hen 
Distributed. — Undivided  annual  net  profits  of  partnerships  thus  returned  by  the 
Individual  members  thereof,  and  tax  paid  thereon,  shall  not,  when  said  profits  are  actually 
distributed  and  paid  to  such  members,  be  again  included  in  their  annual  return  as  a part 
of  their  gross  incom.e.  (Art.  14,  Reg.  33,  Jan.  5,  1914.] 

1 289  Law  H 17 1.  Credits  Allowed  Members  of  Partnerships  for  Normal  Tax  Purposes. — 
“The  partner  shall,  for  the  purpose  of  the  norm.al  tax,  be  allowed  as  credits,  in  addi- 
tion to  the  credits  allowed  to  him  under  section  216  [‘[[1124].  his  proportionate  share  of  such 
amounts  specified  in  subdivisions  [dividends,  ^1125]  (a)  and  (b)  [United  States  bond  interest 
included  in  gross  income,  ^[1127]  of  section  216  as  are  received  by  the  partnership.” 

1 290  Law  1[172.  Taxable  Year  Embracing  Parts  of  Tvvro  Calendar  Years  for  which  the 
Rates  Differ. — “(b)  If  a fiscal  year  of  a partnership  ends  during  a calendar  year 
for  which  the  rates  of  tax  differ  from  those  for  the  preceding  calendar  year,  then” 

1291  L aw  ^173.  “(1)  the  rates  for  such  preceding  calendar  year  shall  apply  to  an  amount 

of  each  partner’s  share  of  such  partnership  net  income  equal  to  the  proportion  which 
the  part  of  such  fiscal  year  falling  within  such  calendar  year  bears  to  the  full  fiscal  year, 
and” 

1 292  Law  11174.  “(2)  the  rates  for  the  calendar  year  during  which  such  fiscal  year  ends 

shall  apply  to  the  remainder.” 

[In  connection  with  the  above  read  at  1f2979.] 

1 293  If  the  fiscal  year  of  a partnership  (other  than  the  calendar  year)  ends  in  a calendar 
year  for  which  there  is  a rate  of  tax,  different  from  the  rate  for  the  preceding  cal- 
endar year,  for  the  purpose  of  the  income  tax,  each  partner’s  share  of  partnership  profits 
shall  be  divided  in  the  proportion  of  the  different  calendar  years  composing  said  fiscal 
year  and  the  rate  of  tax  for  the  respective  calendar  years  shall  apply  to  that  part  of  such 
profits  as  thus  falls  within  said  calendar  years.  (Art.  31,  1[214,  Reg.  33.,  Rev.,  Jan.  2, 
1918.) 

Special  for  1917-1918  and  1918-1919  Partnership  Fiscal  Years,  1[1674. 

1 294  Law  If  175.  Credit  to  a Member  of  a Partnership  V/hose  Fiscal  Year  Ends  in  1918, 
for  his  Proportionate  Share  of  any  Excess  Profits  Tax  Imposed  on  the  Firm  for  the 
1917  Portion  of  such  Fiscal  Year. — “(c)  In  the  case  of  an  individual  member  of  a part- 
nership which  makes  return  for  a fiscal  year  beginning  In  1917  and  ending  in  1918,  his 
proportionate  share  of  any  excess  profits  tax  imposed  upon  the  partnership  under  the 
Revenue  Act  of  1917  with  respect  to  that  part  of  such  fiscal  year  falling  in  1917,  shall, 
for  the  purpose  of  determining  the  tax  imposed  by  this  title,  be  credited  against  that 
portion  of  the  net  income  embraced  in  his  personal  return  for  the  taxable  year  1918  to 
which  the  rates  for  1917  apply.”  [1f2978] 

INC. 


132  TAX 


PARTNERSHIPS  AND  PERSONAL  SERVICE  CORPORATIONS. 


1295  Law  Hi 76.  Manner  of  Computing  Net  Income  by  Partnerships  to  Determine 
Taxable  Distributive  Interests. — “(d)  The  net  income  of  the  partnership  shall  be 

computed  in  the  same  manner  and  on  the  same  basis  as  provided  in  section  212,  [H754] 
except  that  the  deduction  provided  in  paragraph  (11)  [contributes,  Hi  102]  of  subdivision 
(a)  of  section  214  shall  not  be  allowed.” 

1296  Credit  to  Members  on  Account  of  Non-Deductible  Donations  Made  by  a Part- 
nership.— Any  donation  allowed  as  a business  expense  of  the  partnership  would  of 

course  not  be  deductible  by  individual  members  of  the  partnership  in  their  personal  income 
tax  returns.  Donations  made  by  the  partnership  but  not  allowable  as  deductions  by  it 
may  be  prorated  among  the  individual  members  of  the  partnership  for  the  purpose  of  their 
individual  income  tax  returns,  as  contributions  or  gifts,  subject  to  the  limitations  of  Sec- 
tion 5 of  the  Act  of  September  8,  1916,  subdivision  a,  clause  ninth,  added  by  Section  1201 
of  the  Act  of  October  3,  1917.  (Letter  to  The  Corporation  Trust  Company,  signed  by 
Commissioner  Daniel  C.  Roper,  and  dated  May  23,  1918.) 

1297  Amount  Received  by  an  Employee  of  a Partnership  Under  a Participation  of  Profits 
Agreement  is  Deductible  by  the  Partnership  as  an  Expense. — This  office  acknowl- 
edges the  receipt  of  your  letter  of  June  26,  1916,  reading,  in  part  as  follows:  “A  partnership 
agrees  with  an  expert  to  take  charge  of  one  of  its  departments  upon  a participation  of  profits 
basis;  that  is,  the  expert  serves  without  salary  and  his  compensation  is  in  the  form  of  20% 
of  the  net  profits  of  his  department  at  the  end  of  the  year.  May  the  amount  represented 
by  the  20%  be  deducted  as  an  expense  to  the  partnership  In  determining  the  amount 
of  taxable  income  to  the  actual  members  of  the  partnership.?”  (Answer)  It  appears  from 
your  statement  of  facts  that  the  relationship  existing  between  the  partnership  and  the 
“expert”  is  merely  that  of  employer  and  employee  and,  such  being  the  case,  the  office 
holds  that  the  amount  of  compensation  paid  to  the  individual  constitutes  an  Item  of  business 
expense  to  the  partnership  and  may  be  so  considered  in  computing  the  amount  of  taxable 
income  accruing  to  the  partnership  members.  (Letter  to  The  Corporation  Trust  Company, 
signed  by  Acting  Commissioner  David  A.  Gates,  and  dated  June  30,  1916.) 

1298  Law  H238.  Returns  by  Partnerships.  “Sec.  224.  That  every  partnership  shall 
make  a return  for  each  taxable  [H477]  year,”  [H3018.] 

1 299  A partnership  shall  have  the  privilege  of  fixing  and  m.aklng  return  on  the  basis 
of  a fiscal  year  the  same  as  provided  for  corporations  by  section  13  (a)  and  (b). 
Act  of  September  8,  1916,  as  amended.  * * * [Read  “Comment”  at  HLiS6.]  (Art.  31, 

H214,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 300  Any  partnership  may  at  its  option  designate  the  last  day  of  any  month  as  the  close 
of  its  fiscal  year.  In  each  case  where  the  partnership’s  fiscal  year  differs  from  the 
calendar  year  It  shall,  not  less  than  30  days  prior  to  March  1,  give  notice  in  writing  to  the 
collector  of  internal  revenue  of  the  district  In  which  its  principal  place  of  business  Is  located 
that  the  day  it  has  thus  designated  is  the  closing  day  of  its  fiscal  year.  [Read  “Comment” 
at  H1486.]  (Art.  31,  H215,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1301  Law  H238,  Return  of  Gross  Income  and  Deductions. — “stating  specifically  the 
items  of  its  gross  income  and  the  deductions  allowed  by  this  title  [H1295]  and” 

1302  Law  H238.  Return  to  Disclose  Names  and  Addresses  of  all  Members. — “shall 
include  In  the  return  the  names  and  addresses  of  the  individuals  who  would  be 

entitled  to  share  in  the  net  income  if  distributed  and” 

1303  Law  H238.  Return  to  Show  Distributive  Share  of  Each  Member. — “the  amount 
of  the  distribuiive  share  of  each  indIviWual  [H1280].” 

1 304  Law  H238.  Return  to  be  Sv/orn  to  by  One  of  the  Partners. — “The  return  shall 
be  sworn  to  [Hl451j  by  any  one  of  the  partners.” 

General  Law  Provisions  and  Applicable  Regulations  Relative  to  Returns. — [Read 
beginning  at  H 1434.] 


1306  Law  H177.  Personal  Service  Corporations.— “(e)  Personal  service  corporations 
shall  not  be  subject  to  taxation  under  this  title  but  the  individual  stockholders 
thereof  shall  be  taxed  in  the  same  manner  as  the  members  of  partnerships.”  [H2981.] 

1306  Law  Hl78.  “All  the  provisions  of  this  title  relating  to  partnerships  and  the 
members  (H1269,  et  seq.j  thereof  shall  so  far  as  practicable  apply  to  personal  service 
corporations  and  the  stockholders  thereof:” 

INC.  133  TAX 


INFORMATION  AT  THE  SOURCE. 


1307  Law  ^179.  Amounts  Distributed  or  Distributable  by  Personal  Service  Corpora- 
tions.— ^‘Provided,  That  for  the  purpose  of  this  subdivision  amounts  distributed 

by  a persona]  service  corporation  during  its  taxable  year  shall  be  accounted  for  by  the 
distributees;  and  any  portion  of  the  net  income  remaining  undistributed  at  the  close  of 
its  taxable  year  shall  be  accounted  for  by  the  stockholders  of  such  corporation  at  the  close 
of  its  taxable  year  in  proportion  to  their  respective  shares.”  [Read  at  “Dividends”  1[770.] 

Personal  Service  Corporations  to  Make  Annual  Returns. — Read  at  ^1398  and  ^2981. 

1308  Law  ^23.  “Personal  Service  Corporation”  Defined. — “The  term  ‘personal  ser- 
vice corporation’  means  a corporation  whose  income  is  to  be  ascribed  primarily 

to  the  activities  of  the  principal  owners  or  stockholders  who  are  themselves  regularly 
engaged  in  the  active  conduct  of  the  affairs  of  the  corporation  and  in  which  capital  (whether 
invested  or  borrowed)  is  not  a material  income-producing  factor;” 

1 309  Law  ^24.  “but  does  not  include  any  foreign  corporation,” 

1310  Law  ^25.  “nor  any  corporation  50  per  centum  or  uore  of  whose  gross  income 
consists  either” 

1311  Law  ^26.  (1)  of  gains,  profits,  or  Income  derived  from  trading  as  a principal,  or” 

1312  Law  ^27.  “(2)  of  gains,  profits,  commissions,  or  other  income,  derived  from  a 

government  contract  or  contracts  made  between  April  6,  1917,  and  November  11, 

1918,  both  dates  inclusive;” 

[In  connection  with  the  above  read  at  ^3084.] 

1313  Law  ^13.  “Government  Contract”  Defined. — “The  term  ‘Government  contract’ 
m.eans  (a)  a contract  made  with  the  United  States,  or  with  any  department,  bureau, 

officer,  commission,  board,  or  agency,  under  the  United  States  and  acting  in  its  behalf, 
or  with  any  agency  controlled  by  any  of  the  above  if  the  contract  is  for  the  benefit  of  the 
United  States,  or  (b)  a sub-contract  made  with  a contractor  performing  such  a contract 
if  the  products  or  services  to  be  furnished  under  the  subcontract  are  for  the  benefit  of  the 
United  States.  The  term  ‘Government  contract  or  contracts  m.ade  between  April  6, 
1917,  and  November  11,  1918,  both  dates  inclusive’  v/hen  applied  to  a contract  of  the  kind 
referred  to  in  clause  (a)  of  this  paragraph,  includes  all  such  contracts  which,  although  entered 
into  during  such  period,  were  originally  not  enforceable,  but  which  have  been  or  may 
become  enforceable  by  reason  of  subsequent  validation  in  pursuance  of  law;” 


1314  Law  11391.  Returns  of  Information  at  Source. — “Sec.  256.  That  all  individuals, 
corporations  and  partnerships,  in  whatever  capacity  acting,  including  lessees  or 

mortgagors  of  real  or  personal  property,  fiduciaries,  and  employers,” 

1315  Law  1[392.  “making  payment  to  another  individual,  corporation,  or  partnership,” 

1316  Law  1[393  “of  interest,  rent,  salaries,  wages,  premiums,  annuities,  compensations, 
remunerations,  emoluments,  or  other  fixed  or  determinable  gains,  profits,  and  income” 

1317  Law  1[394.  “(other  than  payments  described  in  sections  254  [dividends  1[1393]  and 
255  [profits  paid  to  customers  by  brokers,  1[1396j,” 

1318  Law  1[395,  “of  $1,000  or  more  in  any  taxable  year,” 

1319  Law  1[396.  “or,  in  the  case  of  such  payments  made  by  theiUnited  States,  the  officers 
or  employees  of  the  United  States  having  information  as  to  such  payments  and  re- 
quired to  make  returns  in  regard  thereto  by  the  regulations  hereinafter  provided  for,” 

1320  Returns  of  information  will  not  be  required  from  disbursing  officers  of  payments 
made  to  sailors,  soldiers,  or  civilian  employees  of  the  United  States  Government, 

the  records  in  these  cases  being  available  to  the  Treasury  Department  at  any  time.  (T.  D. 
2670,  Murch  11,  1918.) 

1321  Law  1[397.  “shall  [1[1314]  render  a true  and  accurate  return  [1[1572]  to  the  Com- 
missioner, under  such  regulations  and  in  such  form  and  manner  and  to  such  extent 

as  may  be  prescribed  by  him  with  the  approval  of  the  Secretary,  setting  forth  the  amount 
of  such  gains,  profits,  and  income,  and  the  name  and  address  of  the  recipient  of  such  pay- 
ment.” 

[In  connection  with  the^above  read  at  1[3054.] 

INC.  134  TAX 


INFORMATION  AT  THE  SOURCE. 


1322  In  lieu  of  the  withholding  of  normal  tax  at  the  source,  heretofore  required,  from 
incomes  paid  to  citizens  or  residents  of  the  United  States,  there  shall  hereafter 
be  furnished  “returns  of  information”  in  accordance  with  the  provisions  of  Section 
1211  [Sec.  256,  ^1314]  of  the  War  Revenue  Act  of  October  3,  1917,  on  forms  for  that 
purpose  which  will  be  furnished  you  in  due  time  for  distribution  throughout  your  district. 
(Mimeograph  letter  to  Collectors,  No.  1663,  November  1,  1917.) 

1 323  Every  person,  corporation,  partnership,  association,  and  insurance  company,  in  what- 
ever capacity  acting,  including  lessees  or  mortgagors  of  real  or  personal  property, 
trustees  acting  in  any  trust  capacity,  executors,  administrators,  receivers,  conservators, 
and  employers,  making  payment  to  another  person,  corporation,  partnership,  association, 
or  insurance  company  of  interest,  rent,  salaries,  wages,  premiums,  annuities,  compensa- 
tion, remuneration,  emoluments,  or  other  fixed  or  determinable  gains,  profits,  and  income 
(other  than  payments  [of  dividends,  ^1393,  and  of  profits  to  customers  by  brokers.  ^1396] 
of  [Si, 000]  or  m,ore  in  any  taxable  year,  or,  in  the  case  of  such  payments  made  by  the 
United  States,  the  officers  or  employees  of  the  United  States  having  information  as  to  such 
payments,  are  hereby  authorized  and  required  to  render  a true  and  accurate  return  to  the 
Commissioner  of  Internal  Revenue,  on  the  form  prescribed  for  that  purpose  (Form  1099), 
setting  forth  the  amount  of  such  gains,  profits,  and  income  and  the  name  and  address  of 
the  recipients  of  such  income.  (Art.  3-1,  ^233,  Reg.  33,  Rev.,  Jan.  2,  1918.)  [^3056.] 

1 324  This  Section  makes  it  mandatory  for  all  persons,  corporations,  partnerships,  and 
associations  or  insurance  companies,  in  whatever  capacity  acting,  including  lessees 
or  mortgagors  of  real  or  personal  property,  trustees  acting  in  any  trust  capacity,  executors, 
adm.inistrators,  receivers,  conservators,  and  employers,  m.aking  payments  of  [$1,000] 
or  m.ore  of  incom.e  to  another  person,  corporation,  partnership,  association,  or  insurance 
company,  in  the  [taxable]  year  [1918],  to  file  information  return  of  such  payments  in  ac- 
cordance with  rules  and  regulations  prescribed  by  the  Commissioner  of  Internal  Revenue, 
with  the  approval  of  the  Secretary  of  the  Treasury,  or  become  liable  for  a penalty  of  not 
* * * m.ore  than  $1,000.  [If  neglect  is  willful,  then  “guilty  of  a misdemeanor  and  shall 

be  fined  not  more  than  $10,000  or  imprisoned  for  not  more  than  one  year,  or  both,  together 
with  costs  of  prosecution,  ^1572.]  (T.  D.  2670,  March  11,  1918.)  [^3056.] 

1 325  Tax  Exempt  Organizations  to  Furnish  Information  at  the  Source. — If  it  is  held 
that  the  corporation  itself  is  exempt  from  the  income  and  excess  profits  taxes, 
it  is  not,  however,  exempt  from  the  withholding  requirements  nor  from  furnishing  inform- 
ation in  accordance  with  the  provisions  of  the  Act  of  October  3,  1917.  (T.  D.  2693, 

April  8,  1918.) 

1326  Forms  for  Making  Returns. — To  this  end  certificate  form  No.  1099  and  letter  of 
transmittal  form  No.  1096  have  been  provided  for  use  in  reporting  such  payments. 

(T.  D.  2670,  March  11,  1918.) 

1327  Letter  of  Transmittal. — Returns  of  information  for  the  preceding  calendar  year 
shall  be  filed  with  the  Commissioner  of  Internal  Revenue  on  or  before  March  1 

[March  15]  of  each  year,  accompanied  by  a letter  of  transmittal,  under  oath  (Form 
1096),  which  will  show  the  number  of  returns  filed  and  the  aggregate  amount  represented 
by  the  payments.  (Art.  34,  1[234,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 328  Payments  Made  Which  do  not  Require  Returns  of  Information. — Under  the  above 
authority  the  following  instructions  are  issued  for  the  guidance  of  all  concerned: 
payments  made  which  do  not  require  reports  of  information. 

1329  Payments  made  to  corporations,  associations,  or  insurance  companies,  for  the 
year  1917.  [Note  the  qualifying  clause  “for  the  year  1917.”]  [For  1918  see  ^3056.] 

1330  Bills  paid  for  merchandise,  telegrams,  telephone,  freight,  storage,  and  similar 
charges. 

1331  Bills  paid  to  employees  for  board  and  lodging  while  traveling  under  orders  or 
when  employee  is  employed  on  a salary  basis. 

1 332  Payments  of  premium.s  made  to  insurance  companies  for  annual  protection.  Annu- 
ities representing  return  of  corpus  or  capital. 

1333  Fees  to  lawyers,  doctors,  and  similar  payments,  aggregating  less  than  [$1,000]  for 
the  year. 

1334  Interest  accrued  on  bank  deposits,  before  it  has  been  passed  to  the  credit  of  the 
individual  depositor. 

1335  Salary,  wages,  and  other  compensations  for  services  rendered  in  December,  1917, 
but  paid  in  1918,  unless  the  amount  was  fully  due  and  passed  to  the  credit  of  the 
individual  in  December,  1917. 

1336  Payments  of  rent  made  to  real  estate  agents.  (But  agents  must  repay  payments 
to  landlord,  if  the  same  amounts  to  [$1,000]  or  more  during  1917.) 


1S5  TAX 


Il^C. 


INFORMATION  AT  THE  SOURCE. 


1337  Payments  made  to  employees  in  factories  where  the  brass  check  or  number  sys- 
tem was  in  use  during  1917,  and  a record  of  sufficient  detail  does  not  exist  and 

cannot  be  obtained  because  employees  are  no  longer  in  the  employ  of  the  company. 
However,  in  all  such  cases  an  accounting  system  must  be  installed  that  will  enable  such 
employers  to  keep  an  accurate  check  so  that  full  information  can  be  given  in  the  future. 
[1918  is  presumably  “the  future”.] 

In  the  case  of  an  employer  having  a large  number  of  employees  who  are  moved 

1338  from  place  to  place  as  the  exigencies  of  the  service  require,  and  who  consequently 
has  no  complete  record  of  annual  payments  to  them  at  any  one  place,  the  salary 

of  two  representative  months  may  be  taken  to  establish  a fair  monthly  wage,  and  unless 
yearly  payment  based  on  this  estimate  in  the  case  of  an  empolyee  amounts  to  $800  or 
more  no  return  of  payments  to  such  employee  is  required  for  1917.  [Note  the  “1917”; 
also  that  returns  are  now  required  if  payment  is  “of  $1,000  or  more.”] 

Payments  made  by  branches  of  business  houses  located  in  foreign  countries  to 

1339  alien  employees  serving  In  foreign  countries  need  not  be  reported.  (T.  D.  2670, 
March  11,  1918.) 

1340  Form  1099  should  not  be  used  to  report  payments  for  advertising,  freight,  cartage, 
fire  insurance  premium.s,  and  discounts  paid  banks.  (Telegram  to  Kennedy  M. 

Thompson,  New  York,  N.  Y.,  signed  by  Commissioner  Daniel  C.  Roper,  and  datea 
February  5,  1918.) 

1341  Returns  of  Information  Covering  Payments  made  to  Insurance  Agents  and 
Agencies. — Replying  to  your  letter  of  February  26,  1918,  relative  to  the  reporting 

on  Forms  1096  and  1099  of  commissions  paid  to  insurance  agents  during  1917,  you 
are  advised  that  if  the  com.missions  are  paid  to  soliciting  agents  for  personal  service  in 
securing  insurance  contracts,  the  amount  must  be  reported. 

If,  however,  the  agent  conducts  a branch  office,  or  is  employed  by  an  insurance 

1342  company  under  a contract  that  makes  it  necessary  to  bear  the  expenses  of  the 
branch  office,  and  all  payments  received  are  intended  to  cover  such  expenses,  it 

is  not  then  necessary  that  reports  on  Forms  1096  and  1099  be  filed.  (Letter  to  The  Cor- 
poration Trust  Company,  signed  by  Commissioner  Daniel  C.  Roper  and  dated  March 
28,  1918.) 

1343  Living  Quarters  in  Addition  to  Cash  Compensation. — Where  a person  received  a 
cash  compensation  for  services  rendered  and  in  addition  thereto  living  quarters, 

the  value  to  such  person  of  the  quarters  furnished  constitutes  income  subject  to 
tax.  A return  under  Section  28  Is  required  In  each  case  where  the  cash  compensation 
received  plus  the  value  of  living  quarters  furnished  equals  or  exceeds  [$1,000]  for  a tax  year. 
(Art.  34,  1|235,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 344  “Living  quarters”  referred  to  in  paragraph  235  [^1343],  Regulations  No.  33  (revised) 
are  quarters  furnished  for  the  benefit  and  convenience  of  employees  only.  When 
living  quarters,  such  as  camps,  are  furnished  for  the  convenience  of  the  employer  only, 
the  cost  need  not  be  added  to  the  compensation  of  the  employee.  (T.  D.  2670,  March 
11,  1918.) 

1 345  Return  of  Information  at  the  Source  Required  of  Employer  if  Wage  Payments  to 
Employee  Aggregate  $l,C00or  More  for  the  Year  Irrespective  of  the  Basis  for  Such 
Wage  Payments. — Receipt  is  acknowledged  of  your  letter  dated  October  15, 
1917,  requesting  that  you  be  advised  whether  the  provisions  of  Section  28  added  to  the 
Act  of  September  8,  1916,  by  Section  1211,  Act  of  October  3,  1917,  apply  to  employers 
of  workmen  paid  by  the  hour  or  by  the  piece,  stating  in  this  connection  as  follows;  “One 
of  our  clients  employs  som.e  three  thousand  workmen  who  are  almost  all  on  piece  work 
on  an  hourly  basis  and  a large  number  of  them  will  be  paid  m.ore  than  $800  during  the  year. 
Their  wages,  however,  are  not  fixed  as  would  be  a weekly  or  monthly  salary,  payments 
to  them  being  variable  from  week  to  week  and  even  from  day  to  day.”  (Answer.)  In 
reply  you  are  advised  that  in  accordance  W'ith  the  provisions  of  the  law  as  stated  in  the 
Section  referred  to  above  each  person,  corporation,  partnership,  etc.,  is  authorized  and 
required  to  render  a true  and  accurate  return  to  the  Commissioner  of  Internal  Revenue 
setting  forth  the  amount  of  salary  or  compensation  and  the  name  and  address  of  each 
employee  who  is  paid  [$1,000]  or  m.ore  during  the  year  1917,  and  subsequent  tax  years. 
The  liability  for  such  return  attaches  in  all  cases  of  paym.ents  of  salary  or  compensation 
amounting  to  [$1,000]  or  more  during  the  year,  without  regard  to  the  basis  of  payment 
of  the  period  during  the  year  in  which  it  was  earned  and  for  which  it  was  paid.  (Letter  to 
Palmer  and  Series,  New  York,  N.  Y.,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated 
October  25,  1917.) 


INC. 


136  TAX 


INFORMATION  AT  THE  SOURCE. 


1346  Salaries  Due  to  Non-Resident  Aliens  for  Services  Rendered  Outside  the  United 
States  Need  not  be  Reported  on  Form  1099. — In  reply  to  your  letter  of  February 

6.  1918,  the  receipt  of  which  was  acknowledged  March  7,  1918,  you  are  advised  that  salaries 
paid  to  a non-resident  alien  for  services  performed  outside  of  the  United  States  are  not 
required  to  be  reported  on  Forms  1096  and  1099  ^ * [see  ^563].  ^ (Letter  to 

Kenefick,  Cooke,  Mitchell  & Bass,  Buffalo,  N.  Y.  signed  by  Deputy  Commissioner  L.  F. 
Speer,  and  dated  March  27,  1918.)  [^3058.] 

1347  Branch  Offices  and  Subcontractors. — Heads  of  branch  offices  and  sub-contractors 
employing  labor  and  keeping  the  only  complete  record  of  payments  should  file  the 

returns  of  information  in  regard  to  such  payments  direct  with  the  Commissioner  of  Internal 
Revenue,  Sorting  Division,  Washington,  D.  C.  When  the  record  is  kept  of  payments 
at  both  the  main  office  and  the  branch  office  the  return  should  be  filed  by  the  main  office. 
(T.  D.  2670,  March  11,  1918.) 

1348  Returns  of  Information  at  the  Source  by  Fiduciaries. — In  reply  you  are  advised 
that  fiduciaries  come  within  the  provisions  of  Section  28,  added  to  the  Act  pf 

September  8,  1916,  by  Section  1211  of  the  War  Revenue  of  October  3,  1917,  and  will_^be 
required  to  file  the  return  of  information  as  provided  therein.  (Part  of  letter  to  The 
Corporation  Trust  Company,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  Nov- 
ember 27,  1917.) 

1349  Section  2 (b)  of  the  income  tax  law  of  Septem.ber  8,  1916,  and  the  regulations  pre- 
scribed by  this  office,  require  that  the  beneficiary  shall  report  as  income  his  share  of 

the  distributable  income  of  the  trust  estate  received  by  the  fiduciary  during  the  year.  On 
Form  1099  should  be  showm  the  beneficiary’s  share  of  the  distributable  income  of  the  trust 
estate  regardless  of  whether  or  not  this  is  actually  paid  over  to  the  beneficiary  during 
the  year.  There  should  not  be  included  on  Form  . 1099  any  part  of  the  dividends  received 
by  the  trust  estate.  It  is  only  where  the  beneficiary’s  share  of  the  distributable  income 
of  the  trust  estate  from  sources  other  than  dividends  is  [$1,000]  or  more  that  a return  on 
Form  1099  is  required.  If  the  entire  trust  estate  consists  of  shares  of  stock  in  corporations 
subject  to  the  Income  tax,  no  Form  1099  is  to  be  filed.  (Letter  to  F.  W.  Denio,  Old  Colony 
Trust  Co.,  Boston,  Mass.,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  March 
5,  1918.) 

1 350  Law  ^398.  Returns  of  Information  of  Payments  of  Corporate  Obligation  Interest. — 
“Such  returns  may*  be  required,  regardless  of  amounts,  (1)  in  the  case  of  payments 

of  interest  upon  bonds,  mortgages,  deeds  of  trust,  or  other  similar  obligations  of  corpora- 
tions, and” 

’•‘Comment:  [The  Revenue  Act  of  1916  as  amended  by  the  Revenue  Act  of  1917 
provided  “that  such  returns  shall  be  required.”]  [Required  for  1918,  ^3057.] 

1351  “Art.  35.  Such  returns  of  information  shall  be  required,  regardless  of  ampunt, 
in  the  case  of  payments  of  interest  upon  bonds,  mortgages,  or  deeds  of  trust  or  other 

similar  obligations  of  domestic  or  resident  corporations,  joint-stock  companies,  associations, 
and  insurance  companies,  * * * ^ original  ownership  certificates,  whep  duly 

filed,  shall  constitute  and  be  treated  as  returns  of  information.”  (Part  of  paragraph  1 
i.  e.  ^236,  of  Art.  35,  Reg.  33,  Rev.,  Jan.  2,  1918,  as  amended  by  T.  D.  2759,  Oct.  2,  1918.) 

1352  Law  If 399.  Returns  of  Information  Concerning  the  Collection  of  Foreign  Items. — 
“(2)  [Such  returns  may*  be  required,  regardless  of  amounts]  in  the  case  of  collections 

of  items  (not  payable  in  the  United  States)  of  interest  upon  the  bonds  of  foreign  countries 
and  interest  upon  the  bonds  of  and  dividends  from  foreign  corporations  by  individuals, 
corporations,  or  partnerships,  undertaking  as  a matter  of  business  or  for  profit  the  collection 
of  foreign  payments  of  such  interest  or  dividends  by  means  of  coupons,  checks,  or  bills 
of  exchange  [If  1378].” 

“Comment:  [The  Revenue  Act  of  1916  as  amended  by  the  Revenue  Act  of  1917 

provided  “that  such  returns  shall  be  required.”]  [Required  for,  1918,  ^3059.] 

1 353  Article  35,  regulations  No.  33,  Revised,  as  amended  by  Treasury  Decision 
2716,  is  hereby  amended  to  read  as  follows: 

“Art.  35.  Such  returns  of  information  shall  be  required,  regardless  of  amount,  in  the 
case  of  payments  of  interest  upon  bonds,  mortgages,  or  deeds  of  trust  or  other  similar 


INFORMATION  AT  THE  SOURCE. 


obligations  of  domestic  or  resident  corporations,  joint-stock  companies,  associations,  and 
insurance  companies,  and  in  the  case  of  foreign  items.  The  original  ownership  certificates 
^when  duly  filed,  shall  constitute  and  be  treated  as  returns  of  information. 

“The  term  ‘foreign  item,,’  as  used  in  this  Article,  m.eans  any  dividend  upon  the 

1354  stock  of  a foreign  corporation,  or  any  item  of  interest  upon  the  bonds  of  foreign 
countries  or  foreign  corporations,  whether  or  not  such  dividend  or  interest  is  paid 

an  the  United  States,  or  by  check  drawn  on  a domestic  bank.  The  term  ‘foreign  corpo- 
ration’ as  used  in  this  Article,  m.eans  one  not  organized  and  existing  under  the  laws  of  the 
United  States  or  of  any  State  or  Territory  thereof,  or  of  the  District  of  Columbia,  Porto 
Rico,  or  the  Philippine  Islands. 

“Wherever  a foreign  country  or  foreign  corporation  issuing  bonds  has  appointed 

1355  a paying  agent  in  this  country,  charged  with  the  duty  of  paying  the  interest  upon 
such  bonds,  such  paying  agent  shall  be  the  source  of  information.  If  such  foreign 

.country  or  foreign  corporation  has  no  such  agent  then  the  last  bank  or  collecting  agent  in  this 
‘Country  shall  be  the  source  of  information.  In  the  case  of  dividends  on  the  stock  of  a foreign 
tcorporation,  the  first  bank  or  collecting  agent  accepting  such  item  for  collection  shall  be 
the  source  of  inform.ation. 

“Where  bonds  of  foreign  countries,  or  bonds  or  stocks  of  foreign  corporations, 

1356  are  owned  by  citizens  or  residents  of  the  United  States,  individual  or  fiduciary, 
or  by  domestic  or  resident  corporations,  joint-stock  companies,  associations,  in- 
surance companies  or  partnerships,  ownership  certificate  lOOlA  shall  be  executed  by  the 
actual  owner,  or  by  his  duly  authorized  agent,  when  presenting  the  item  for  collection, 
whether  such  Item,  Is  a dividend  or  an  interest  payment,  except  in  the  case  of  a foreign 
country  ora  foreign  corporation  having  a paying  agent  in  this  country  and  issuing  bonds 
which  contain  a ‘tax-free’  covenant  clause.  In  such  cases  the  paying  agent  is  required 
to  withhold  the  normal  tax  upon  the  interest  on  such  bonds;  and  ownership  certificate. 
Form  KXX),  properly  modified  to  show  that  the  debtor  has  a paying  agent  in  this  country, 
should  be  used,  unless  the  owner  desires  to  claim  exem.ption;  in  which  case  Form  lOOlA 
should  be  filed. 

■“Where  bonds  of  foreign  countries,  or  bonds  or  stocks  of  foreign  corporations, 

1357  are  owned  by  nonresident  alien  individuals,  or  foreign  corporations,  associations 
or  partnerships,  ownership  certificate.  Form  1071,  Revised,  shall  be  used  for  and  on 

l)ehalf  of  such  owners  by  any  responsible  bank  or  banker,  either  foreign  or  domestic.  (Para- 
graphs 1 to  5 of  Art.  35,  Reg.  33,  Rev.,  Jan.  2,  1918,  as  amended  by  T.  D.  2759,  Oct. 
2,  1918.) 

1358  “Y  our  telegrams  October  10.  The  words  “resident  corporation”  paragraph  4 
il[1356].  Treasury  Decision  2759,  referred  to  in  your  telegram,  govern  in  the  col- 

Section  of  foreign  Items  by  a foreign  corporation  having  an  office  or  place  of  business 
Hn  United  States  and  ownership  certificate  Form  lOOlA,  revised,  is  required.  The  words 
-“foreign  corporation”  paragraph  5 [^1357],  Treasury  Decision  2759,  referred  to  in  your 
rtelegram,  govern  only  in  collection  of  foreign  Items  by  a foreign  corporation  not  having 
;aTi  ofitoe-or  place  of  business  In  United  States  and  ownership  certificate  Form  1071,  revised 
. April  20,  1916,  Is  required.  Article  43,  Regulations  33,  revised,  not  changed  by  Treasury 
ID.ecision  2759  except  [1[654]  in  collecting  interest  from  resident  foreign  corporations, 
'bondholders  will  be  required  to  use  ownership  certificates  Form  1001  A,  revised,  or  1071, 
3-evised,  according  to  status  of  owner  except  as  otherwise  provided  In  paragraph  4,  Treasury 
'Decision  2759.  The  words  “paying  agent”  as  used  in  this  Treasury  Decision  are  not  to  be 
finterpreted  as  meaning  “office  or  paying  agent.”  The  mere  maintenance  of  an  office  or 
ipaying  agency  in  United  States  for  the  payment  of  dividends  on  stock  or  interest  on  bonds 
'does  not  constitute  a foreign  corporation  a resident  of  United  States  within  the  meaning 
:of  this  Treasury  Decision.  (Telegram  to  the  First  National  Bank,  Cleveland,  Ohio, 
'dsigned  hy  Commissioner  Daniel  C.  Roper,  and  dated  October  14,  1918.) 

1359  “Foreign  Item.s  shall  not  be  accepted  for  collection  by  any  bank  or  collecting  agent 
so  licensed  [for  license  requirem.ents  see  ^1378]  unless  endorsed  as  hereinafter  pro- 
vided or  accompanied  by  proper  ownership  certificates  (Form  1001-A,  Form  1000,  properly 
modified  as  outlined  above,  or  Form  1071,  Revised,  as  the  case  may  be),  giving  all  informa- 
tion called  for  by  such  certificate.  In  all  cases  in  which  the  first  licensed  bank  or  collecting 
agent  Is  the  source  of  information,  such  licensee  shall  detach  the  ownership  certificate, 
and  indorse  on  the  item  the  words  “Certificate  detached  and  information  furnished,” 
adding  his  name  and  address.  W'here  an  interest  coupon  Is  received  for  collection,  the 
cwmership  certificate  shall  accompany  the  coupon  to  the  paying  agent  in  this  country,  or, 
if  there  is  no  such  agent,  then  to  the  last  bank  or  collecting  agent  handling  the  item  in  this 
country.  When  more  than  one  coupon  of  the  same  maturity  Is  received  at  one  time  from 
the  same  owmer  and  from  the  same  issue  of  bonds,  a single  certificate  may  be  used  for  all  of 
such  coupons.  W’hen  foreign  items  have  been  indorsed  as  above  prescribed,  the  certificates 
shall  be  detached  and  forwarded  to  the  Commissioner  of  Internal  Revenue  (Sorting  Divis- 


INC. 


138  TAX 


INFORMATION  AT  THE  SOURCE. 


ion),  Washington,  D.  C.,  on  or  before  the  20th  day  of  the  month  following  that  during  which 
the  items  were  accepted,  accompanied  by  a letter  of  transmittal,  showing  the  number  of 
certificates,  and  the  aggregate  amount  of  foreign  items  disclosed  thereon. 

“In  all  cases  in  w^hich  the  paying  agent  or  the  last  bank  or  collecting  agent  in  this 

1360  country  is  the  source  of  information,  the  ownership  certificate  shall  accompany 
the  coupon  to  such  agent  or  source  of  information,  who  shall  forward  the  owner- 
ship certificate  to  the  Commissioner  of  Internal  Revenue,  in  the  manner  provided 
where  such  duty  is  upon  the  licensee.  Provided^  however,  that,  in  case  ownerhip  certi- 
ficate, Form  1000,  is  used  as  provided  above,  the  paying  agent  shall  make  return  on  Form 
1012  as  provided  in  the  Regulations.  [11702]  (Paragraphs  7 and  8 of  Art.  35,  Reg.  35, 
Rev.,  Jan.  2,  1918,  as  amended  by  T.  D.  2759,  Oct.  2,  1918.) 

1361  In  order  that  these  requirements  may  be  complied  with,  certificates  (Form 
1001-A  and  Form  1071,  Revised)  will  be  provided  by  the  Government  and  fur- 
nished to  collectors  of  internal  revenue  for  distribution  to  the  public.  (T.  D.  2759.  Oct. 
2,  1918.) 

1362  Certificate  Form  1071  Revised  will  be  printed  on  yellow  paper  in  the  form  that 
follows: 

1363  [Certificate  Form  1001-A,  Revised,  will  be  printed  on  v/hite  paper,  green  ink, 
in  the  form  that  follows:] 

1364  These  certificates  will  be  in  size  8 by  3j^  inches,  and  will  be  printed  to  read  from 
left  to  right  along  the  8-inch  dimension. 

1365  The  paper  to  be  used  will  correspond  in  weight  and  texture  to  white  writing  paper,. 
21  by  32,  about  40  pounds  to  the  ream  of  500  sheets. 

1366  They  will  be  printed  by  the  Government  and  furnished  without  cost. 

1367  Banks  or  bankers  desiring  to  furnish  their  own  certificates  may  do  so,  but  the 
certificates  so  printed  must  conform  in  size  to  those  prescribed  and  be  printed  in 
similar  type  upon  the  same  color,  shade,  and  weight  of  paper  as  used  by  the  Gov- 
ernment. 

Sample  certificates  showing  size  of  type  and  color  of  paper  can  be  secured  from 

1368  the  Commissioner  of  Internal  Revenue,  Washington,  D.  C.  (T.  D.  2325,  April 
24,  1916.) 

1369  Form  1071,  Modified,  to  be  Filed  by  Nonresident  Alien  with  Coupon  from  Foreign 
Bond  When  Presented  Direct  to  Paying  Agent  in  the  United  States. — This  office 

acknowledges  the  receipt  of  your  letter  of  June  7,  1916,  requesting  to  be  advised  what 
form  of  income  tax  certificate  should  be  executed  by  a nonresident  alien  to  accompany 
interest  coupons  detached  from  bonds  issued  by  a foreign  Government  when  such  coupons 
are  payable  in  the  United  States.  In  reply  you  are  advised  that  if  the  nonresident  alien 
bondowner  does  not  present  his  coupons  for  payment  or  collection  through  a bank  or 
banker,  but  direct  to  a paying  agent  in  the  United  States,  such  coupons  should  be  accom- 
panied by  exemption  certificates.  Form  1071,  Revised,  so  modified  as  to  show  personal 
ownership  of  the  bonds.  (Letter  to  The  Corporation  Trust  Company,  signed  by  Deputy 
Commissioner  L.  F.  Speer,  and  dated  June  13,  1916.) 

1370  Dividends  Paid  by  Foreign  Corporation  Deriving  its  Entire  Income  From  Business 
Done  Wholly  Within  the  United  States. — Dividends  declared  and  paid  by  a foreign 

corporation  which  derives  its  entire  income  from  business  done  wholly  within  the 
United  States  and  pays  under  the  provisions  of  the  Federal  income-tax  law,  a tax  upon 
its  net  income  should  be  treated  in  the  same  manner  as  dividends  from  domestic  corpora- 
tions. (T.  D.  2090  Dec.  14,  1914.) 

1371  Law  1[400.  Name  and  Address  of  Recipient  of  Income  to  be  Furnished  on  Request. 
— “When  necessary  to  make  effective  the  provisions  of  this  section  the  name  and 

address  of  the  recipient  of  income  shall  be  furnished  upon  demand  of  the  individual,  cor- 
poration, or  partnership  paying  the  income.”  [1(3062.] 

137  2 When  the  person  receiving  a payment  falling  within  the  provisions  of  law  for  infor- 
mation at  the  source  is  not  the  actual  owner  of  the  income  received  the  name  and 
address  of  the  actual  owner  shall  be  furnished  upon  demand  of  the  person,  corporation, 
partnership  or  association  paying  the  income,  and  in  default  of  a compliance  with  such 
demand  the  payee  becomes  liable  to  a penalty.  * * * [1(1572].  (Art.  36,  1(240,  Reg. 
33,  Rev.,  Jan.  2,  1918.) 

1373  Where  no  address  is  available  the  last  known  post  office  address  must  be  given. 
Street  and  number  should  be  given  when  possible. 

1374  Information  in  regard  to  whether  an  employee  is  single,  head  of  a family,  or  mar- 
ried, should  be  given  when  possible.  (T.  D.  2670,  March  11,  1918.) 


INC. 


139  TAX 


INFORMATION  AT  THE  SOURCE. 


1375  Law  1[401.  Information  at  the  Source  Provisions  Apply  to  Calendar  Year  1918. — • 

“The  provisions  of  this  section  shall  apply  to  the  calendar  year  1918  and  each 
calendar  year  thereafter,” 

137  6 Law  ^402.  Information  at  the  Source  Provisions  Do  Not  Apply  to  Payments  of 
Interest  on  Government  Obligations. — “but  s hall  not  apply  to  the  payment  of 
interest  on  obligations  of  the  United  States.” 

1 377  The  requirement  of  law  for  information  at  the  source  shall  not  apply  to  the  payment 
of  interest  on  obligations  of  the  United  States.  (Art.  37,  11241,  Ree.  33,  Rev., 

Jan.  2,  1918.) 

1 378  Law  1[410.  License  Required  for  the  Collection  of  Foreign  Items. — “Sec.  259.  ‘ 

That  all  individuals,  corporations,  or  partnerships  undertaking  as  a matter  of  busi- 
ness or  for  profit  the  collection  of  foreign  payments  of  interest  or  dividends  by  means  of 
coupons,  checks,  or  bills  of  exchange  [1[1352]  shall  obtain  a license  from  the  Commissioner 

and”  [113068.] 

1379  Banks  or  agents  collecting  foreign  items  are  required  to  obtain  a license  from  the 
Commissioner  of  Internal  Revenue  to  engage  in  such  business,  and  are  subject  to 

such  regulations  for  the  furnishing  of  information,  as  the  Commissioner,  with  the  approval 
of  the  Secretary  of  the  Treasury,  shall  prescribe,  and  to  the  penalties  prescribed  for  failure  \ 

to  obtain  such  license  (Act  of  September  8,  1916,  Section  9 (f),  as  amended  by  Act  of 
October  3,  1917,  Section  1205).  (Part  of  Paragraph  6 of  Art.  35,  Reg.  33,  Rev.,  Jan.  2, 

1918,  as  amended  by  T.  D.  2759,  Oct.  2,  1918.) 

1 380  All  persons,  corporations,  partnerships,  or  associations  undertaking  as  a matter  of 
business  or  for  profit  the  collection  of  foreign  payments  of  interest  or  dividends 
by  means  of  coupons,  checks,  or  bills  of  exchange  shall  obtain  a license  from  the  Com- 
missioner of  Internal  Revenue.  * * * (Art.  48,  11276,  Reg.  33,  Rev.,  Jan.  2,  1918  ) 

1381  Each  Bank  Handling  a Foreign  Item  before  it  Reaches  the  Source  of  Information 
is  Required  to  be  Licensed. — Receipt  is  acknowledged  of  your  letter  of  recent  date, 

referring  to  Treasury  Decision  2759  f1[1355]  as  follows:  “In  Instances  where  a foreign 
country  or  corporation  has  no  paying  agent  in  this  country  the  above  numbered  Treasury  f 

Decision  requires  the  last  bank  to  be  the  source  of  information.  It  may  be  that  several 
banks  may  handle  a foreign  item  before  it  reaches  the  source  of  information.  We  inquire 
if  each  of  the  banks  handling  a foreign  item  before  it  reaches  the  last  bank  in  this  country 
must  take  out  a license.?”  1[In  reply  you  are  advised  that  the  provision  referred  to  is 
applicable  only  to  interest  coupons  detached  from  bonds  issued  by  a foreign  government, 
corporation,  etc.  In  cases  where  a dividend  check  or  warrant  is  presented  for  collection, 
the  first  bank  accepting  the  item  is  held  to  be  the  source  of  information.  IfThe  first  bank 
making  payment  of  a foreign  item  and  the  last  bank  in  this  country  handling  same,  as  well 
as  the  intermediary  banks  concerned  in  the  transmission  of  the  item  between  these  two 
agencies,  are  required  to  obtain  a license.  (Letter  to  The  Corporation  Trust  Company, 
signed  by  Commissioner  Daniel  C.  Roper,  and  dated  November  28,  1918.) 

1382  Licenses  Required  for  Branch  Offices  of  Persons  or  Firms  Collecting  Foreign 

Items. — When  any  person,  firm,  or  corporation  shall  have  branch  offices  and^  desire  ‘ 

to  collect  foreign  interest  or  dividend  Income  through  such  branch  offices,  the  application 
for  license  or  licenses  shall  be  made  by  the  person,  firm,  or  corporation  through  its  principal 
office  for  its  branch  office  or  offices.  Application  for  licenses  in  such  cases  shall  be  made 
to  the  collector  of  internal  revenue  for  the  district  in  which  the  home  office  is  located. 

(Art.  57,  Reg.  33,  Jan.  5,  1914.) 

1383  License  for  Branch  Office  of  Person  or  Firm  Collecting  Foreign  Items  having 
Branch  Office,  to  be  Issued  by  Collector  of  District  where  Branch  is  Located. — 

The  names  and  addresses  of  the  branch  offices  shall  be  furnished  to  the  collector  in  the 
application  of  the  said  principal,  and  if  the  requirements  of  the  foregoing  regulations 
have  been  complied  with  to  the  satisfaction  of  the  collector,  he  shall  certify  this  fact  to 
the  collector  of  internal  revenue  for  the  district  in  which  the  branch  office  is  located,  and 
the  collector  to  whom  this  certification  is  made  shall  issue  to  such  branch  office  a license, 
as  in  the  case  provided  in  article  55  [paragraph  1385].  (Art.  57,  Reg.  33,  Jan.  5,  1914.) 

1 384  Application  for  License  for  the  Collection  of  Foreign  Items  to  be  Made  to  Collector 
of  Internal  Revenue. — A blank  application  (Form  1017)  for  such  license  may  be 
obtained,  upon  request,  from  any  collector  of  Internal  revenue.  This  license  is  issued  with- 
out cost.  (Part  of  paragraph  6 of  Art.  35,  Reg.  33,  Rev.,  Jan.  2,  1918,  as  amended  by 
T.  D.  2759,  Oct.  2,  1918.) 


INC. 


140  TAX 


INFORMATION  AT  THE  SOURCE. 


1385  Applications  for  such  license  (Form  1017)  will  be  made  to  the  collector  for  the  dis« 
trict  in  which  such  business  is  to  be  carried  on.  Upon  the  acceptance  of  such 

application  the  collector  will  issue  to  the  applicant  without  cost  a license  (Form  1010) 
which  will  continue  in  force  until  revoked  or  canceled.  Blank  forms  of  such  license,  bearing 
the  fac-simile  signature  of  the  Commissioner  of  Internal  Revenue,  will  be  furnished  collec- 
tors on  requisition,  who  will  in  all  cases  countersign  the  same  before  issuing  it  to  applicant. 
(Art.  55,  Reg.  33,  Jan.  5,  1914.) 

1386  The  applications  for  these  licenses  and  the  stubs  of  the  licenses  issued  shall  be 
retained  and  preserved  in  the  offices  of  the  collectors  of  internal  revenue.  (T.  D. 

1909,  Nov.  28,  1913.) 

1387  Licensees  for  Collecting  Foreign  Items  to  Keep  Open  Record  of  all  Transactions. — 

All  persons  licensed  shall  keep  their  records  in  such  manner  as  to  show  from  whom 
every  such  item  has  been  received,  and  such  records  shall  be  open  at  all  times  to  the  inspec- 
tion of  internal-revenue  officers.  (Art.  62,  Reg.  33,  Jan.  5,  1914.) 

1388  Foreign  Pensions. — License  not  required  for  collection  of  foreign  pensions  paid  to 
resident  aliens  or  citizens  of  the  United  States.  (T.  D.  2090  Dec.  14,  1914.) 

1389  Law  1f411.  All  Persons  Collecting  Foreign  Items  to  be  Subject  to  Regulations. — 
“shall  be  subject  to  such  regulations  enabling  the  Government  to  obtain  the  infor- 
mation required  under  this  title  as  the  Commissioner,  with  the  approval  of  the  Secretary, 
shall  prescribe;” 

1390*  * * and  shall  be  subject  to  such  regulations  enabling  the  Government  to 

obtain  the  information  required  under  this  title  as  the  Commissioner  of  Internal 
Revenue,  with  the  approval  of  the  Secretary  of  the  Treasury,  shall  prescribe.  (Art.  48, 
^276,  Reg.  33,  Rev.,  Jan.' 2,  1918.) 

1391  Law  1f412.  Penalty  for  Failure  to  Obtain  a License  for  the  Collection  of  Foreign 
Items  and  for  Failure  to  Comply  with  the  Regulations. — “and  whoever  knowingly 

undertakes  to  collect  such  payments  without  having  obtained  a license  therefor,  or  without 
complying  with  such  regulations,  shall  be  guilty  of  a misdemeanor  and  shall  be  fined  not 
more  than  $5,000,  or  imprisoned  for  not  more  than  one  year,  or  both.” 

1 392  * * * and  whoever  knowingly  undertakes  to  collect  such  payments  as  aforesaid 

without  having  obtained  a license  therefor  or  without  complying  with  such  regula- 
tions, shall  be  deemed  guilty  of  a misdemeanor  and  for  each  offense  be  fined  in  a sum 
not  exceeding  $5,000  or  imprisoned  for  a term  not  exceeding  one  year,  or  both,  in  the 
discretion  of  the  court.  (Art.  48,  1[276,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 393  Law  ^389.  Returns  of  Information  Relative  to  Payments  of  Dividends  to  be 
Rendered  When  Required. — “Sec.  254.  That  every  corporation  subject  to  the  tax 
imposed  by  this  title  and  every  personal  service  corporation  [^1305]  shall,  when  required 
by  the  Commissioner,  render  a correct  return  [^1572]  duly  verified  under  oath  [^1452], 
of  its  payments  of  dividends,  stating  the  name  and  address  of  each  stockholder,  the  numb 
of  shares  owned  by  him,  and  the  amount  of  dividends  paid  to  him.”  [^3052.] 

1394  Under  the  provisions  of  section  26  of  the  Act  of  September  8,  1916,  as  amended, 
every  corporation  subject  to  the  tax  imposed  by  this  title  shall,  when  required  to 
to  do  by  the  Commissioner  of  Internal  Revenue,  render  a correct  return  under  oath,  in 
which  is  set  out  the  amount  of  dividends  paid  by  it  during  the  year  covered  by  the  return, 
whether  paid  in  cash  or  its  equivalent  in  stock;  the  names  and  addresses  of  its  stockholders, 
the  number  of  shares  owned  by  each,  the  tax  years  in  which  the  amounts  distributed 
were  earned,  and  the  amounts  so  distributed  to  each  stockholder,  applicable  to  the  earnings 
of  each  of  such  years. 

This  return,  when  required,  will  be  made  upbn  a form  prescribed  for  this  purpose 
1 395  and  will  be  forwarded  direct  to  the  office  of  the  Commissioner  of  Internal  Revenue 
within  10  days  from  the  date  of  the  receipt  of  the  notice  requiring  such  return. 
(Art.  237,  1[665-666,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1396  Law  ^[390.  Returns  of  Information  by  Brokers  to  be  Rendered  When  Required. 

— “Sec.  255.  That  every  individual,  corporation,  or  partnership  doing  business  as 
a broker*  shall,  when  required  by  the  Commissioner,  render  a correct  return  [1[1572]  duly 
verified  under  oath  [If  1452],  under  such  rules  and  regulations  as  the  Commissioner,  with 
the  approval  of  the  Secretary,  may  prescribe,  showing  the  names  of  customers  for  whom 
such  individual,  corporation,  or  partnership  has  transacted  any  business^  with  such  details 


RETURNS  BY  CORPORATIONS. 


as  to  the  profits,  losses,  or  other  information  which  the  Commissioner  may  require,  as  to 
each  of  such  customers,  as  will  enable  the  Commissioner  to  determine  whether  all  income 
tax  due  on  profits  or  gains  of  such  customers  has  been  paid.”  [^3053.] 

^[Formerly  applied  to  brokers  “on  any  exchange  or  board  of  trade  or  other  similar 
place  of  business.”] 

13S7  Every  person^  corporation,  partnership,  or  association  doing  business  as  a broker 
on  any  exchange  or  board  of  trade  or  other  similar  place  of  business,  shall,  upon 
request  of  the  CommJssloner  of  Internal  R.evenue,  render  a correct  return  under  oath,  on 
a form  furnished  by  the  Commissioner  of  Internal  Revenue  for  that  purpose,  showing  the 
names  of  customers  for  whom  such  person,  corporation,  partnership,  or  association  has 
transacted  any  business,  with  such  details  as  to  the  profits,  losses,  or  other  inform.ation  as 
may  be  called  for  by  such  return  form  as  to  each  of  such  customers.  See  special  regulations 
No.  40.  [Stamp  tax  regulations  issued  Nov,  30,  1917.]  (Art.  33,  11232,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

1 398  Law*  1[343.  Returns  by  Corporations.' — “Sec.  239.  That  every  corporation  subject 
to  taxation  under  this  title  and  every  personal  service  corporation  [1[1305]  shall  miake 
a return,  stating  specifically  the  item.s  of  its  gross  income  [1[1787]  and  the  deductions  [*[1922] 
and  credits  [2325]  allowed  by  this  title,” 

1399  Law  1[347.  “Returns  made  under  this  section  shall  be  subject  to  the  provisions  of 
sections  226  [‘Returns  when  accounting  period  is  changed,’  1[1479]  and  228  [‘Under- 
statement in  Returns,’  1[1538],” 

1 4CO  Duty  to  Make  Return  Depends  on  Corporate  Existence  Rather  Than  on  Income. — 

The  duty  to  make  a return  depends  upon  corporate  or  associational  existence  and 
not  upon  the  receipt  of  incomie.  (T.  D.  2090,  Dec.  14,  1914.) 

1401  W hen  Required. — Every  corporation  not  specifically  enumerated  as  exempt  shall 
m.ake  a return  of  annual  net  incomie  whether  or  not  it  may  have  for  the  particular 

year  any  net  income,  * * * (Art.  203,  1[606,  Reg.  33,  Rev.,  jan.  2,  1918.) 

1402  Dissolved  Corporations  to  Make  Final  Return. — All  corporations  having  an  exis- 
tence as  such  during  all  or  any  portion  of  a year,  unless  coming  wfithin  the  class  speci- 
fically enum.erated  as  exempt,  are  required  to  make  returns.  Corporations  dissolved  during 
the  year  and  whose  fiscal  year  coincides  with  the  calendar  year  will  make  returns  covering 
the  period  from  January  1,  to  the  date  of  dissolution,  and  such  corporations  having  a 
fiscal  year  other  than  the  calendar  year,  will  make  returns  covering  the  period  from  the 
beginning  of  the  fiscal  year  to  the  date  of  dissolution,  and  new  corporations  will  make 
returns  for  the  period  from  the  date  of  organization  to  December  31,  unless  a fiscal  year  is 
designated  in  the  proper  m.anner,  in  which  case  returns  for  a period  fromi  the  date  of  organ- 
ization to  the  close  of  the  fiscal  year  so  established,  in  no  case  to  exceed  12  months,  will  be 
filed.  (Art.  203,  1[608,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 4C3  Liquidating  Corporations. — A corporation  going  into  liquidation  during  any  tax 
period  m.ay,  at  the  time  of  such  liquidation,  prepare  a “final  return”  covering  the 
income  received  or  accrued  to  it  during  the  fractional  part  of  the  year  during  v/hich  it  was 
engaged  in  business,  and  immediately  file  the  same  with  the  collector  of  the  district  in 
which  the  corporation  has  its  principal  place  of  business.  Before  distributing  its  assets, 
a dissolving  corporation  should  reserve  funds  sufficient  to  pay  any  income  tax  assessable 
against  it.  Otherwise  the  tax  may  be  collected  by  suit  against  the  stockholders.  (Art. 

205,  1[612,  R.eg.  33,  Rev.,  Jan.  2,  1918). 

1 404  Change  of  Corporate  Name. — A mere  change  in  name  does  not  constitute  a new 
corporation.  If  the  business  was  contiriuous  throughout  the  year,  no  change  in 
management  or  operation  other  than  the  change  in  name  having  occurred,  the  return 
should  be  made  covering  the  business  transacted  throughout  the  year,  such  return  to  be 
made  by  the  corporation  in  the  name  which  it  bears  at  the  end  of  the  year,  with  a notation 
on  the  return  to  the  effect  that  the  name  had  been  changed,  giving  both  the  old  and  the 
new'  nam.es.  If,  how  ever,  a distinctly  new'  corporation  was  organized  to  take  over  the  prop- 
erty of  the  old,  both  corporations  will  be  required  to  m.ake  separate  returns  covering  the 
periods  of  the  year  during  which  they  were  respectively  in  charge  of  the  business.  (Art. 

206,  11613,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

14C6  Law  1[349.  Consolidated  Returns  by  Affiliated  Corporations. — “Sec.  240.  (a) 

That  corporations  which  are  affiliated  w'ithin  the  meaning  of  this  section  shall, 
under  regulations  to  be  prescribed  by  the  Commissioner  with  the  approval  of  the  Secretary, 
make  a consolidated  return  of  net  income  and  invested  capital  for  the  purposes  of  this  title 
and  Title  III  [w'ar  excess  profits  tax],  and  the  taxes  thereunder  shall  be  computed  and 
determined  upon  the  basis  of  such  return:” 


INC. 


142  TAX 


RETURNS  BY  CORPORATIONS. 


1 406  Law  1(350.  Provided,  That  there  shall  be  taken  out  of  such  consolidated  net 
income  and  Invested  capital,  the  net  income  and  invested  capital  of  any  such 

affiliated  corporation  organized  after  August  1,  1914,  and  not  successor  to  a then  existing 
business,  50  per  centum  or  more  of  whose  gross  income  consists  of  gains,  profits,  com- 
missions, or  other  incomie,  derived  from  a Governwient  contract  or  contracts  made  between 
April  6,  1917,  and  November  11,  1018,  both  dates  inclusive.  In  such  case  the  corporation 
so  taken  out  shall  be  separately  assessed  on  the  basis  of  its  own  invested  capital  and  net 
income  and  the  remainder  of  such  affiliated  group  shall  be  assessed  on  the  basis  of  the 
remaining  consolidated  invested  capital  and  net  income.” 

1407  Law  K351.  In  the  Case  of  Consolidated  Returns  the  Tax  is  Assessed  as  a Unit 
and  then  Apportioned. — “In  any  case  in  which  a tax  is  assessed  upon  the  basis  of 

a consolidated  return,  the  total  tax  shall  be  computed  in  the  first  instance  as  a unit  and  shall 
then  be  assessed  upon  the  respective  affiliated  corporations  in  such  proportions  as  may  be 
agreed  upon  among  them,  or,  in  the  absence  of  any  such  agreement,  then  on  the  basis  of 
the  net  income  properly  assignable  to  each.” 

1408  Law  1(352.  In  the  Case  of  Consolidated  Returns  One  Specific  Cred.t  of  $2,000 
only  is  Allowed. — “There  shall  be  allowed  in  computing  the  income  tax  only  one 

specific  credit  of  $2,000  (as  provided  in  section  236  [1(2330]);  [The  following  is  applicable 
to  the  war  excess  profits  tax  only.]  in  com.puting  the  war-profits  credit  (as  provided  in 
section  311)  only  one  specific  exemption  of  $3,000;  and  in  computing  the  excess-profits 
credit  (as  provided  in  section  312)  only  one  specific  exemption  of  $3,000.” 

1 409  Law  K353.  What  Corporations  are  Deemed  to  be  Affiliated.^ — “(b)  For  the  purpose 
of  this  section,  two  or  more  domestic  corporations  shall  be  deemed  to  be  affiliated” 

1410  Law  K354.  “(1)  if  one  corporation  owns  directly  or  controls  through  closely  affil- 

iated interests  or  by  a nominee  or  nominees  substantially  all  the  stock  of  the  ether 

or  others,  or” 

1411  Law  1(355.  “(2)  if  substantially  all  the  stock  of  two  or  more  corporations  is  owned  or 

controlled  by  the  same  interests.” 

1412  Law  ^356.  Credit  for  Certain  Taxes  Paid  by  a Foreign  Corporation,  a Majority 
of  the  Voting  Stock  of  Which  is  Owned  by  a Domestic  Corporation. — “(c)  For  the 

purposes  of  section  238  [1(2332]  a domestic  corporation  which  owns  a majority  of  the  voting 
stock  of  a foreign  corporation  shall  be  deemed  to  have  paid  the  same  proportion  of  any 
income,  war-profits  and  excess-profits  taxes  paid  (but  not  including  taxes  accrued)  by  such 
foreign  corporation  during  the  taxable  year  to  any  foreign  country  or  to  any  possession  of 
the  United  States  upon  income  derived  from  sources  without  the  United  States,  which  the 
amount  of  any  dividends  (not  deductible  under  section  234  [1(2102])  received  by  such  do- 
mestic corporation  from  such  foreign  corporation  during  the  taxable  year  bears  to  the  total 
taxable  income  of  such  foreign  corporation  upon  or  with  respect  to  which  such  taxes  were 
paid:” 

1413  Law  K357.  “Provided,  That  in  no  such  case  shall  the  amount  of  the  credit  for  such 
taxes  exceed  the  amount  of  such  dividends  (not  deductible  under  section  234 

[K2102])  received  by  such  domestic  corporation  during  the  taxable  year.” 

1 4 1 4 Comment.  [Consolidated  returns  have  not  heretofore  been  authorized  by  law. 
Under  the  War  Excess  Profits  Tax  law  of  Oct.  3,  1917,  consolidated  returns  were 

called  for  by  the  Government  by  regulation,  under  certain  conditions,  but  for  excess  profits 
tax  only.  The  regulations  issued  by  the  Department,  bearing  on  the  subject,  are  repro- 
duced here,  K1415  to  1[1428,  but  must  be  read  with  the  conditions  outlined  above  fully  In 
mind.] 

1416  When  Affiliated  Corporations  Must  Furnish  Information  as  to  Intercorporate 
Relations. — For  the  purpose  of  the  excess  profits  tax  every  corporation  will  describe 
in  Its  return  all  its  intercorporate  relationships  with  other  corporations  with  which  it  is 
affiliated,  and  will  furnish  such  information  in  relation  thereto  as  will  enable  the  Com- 
missioner of  Internal  Revenue  to  compute  the  amount  of  the  tax  properly  due  from  each 
corporation  on  the  basis  of  an  equitable  and  lawful  accounting. 

For  the  purpose  of  this  regulation  two  or  more  corporations  will  be  deemed  to  be 
1416  affiliated  (l)  when  one  such  corporation  owns  directly  or  controls  through  closely 
affiliated  interests  or  by  a nominee  or  nominees,  all  or  substantially  all  of  the  stock 
of  the  other  or  others,  or  when  substantially  all  of  the  stock  of  two  or  more  corporations 
is  owned  by  the  same  individual  or  partnership,  and  both  or  all  of  such  corporations  are 
engaged  in  the  same  or  a closely  related  business;  or  (2)  when  one  such  corporation  (a) 


INC. 


143  TAX 


RETURNS  BY  CORPORATIONS. 


buys  from  or  sells  to  another  products  or  services  at  prices  above  or  below  the  current 
market,  thus  effecting  an  artificial  distribution  of  profits,  or  (b)  in  any  way  so  arranges 
its  financial  relationships  with  another  corporation  as  to  assign  to  it  a disproportionate 
share  of  net  income  or  invested  capital.  (Art.  77,  Reg.  41,  released  for  publication  Feb.  4, 
1918.) 

1417  When  Affiliated  Corporations  May  be  Required  to  Make  Consolidated  Return. — 
Whenever  necessary  to  more  equitably  determine  the  invested  capital  or  taxable 

income,  the  Commissioner  of  Internal  Revenue  may  require  corporations  classed  as  affiliated 
under  article  77  to  furnish  a consolidated  return  of  net  income  and  invested  capital.  Where 
such  consolidated  return  is  required  it  may  be  made  by  any  one  or  more  of  such  corporations 
or  by  all  of  them  acting  jointly;  but  if  such  affiliated  corporations,  when  requested  to  file 
such  consolidated  return,  neglect  or  refuse  to  do  so,  the  Commissioner  of  Internal  Revenue 
may  cause  an  examination  of  the  books  of  all  such  corporations  to  be  made  and  a consoli- 
dated statement  to  be  made  from  such  examination.  In  cases  where  consolidated  returns 
are  accepted,  the  total  tax  will  be  computed  in  the  first  instance  as  a unit  upon  the  basis 
of  the  consolidated  return  and  will  be  assessed  upon  the  respective  affiliated  corporations 
in  such  proportions  as  may  be  agreed  among  them.  If  no  such  agreement  is  made  the 
tax  will  be  assessed  upon  each  such  corporation  in  accordance  with  the  net  income  and 
invested  capital  properly  assignable  to  it.  (Art.  78,  Reg.  41,  released  for  publication 
Feb.  4,  1918.) 

1418  Pursuant  to  Article  78  [If  1417]  of  Regulations  41  relative  to  War  Excess  Profits  Tax, 
affiliated  corporations,  as  limited  and  defined  in  paragraphs  C and  D below,  are 

hereby  directed  to  make  consolidated  returns  for  the  purpose  of  excess  profits  tax.  Affili- 
ated corporations  other  than  those  falling  within  the  provisions  of  paragraphs  C and  D 
may  make  a consolidated  return  only  after  having  secured  permission  in  writing  from  the 
Commissioner  of  Internal  Revenue.  Affiliated  corporations  are  defined  in  Article  77 
[^1416]  of  the  Regulations  as  follows: 

“For  the  purpose  of  this  regulation  two  or  more  corporations  will  be  deemed  to  be 
affiliated  (1)  when  one  such  corporation  owns  directly  or  controls  through  closely  affiliated 
interests  or  by  a nominee  or  nominees,  all  or  substantially  all  of  the  stock  of  the  other  or 
others,  or  when  substantially  all  of  the  stock  of  two  or  more  corporations  is  owned  by  the 
same  individual  or  partnership,  and  both  or  all  of  such  corporations  are  engaged  in  the 
same  or  a closely  related  business;  or  (2)  when  one  such  corporation  (a)  buys  from  or  sells 
to  another  products  or  services  at  prices  above  or  below  the  current  market,  thus  affecting 
an  artificial  distribution  of  profits;  or  (b)  in  any  w'ay  so  arranges  its  financial  relationships 
with  another  corporation  as  to  assign  to  it  a disproportionate  share  of  net  income  or  invested 
capital.” 

A.  Two  or  more  corporations  are  not  “affiliated”  merely  because  all  or  substan- 

1419  tially  all  of  the  stock  therein  is  owned  by  the  same  corporation,  individual  or  part- 
nership; they  must  also  be  engaged  in  the  same  or  a closely  related  business. 

1420  B.  For  purposes  of  regulation  by  Public  Service  Commissions  or  similar  authorities 
the  identity  of  public  service  corporations,  when  not  grouped  into  one  operating  unit, 

must  be  maintained,  even  though  they  are  owned  by  the  same  corporation  or  taxpayer; 
and  under  such  regulation  the  accounts  of  such  public  service  corporations  are  deemed 
to  reflect  the  true  invested  capital  and  income  of  each  operating  unit.  Accordingly  rail- 
roads, gas,  electric,  water  and  other  public  service  corporations  when  operated  independently 
and  not  physically  connected  or  merged — particularly  when  situated  in  different  juris- 
dictions and  subject  to  regulation  by  public  service  commissions — will  not  be  required  or 
permitted  without  special  permission  obtained  in  advance,  to  make  a consolidated  return. 
When,  however,  a railroad  or  other  public  utility  is  owned  by  an  industrial  corporation 
and  is  operated  as  a plant  facility  or  as  an  integral  part  of  a group  organization  of  affiliated 
-corporations,  and  such  affiliated  corporations  are  required  to  file  a consolidated  return, 
the  return  of  such  railroad  or  other  public  utility  shall  be  included  therein. 

C.  The  words  “all  or  substantially  all  of  the  stock”  as  used  in  the  above  definition 

1421  (Article  77)  wfill  until  further  notice  be  interpreted  as  meaning  an  ownership  of  95 
per  cent  or  more  of  such  stock  by  the  same  taxpayer  during  the  taxable  year. 

1422  D.  In  case  of  affiliated  corporations  among  which  there  exist  contracts  or  trade 
or  financial  practices  which  arbitrarily  or  artificially  influence  or  determine  the 

amount  of  the  invested  capital  or  net  income  of  one  or  more  of  the  corporations  so  afiiliated 
and  where  95  per  cent  or  more  of  the  stock  of  the  subsidiary  affiliated  corporations  is  owned 
by  a parent  or  controlling  corporation  or  by  an  individual  or  partnership,  a consolidated 
return  will  be  required. 

E.  A consolidated  return  shall  be  filed  by  the  parent  or  principal  corporation  in 

1423  the  office  of  the  collector  of  fhe  district  in  which  it  has  its  principal  office.  Each 
of  the  other  affiliated  corporations  shall  file  in  the  office  of  the  collector  of  its  respec- 
tive district  a return,  entering  thereon  its  name  and  address  and  replying  to  the  questions 
in  Schedule  One,  and  to  questions  1,  2,  3,  4 and  1 1 on  page  4 of  Form  1 103;  and  stating  also 


INC. 


144 


TAX 


RETURNS  BY  CORPORATIONS. 


(1)  that  the  corporation  is  affiliated  with  a designated  parent  or  principal  corporation, 

(2)  that  its  return  is  included  in  the  consolidated  return  of  such  parent  or  principal  corpora- 
tion, and  (3)  the  district  in  which  the  consolidated  return  is  filed. 

F.  Assets  of  affiliated  or  subsidiary  corporations  which  have  to  be  adjusted  to 

1424  meet  the  statutory  limitation  prescribed  by  Section  207  shall  be  valued  as  of  con- 
ditions existing  at  the  dates  when  such  assets  were  acquired  by  the  respective  affili- 
ated or  subsidiary  corporations  and  not  as  of  the  date  when  the  stock  in  such  affiliated  or 
subsidiary  corporations  was  acquired  by  the  parent  or  controlling  corporation. 

G.  Affiliated  corporations  filing  a consolidated  return  shall  include  in  such  return 

1425  (0  a specific  statement  of  the  number  or  proportion  of  the  shares  in  the  affiliated 
1^30^  corporations  held  by  the  parent  or  controlling  corporation  during  the  taxable  year, 
and  (2)  a schedule  showing  the  proportionate  amount  of  the  total  tax  which  it  is  agreed 
among  them  is  to  be  assessed  upon  each  affiliated  corporation. 

H.  If  the  Commissioner  of  Internal  Revenue  upon  examination  of  any  consolidated 

1426  return  finds  that  the  tax  cannot  in  his  judgment  be  properly  assessed  upon  the  basis 
of  such  return,  the  affiliated  corporations  covered  by  such  consolidated  return 

shall,  upon  notice  from  the  Commissioner  of  Internal  Revenue,  file  separate  returns. 
(T.  D.  2662,  March  6,  1918.) 

1427  Consolidated  Returns  of  Affiliated  Corporations  with  Different  Fiscal  Years. — 

Receipt  is  acknowledged  of  your  letter  of  March  13,  in  which  you  make  the  fol- 
lowing inquiry: 

“We  inquire  the  proper  method  of  handling  consolidated  returns  of  affiliated 
corporations  under  the  Excess  Profits  Tax  Law  in  cases  where  subsidiary  corporations 
maintain  their  books  on  a fiscal  year  basis  and  make  returns  for  Income  Tax  purposes 
on  a fiscal  year  basis?” 

In  reply,  you  are  advised  that  when  required,  a consolidated  return  must,  as  to 

1428  both  the  parent  or  controlling  corporations  and  its  subsidiaries,  be  made  on  the 
basis  of  the  fiscal  year  of  the  parent  company.  As  to  past  periods,  taxable  income  of 

subsidiaries  must  be  computed  to  the  date  of  the  fiscal  year  of  the  parent  company,  and  where 
the  amounts  do  not  disclose  the  profits  earned  as  of  such  date,  estimates  will  be  accepted, 
but  at  the  close  of  the  succeeding  year  a correct  accounting  must  be  made.  Invested 
capital  must  be  computed  as  at  the  beginning  of  the  parent  company’s  fiscal  period  for 
both  the  parent  and  subsidiary  company.  (Letter  to  The  Corporation  Trust  Company, 
signed  by  Commissioner  Daniel  C.  Roper,  and  dated  March  23,  1918.) 

1429  Law  ^346.  Receivers,  Trustees  in  Bankruptcy,  and  Assignees  Operating  the 
Property  or  Business  of  Corporations,  to  make  Returns. — “In  cases  where  receivers, 

trustees  in  bankruptcy,  or  assignees  are  operating  the  property  or  business  of  corporations, 
such  receivers,  trustees,  or  assignees  shall  make  returns  for  such  corporations  in  the  same 
manner  and  form  as  corporations  are  required  to  make  returns.  Any  tax  due  on  the  basis 
of  such  returns  made  by  receivers,  trustees,  or  assignees  shall  be  collected  in  the  same 
manner  as  if  collected  from  the  corporations  of  whose  business  or  property  they  have 
custody  and  control.” 

1430  Section  13,  paragraph  C,  of  this  title  requires  receivers,  trustees  in  bankruptcy, 
or  assignees,  who  are  in  charge  of  and  are  operating  the  property  and  business  of 

corporations,  to  make  returns  of  annual  net  income  and  pay  any  income  tax  thereby 
shown  to  be  due,  regardless  of  what  disposition,  subject  to  the  orders  of  the  court,  may  be 
made  of  such  income. 

Notwithstanding  the  fact  that  the  powers  and  functions  of  the  corporation  are  sus- 

1431  pended  and  that  the  property  and  business  are  for  the  time  in  control  and  custody 
of  the  receiver,  trustee,  or  assignee,  subject  to  the  orders  of  the  court,  such  receiver, 

trustee,  or  assignee  stands  in  the  place  of  the  corporate  officers  and  is  required  for  the 
purpose  of  this  title  to  perform  all  the  duties  and  assume  all  the  liabilities  which  would 
devolve  upon  the  officers  of  the  corporation  were  they  in  control.  The  income  which 
he  receives  on  account  of  the  business  transacted  is  the  income  of  the  corporation  and, 
no  matter  how  such  income  is  applied,  it  is  subject  to  the  tax  imposed  by  this  title  in  so 
far  as  it  exceeds  the  deductions  or  allowances  authorized  by  law. 

The  receiver,  trustee,  or  assignee  acting  for  the  corporation,  is  required  to  make  a 

1432  true  and  accurate  return  of  annual  net  income  covering  each  year  or  part  of  each 
year  during  which  he  is  in  custody  and  control  of  the  business  or  properties  and  will 

be  liable  to  all  the  penalties  imposed  by  this  title  for  failure  to  meet  any  of  its  requirements. 
(Art.  209,  ^621-623,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1433  No  Return  Required  From  Receiver  in  Charge  of  Part  of  Property  Only,  In  Mort- 
gage Foreclosure  Proceedings. — Reference  is  made  to  office  letter  of  March  28, 

1918,  an  extract  from  which  has  appeared  in  a recent  installment  of  the  Income  Tax 
Service  maintained  by  The  Corporation  Trust  Company.  In  the  letter  in  question  you 


INC. 


145  TAX 


RETURNS  IN  GENERAL. 


were  advised  to  the  effect  that  a receiver  of  the  rents  and  profits  of  premises  involved  in 
mortgage  foreclosure  proceedings,  although  the  receiver  of  only  a part  of  the  property 
of  the  corporation,  is  required  to  file  a return  of  annual  net  income  on  behalf  of  the  corpo- 
ration. ^In  this  connection  you  are  informed  that  the  subject  in  question  has  been  given 
further  consideration,  and  it  appears  that  the  receiver  in  question  is  appointed  by  a court 
of  equity  in  aid  of  its  jurisdiction,  and  is  not  a receiver  of  all  the  property  of  the  corporation, 
but  is  a common-law  receiver  in  charge  of  only  a part  of  the  mortgaged  property  of  the 
corporation,  and  is  the  receiver  merely  of  the  rents  and  profits  of  such  mortgaged  property. 
Ifit  is  held  therefore  that,  although  for  the  purpose  of  the  income  tax  the  receiver  who 
stands  in  the  stead  of  an  individual  or  -corporation  m.ust  render  a return  of  income  under 
Section  8c  and  Section  13c  of  the  Income  Tax  Act  of  September  8,  1916,  as  amended,  the 
receiver  of  only  part  of  the  property  of  an  individual*  or  corporation  need  not  file  such  a 
return  of  annual  net  income  under  the  Sections  cited.  For  the  purpose  of  the  excess- 
profits  tax  the  same  rule  extends  to  receivers  of  partnerships  under  Sections  206,  211  and 
2 12  of  the  Title  II  of  the  Act  of  October  3,  1917.  However,  every  receiver  for  an  individual, 
partnership  or  corporation  must  render  a return  of  information  under  Section  28  of  the 
Income  Tax  Act.  ^It  is  respectfully  requested  that  the  information  contained  in  this 
letter  be  given  the  same  publicity  that  was  given  to  the  letter  of  March  28,  1918,  referred 
to^  above.  (Letter  to  Greenbaum,  Wolff  & Ernst,  New  York,  N.  Y.,  signed  by  Com- 
missioner Daniel  C.  Roper,  and  dated  May  1,  1918.) 

*Comnient. — [Sec.  225  (^1168)  reads  “That  every  fiduciary  {except  receivers  appointed 
by  authority  of  law  in  possession  of  part  only  of  the\property  of  an  individual)  shall  make 
under  oath  a return  * * * 


RETURNS  IN  GENERAL. 


1 434  Prescribed  Forms. — Returns  made  under  this  act  and  pursuant  to  these  instructions 
must  be  made  on  the  forms  prescribed  by  this  department  for  each  particular  year, 

and  which  are  available  at  the  offices  of  collectors.  (Art.  210,  1[624,  Reg.  33,  Rev.,  Jan.  2, 
1918.) 

1435  Forms  in  Use  During  1918. — [Forms  for'making  returns  during  191  8,  were  prescribed 

as  follows: 

1030  Insurance  companies  including  mutual  life  and  mutual  marine. 

1030  A Mutual  insurance  companies  other  than  mutual  life  and  mutual  marine. 

1031  All  corporations  other  than  railroad  and  insurance  companies. 

1040  Resident  and  citizen  individuals. 

1040  A Resident  and  citizen  individuals  for  net  incomes  of  not  more  than  $3,000. 

1040  B Nonresident  alien  individuals. 

1041  Fiduciaries. 

1065  Partnerships. 

1090  Railroad  corporations.] 

[See  list  of  forms  at  back  of  book.] 

1436  Forms  To  Be  Furnished.- — Under  the  authority  conferred  by  this  title,  forms  of 
return  have  been  prescribed  in  which  the  various  items  specified  in  the  law  are  to  be 

stated.  Blank  forms  of  this  return  will  be  forwarded  to  collectors  and  should  be  furnished 
to  every  corporation,  not  expressly  exempted,  on  or  before  January  1 of  each  year,  in  the 
case  of  corporations  making  their  next  returns  for  the  calendar  year;  on  or  before  the  first 
day  of  the  next  fiscal  year  in  the  case  of  corporations  filing  returns  for  their  fiscal  year. 
Failure  on  the  part  of  any  corporation,  joint-stock  company,  association,  or  insurance  com- 
pany liable  to  this  tax  to  receive  a prescribed  blank  form  will  not  excuse  it  from  making 
the  return  required  by  law  or  relieve  it  from  any  penalties  for  failure  to  make  the  return 
within  the  prescribed  time.  (Art.  216,  1[631,  Reg.  33,  Rev.  Jan.  2,  1918.) 

1437  Failure  to  Receive  Returns. — Corporations  not  supplied  with  the  proper  forms  for 
making  the  return  should  make  application  therefor  to  the  collector  of  internal  rev- 
enue in  whose  district  are  located  their  principal  places  of  business  in  ample  time  to  have 
their  returns  prepared,  verified,  and  filed  with  the  collector  on  or  before  the  last  due  date 
defined  by  the  lawand  these  regulations.  (Art.  216,  ^632,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1438  Failure  in  this  respect  subjects  the  corporation  to  not  only  [25]  per  cent  additional 
tax,  but  to  the  specific  penalty  imposed  by  the  law  for  delinquency.  Each  corpo- 
ration should  carefully  prepare  its  return  so  as  to  fully  and  clearly  set  forth  the  data  therein 
called  for.  Imperfect  or  incorrect  returns  will  not  be  accepted  as  meeting  the  requirements 
of  the  law.  (Art.  216,  1[633,  Reg.  33,  Rev.,  Jan.  2,  1918.) 


INC. 


146  TAX 


RETURNS  IN  GENERAL. 


1 439  Tentative  Returns  When  No  Forms  Available. — In  the  absence  of  a prescribed 
form  a statement  made  by  a corporation  disclosing  its  gross  income  and  deduc- 

•tions  therefrom  may  be  accepted  as  a tentative  return,  and  if  filed  within  the  prescribed 
time  a return  so  made  will  relieve  the  corporation  from  liability  to  the  penalties  imposed 
by  law,  provided  that  upon  request  and  without  delay  such  tentative  return  be  substituted 
by  a return  made  on  the  regular  form.  (Art.  210,  1[625,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 440  Tentative  Returns  By  Foreign  Corporations  and  Domestic  Corporations  Doing 
Business  in  Foreign  Countries. — In  cases  wherein  foreign  corporations  or  domestic 

corporations  doing  business  in  foreign  countries  are  unable  to  assemble  their  data  in  time 
to  make  their  returns  of  annual  net  income  within  the  prescribed  time,  it  will  be  per- 
missible for  such  corporations  upon  a showing  of  this  fact  to  file  with  the  collector  of 
internal  revenue  a tentative  return  in  which  there  shall  be  approximated,  as  nearly  as  pos- 
sible, the  actual  business  transacted  during  the  year. 

This  tentative  return  will  be  substituted  by  a true  and  accurate  return  as  soon  as 

1441  the  necessary  data  to  make  such  true  and  accurate  return  shall  be  available. 
Collectors  of  internal  revenue  are  authorized  to  grant  an  extension  of  time  not 

1 442  in  excess  of  30  days  from  the  date  when  returns  are  due,  such  extension  to  be  granted 
only  in  cases  wherein  the  neglect  to  file  the  return  within  the  prescribed  time  was 
due  to  the  sickness  or  absence  of  an  officer  whose  signature  to  the  return  was  necessary. 
Foreign  corporations  or  domestic  corporations  doing  business  in  foreign  countries  can  not 
be  granted  an  extension  of  time  merely  for  the  reason  that  they  are  unable  to  assemble 
their  data  to  make  the  return  within  the  prescribed  time.  In  all  such  cases,  liability  to 
the  penalty  of  the  act  can  be  obviated  only  by  filing  a tentative  return  as  hereinbefore  in- 
dicated. (T.  D.  2137,  Jan.  30,  1915.)  [For  extension  of  time  in  the  case  of  certain  foreign 
corporations  see  ^1510.] 

1443  Returns  to  Set  Forth. — -[Presumably  this  data  will  be  required  still,  although  the 
information  is  no  longer  required  in  any  case  for  the  determination  of  the  amount 

of  interest  properly  deductible.] — Full  amount  of  stock,  as  represented  by  the  par  value 
of  the  shares  issued,  is  to  be  regarded  as  the  paid-up  capital  stock,  except  when  such  stock 
is  assessable  on  account  of  deferred  payments,  or  payable  in  installments,  in  which  case  the 
amount  actually  paid  on  such  shares  will  constitute  the  actual  paid-up  capital  stock  of  the 
corporation.  (Art.  95,  Reg.  33,  Jan.  5,  1914.) 

1444  In  making  returns  of  annual  net  income  for  the  purpose  of  the  income  tax,  every 
corporation,  in  making  such  returns,  must  report  under  item  1 of  the  return  form 

the  total  par  value  of  its  stock,  both  common  and  preferred,  outstanding  at  the  close  of 
the  year. 

Stock  outstanding  at  the  close  of  the  year  and  upon  the  basis  of  which  dividends 

1445  are  or  may  be  paid  is  held  to  be  paid-up  capital  stock  within  the  meaning  of  the  law. 
For  this  purpose  it  is  immaterial  whether  the  stock  be  paid  for  in  cash,  promissory  notes, 
or  other  assets.  The  fact  that  notes  are  given  in  payment  of  the  stock  issued  and  that  the 
notes  have  not  been  paid  in  full  at  the  time  the  return  is  made  is  immaterial.  (T.  D.  2137, 
Jan.  30,  1915.) 

1446  The  amount  of  interest-bearing  indebtedness  of  a corporation,  outstanding  at  the 
close  of  the  year,  should  be  reported  under  Item  2 of  the  return  Form  1031  whether 

the  interest  accrued  upon  such  indebtedness  was  actually  paid  within  the  year  or  not. 
(T.  D.  2137,  Jan.  30,  1910.) 

1447  In  the  case  of  public-service  and  all  other  corporations  it  is  desired  by  this  office 
that  the  supplementary  statement  which  forms  a part  of  the  return  Form  1031, 

prescribed  by  the  Secretary  of  the  Treasury  for  the  use  of  such  corporations  in  making 
their  returns  of  annual  net  income,  shall  be  prepared  as  far  as  practicable  in  detail. 

It  is  not  expected  or  required,  however,  that  every  particular  item  going  to  make 

1448  up  either  gross  income  or  the  deductions  therefrom  shall  be  set  out  in  the  supple- 
mentary statement.  It  will  be  sufficient  for  the  purpose  of  this  office  in  the  case  of 

public-service  corporations  and  other  similar  concerns  that  they  supply  the  information  by 
classes  rather  than  giving  the  items  in  detail,  classifying  the  income  and  expenditures 
in  the  same  manner  as  is  required  as  to  these  items  by  the  Interstate  Commerce  Com- 
mission. (T.  D.  2137,  Jan.  30,  1915.) 

1449  * * ♦ this  office  does  not  desire  to  cause  corporations  any  unnecessary  trouble 

or  expense  in  preparing  the  supplementary  statement  referred  to  and  therefore 

if  the  books  of  the  corporation  which  you  represen  t are  kept  in  such  a manner  as  to  make 
it’very  difficult  to  give  the  information  in  the  exact  form  called  for  on  the  supplementary 
statement,  a reasonable  explanation  in  detail  of  the  manner  of  arriving  at  gross  income 
and  expenses  will  be  accepted.  However,  it  is  desired  that  this  information  shall  be 


INC. 


147  TAX 


RETURNS  IN  GENERAL. 


furnished  in  such  a manner  that  the  returns  can  be  intelligently  audited  upon  receipt  thereof 
in  this  office.  (Extract  from  letter  to  Clinton  H.  Scovell  & Co.,  signed  by  Commissioner 
W.  H.  Osborn,  and  dated  Jan.  29,  1915.) 

1450  Especial  attention  should  be  given  to  the  requirement  that  the  supplemental 
statements,  made  a part  of  Forms  1030  and  1031,  be  properly  filled  out  in  detail, 

and  no  return  which  is  not  substantially  correct  in  this  respect  should  be  accepted.  (Mime- 
ograph letter  No.  1148  to  Collectors,  Jan.  16,  1915.) 

1451  Law  1|344.  Returns  to  be  Made  Under  Oath. — “The  [corporation]  return  shall  be 
sworn  to  by  the  president,  vice  president,  or  other  principal  officer  and  by  the 

treasurer  or  assistant  treasurer.’* 

“Every  individual  shall  make  under  oath  a return,”  ^1144.  ( 

“The  return  shall  be  sworn  to  by  any  one  of  the  partners,”  ^1304. 

“Every  fiduciary  shall  made  under  oath  a return  for  the  individual,  estate  or  trust 
for  which  he  acts,”  ^1175. 

1452  Law  ^440.  Sec.  3165,  Revised  Statutes.  “Every  collector,  deputy  collector 
internal-revenue  agent,  and  internal-revenue  officer  assigned  to  duty  under  an 

internal-revenue  agent,  is  authorized  to  administer  oaths  and  to  take  evidence  touching 

any  part  of  the  administration  of  the  internal-revenue  laws  with  which  he  is  charged, 

or  where  such  oaths  and  evidence  are  authorized  by  law  or  regulation  authorized  by  law  f 

to  be  taken.” 

1453  Referring  to  your  suggestion  at  a personal  conference  that  revenue  agents,  inspec- 
tors, and  special  employees  be  commissioned  as  deputy  collectors  without  addi- 
tional compensation  for  the  purpose  of  qualifying  them  to  administer  oaths,  you  are 
advised  that  the  suggestion  has  been  given  careful  consideration  by  this  office,  and  it 
is  of  the  opinion  that  there  is  no  legal  objection  thereto  and  the  plan  is  both  practicable 
and  desirable.  Manifestly  it  will  save  much  time  and  some  expense  to  taxpayers,  as  well 
as  result  in  a prompter  filing  of  returns  by  persons  found  to  be  liable  for  taxes  if  such  officers 
are  in  position  to  secure  a return  properly  sworn  to  on  the  spot. 

Collectors  will  therefore  be  authorized  to  issue  commissions  to  such  officers  serv- 

1454  ing  in  their  districts,  the  commissions  to  expire  with  the  regular  employment  of 

the  officer  so  commissioned.  ‘ . 

A copy  of  this  letter  will  be  published  in  Treasury  Decisions  as  authority  to  col-  ' 

1455  lectors  for  such  action.  (T.  D.  2235,  Aug.  28,  1915.) 

1456  In  reply  to  your  letter  of  the  11th  instant,  requesting  to  be  advised  whether  in 
issuing  commissions  to  officers  mentioned  in  T.  D.  2235  it  should  be  stated  that 

the  commission  is  only  issued  for  the  purpose  of  administering  oaths,  you  are  advised 
that  this  office  doubts  the  legality  of  such  a limited  commission,  and  a regular  coijimission 
should  be  issued  with  a proviso  that  the  service  is  to  be  without  additional  compensation, 
but  the  officers  instructed  that  their  activities  as  deputy  collectors  should  be  confined 
to  the  administering  of  oaths,  as  it  is  not  necessary  for  such  officers  to  collect  moneys. 

There  is  no  objection  to  your  requiring  that  the  officers  to  whom  such  commissions 

1457  are  issued  furnish  you  a bond,  the  same  as  other  deputies  appointed  by  you.  (T. 

D.  2238,  Sept.  17,  1915.) 

< 

1458  This  office  is  in  receipt  of  your  letter  of  the  8th  instant  referring  to  Treasury 
Decision  2235  [paragraphs  1453 -f-]  authorizing  Collectors  to  commission  Revenue 

Agents,  Inspectors  and  Special  Employees  as  Deputy  Collectors  without  additional  com- 
pensation for  the  purpose  of  administering  oaths,  and  requesting  to  be  advised 
whether  or  not  this  decision  can  be  extended  to  apply  to  clerks  on  the  Income  Tax  Roll, 
stating  that  the  Deputies  in  your  office  are  too  busy  on  other  assignments  to  assist  in  the 
Income  Tax  Department  and  it  would  be  advisable  to  have  Income  Tax  Clerks  empowered 
to  administer  oaths. 

In  reply,  you  are  advised  that  this  office  sees  no  objection  to  the  commissioning 

1459  by  Collectors  of  Income  Tax  or  other  clerks  as  Deputy  Collectors  without  addi- 
tional compensation  under  the  same  provisions  and  with  the  same  restrictions 

as  applied  in  Treasury  Decision  2235  to  the  commissioning  of  the  field  officers  named. 

A copy  of  this  letter  will  be  published  in  Treasury  Decisions  as  authority  to  Col- 

1460  lectors  for  such  action.  (T.  D.  2293,  Feb.  10,  1916.) 

1461  The  annual  return  must  be  verified  by  oath  * ♦ * of  the  person  making 

the  same.  Collectors  are  directed  by  law  to  require  every  return  to  be  so  verified 

by  the  person  rendering  it.  The  affidavit  may  be  made  before  the  collector  for  the  dis- 
trict or  before  any  officer  authorized  by  law  to  administer  oaths.  (Art.  22,  Reg.  33, 

Jan.  5,  1914.) 


INC. 


148  TAX 


RETURNS  IN  GENERAL. 


1462  All  income-tax  returns  must  be  verified  under  oath  or  affirmation.  Persons  in 
the  naval  or  military  service  of  the  United  States  may  verify  their  returns  before 

any  official  of  those  services  authorized  to  administer  oaths  for  the  purposes  of  those 
' services.  (Art.  26,  1[175,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1463  Treasury  Decision  2090,  Oaths,  items  3 and  4,  hereby  amended  by  substituting 
for  said  items  3 and  4,  the  following: 

For  the  purpose  of  verification  of  returns  of  income  by  persons  in  the  Naval  and  Mili- 
tary service  of  the  United  States,  any  officer  in  the  Naval  or  Military  service  of  the  United 
States  within  or  without  the  United  States,  who  is  authorized  to  administer  oaths  under  the 
provisions  of  Section  4,  Act  of  July  27,  1892,  87  Stat.  278,  providing  for  the  administration 
of  oaths  for  the  purpose  of  Military  justice  and  administration,  or  under  the  provisions 
of  Act  of  March  4,  1917,  Public  391,  page  4,  providing  for  administration  of  oaths  for  the 
purpose  of  Naval  justice  and  administration,  is  hereby  empowered  and  authorized  to 
take  the  acknowledgment  of  such  persons  making  returns  of  income. 

In  all  such  cases  the  certifying  officer  shall  place  under  his  name  the  official  designa- 

1464  tion  under  which  he  acts.  (T.  D.  2534,  Oct.  11,  1917.) 

1465  (1)  A return  of  income  rendered  by  an  individual  residing  abroad  may  be^  ac- 
knowledged before  any  duly  appointed  officer  of  the  country  in  which  he  resides, 

authorized  to  administer  oaths  and  use  an  official  seal.  (T.  D.  2090,  Dec.  14,  1914.) 
i 

1466  Income-tax  returns  executed  abroad  may  be  attested  free  of  charge  before  United 
States  consular  officers. 

Where  a foreign  notary  or  other  official  having  no  seal  shall  act  as  attesting  officer 

1467  the  authority  of  such  attesting  officer  should  be  certified  to  by  some  judicial  official 
or  other  proper  officer  having  knowledge  of  the  appointment  and  official  character 

of  the  attesting  officer.  (Art.  26,  ^176-177,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1468  (2)  If  a return  is  executed  in  a State  before  a notary  who  is  not  required  by  the 
laws  of  the  State  to  use  a seal,  and  none  is  used,  the  notary  should  file  with  the 

Commissioner  of  Internal  Revenue  the  certificate  of  an  officer  possessing  a seal,  showing 
that  he  is  duly  commissioned  and  authorized  to  administer  oaths;  otherwise  the  certificate 
will  not  be  recognized.  (T.  D.  2090,  Dec.  14,  1914.) 

^ 1469  Replying  to  your  letter  of  the  23d  ultimo  you  are  informed  that  affidavits  to  tar 

returns  may  be  made  before  Justices  of  the  Peace  or  any  officer  authorized  by 
law  to  administer  oaths. 

If  made  before  a Notary  Public  who  is  not  required  by  the  laws  of  the  State  to 

1470  use  a seal,  and  none  is  used,  or  if  made  before  a Justice  of  the  Peace  who  has  no 
seal,  certificates  of  the  Clerk  of  Court  as  to  their  authority  to  administer  oaths 

may  be  waived  in  your  State  or  in  any  other  State  where  such  jurats  are  accepted 
in  the  State  Courts  either  with  or  without  seal,  and  without  a certificate  showing  authority. 
(T.  D.  2174,  March  12,  1915.) 

1471  Law  ^358.  Time  for  Filing  Returns. — “Sec.  241.  (a)  That  returns  of  corporations 

shall  be  made  at  the  same  time  as  is  provided  in  subdivision  (a)  of  section  227 

[^1472  below].” 

j 1472  Law  ^253.  Time  for  Filing  Returns  on  Fiscal  Year  Basis. — “Sec.  227.  (a)  That 

returns  shall  be  made  on  or  before  the  fifteenth  day  of  the  third  month  following, 
the  close  of  the  fiscal  year,  or,”  [1[3025.] 

1473  La  w ^254.  Time  for  Filing  Return  on  Calendar  Year  Basis. — “if  the  return  is  made 
on  the  basis  of  the  calendar  year,  then  the  return  shall  be  made  on  or  before  the 

fifteenth  day  of  March.”  [1]3025.] 

Comment:  [All  returns  of  net  Income  are  “for  the  taxable  year.”  “Taxable  year” 
is  defined  at  1[476,  in  general,  as  being  coextensive  with  the  taxpayer’s  annual  accounting 
I period.  If  the  taxpayer  has  no  accounting  period,  or  keeps  no  books,  his  taxable  year  is 

the  calendar  year.] 

1 474  If  Return  is  Not  Filed  on  Time  Notice  is  Sent  to  Corporation  by  Collector.-— \\Te re 
the  required  returns  are  not  filed  within  the  prescribed  time,  either  by  individuals 

or  corporations,  notice  on  Form  1045  should  jn  each  case  be  sent  to  the  delinquent.  (Art. 
196,  Reg.  33,  Jan.  5,  1914.) 

V 1476  “Last  Due  Date.” — “Last  due  date,”  as  used  in  these  regulations,  is  construed 

) to  m.ean  the  last  day  upon  which  a return  is  required  to  be  filed  in  accordance  vidtb 

the  provisions  of  the  law,  or  the  last  day  of  the  period  covered  by  an  extension  of  time- 
granted  by  the  collector  or  Commissioner  of  Internal  Revenue. — (Art.  218,  11635,  Reg.. 
33,  Rev.,  Jan.  2,  1918.) 


INC. 


149 


TAX 


RETURNS  IN  GENERAL. 


1476  Sunday  or  Holidays. — When  the  last  due  date  as  above  defined  falls  on  Sunday 
or  a legal  holiday  the  last  due  date  for  filing  returns  will  be  held  to  be  the  day 

following  such  Sunday  or  legal  holiday  and  the  return  should  be  made  to  the  collector  not 
later  than  such  following  day,  or,  if  placed  in  the  mails,  it  should  be  posted  in  ample  time 
to  reach  the  collector’s  office,  under  ordinary  handling  of  the  mails,  on  or  before  the  date 
on  which  the  return  as  here  indicated  is  required  to  be  filed  in  the  office  of  the  collector. 

(Art.  219,  1f636,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1477  Returns  Forwarded  by  Mail. — If  a return  is  made  and  placed  in  the  United  States 
mails  in  due  course,  properly  addressed,  and  postage  paid,  in  ample  time  to  reach 

the  office  of  the  collector  or  deputy  collector  on  or  before  the  last  due  date,  no  penalty  will 

be  held  to  attach  should  the  return  not  be  actually  received  by  such  officer  until  subse-  r 

quent  to  that  date.  In  cases  wherein  a question  may  be  raised  as  to  whether  or  not  the 

return  was  posted  in  ample  time  to  reach  the  collector’s  office  on  or  before  the  date  due, 

the  envelope  in  which  the  return  was  transmitted  should  be  preserved  by  the  collector 

of  internal  revenue  and  forwarded  to  the  Commissioner  of  Internal  Revenue  with  the 

return.  (Art.  220,  11637,  Reg.,  33  Rev.,  Jan.  2,  1918.) 

1478  If  a return  is  made  and  placed  in  the  United  States  mail,  properly  addressed,  and 

postage  paid,  in  ample  time,  in  due  course  of  mail,  to  reach  the  office  of  the  col- 
lector or  deputy  collector  on  or  before  the  last  due  date,  no  penalty  will  be  held  to  attach  t 

should  the  return  not  be  actually  received  by  such  officer  until  subsequent  to  that  date. 

(Art.  52,  11287,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1479  Law  1[247.  Returns  when  Accounting  Period  is  Changed.  Fiscal  to  Calendar 
Year  Basis. — “Sec.  226.  That  if  a taxpayer,  with  the  approval  of  the  Commissioner, 

changes  the  basis  of  computing  net  income  from  fiscal  year  to  calendar  year  a separate 
return  shall  be  made  for  the  period  between  the  close  of  the  last  fiscal  year  for  which  return 
was  made  and  the  following  December  thirty-first.” 

1 480  Law  1[248.  Calendar  to  Fiscal  Year  Basis. — “If  the  change  is  from  calendar  year 
to  fiscal  year,  a separate  return  shall  be  made  for  the  period  between  the  close  of 

the  last  calendar  year  for  which  return  was  made  and  the  date  designated  as  the  close 
of  the  fiscal  year.” 

1 481  Law  1[249.  One  Fiscal  Year  to  Another  Fiscal  Year  Basis.— “If  the  change  is  from 
one  fiscal  year  to  another  fiscal  year  a separate  return  shall  be  made  for  the  period 

between  the  close  of  the  former  fiscal  year  and  the  date  designated  as  the  close  of  the  new 
fiscal  year.” 

1482  Law  1[250.  First  Return  when  on  Fiscal  Year  Basis. — “If  a taxpayer  making  his 
first  return  for  income  tax  keeps  his  accounts  on  the  basis  of  a fiscal  year  he  shall 

make  a separate  return  for  the  period  between  the  beginning  of  the  calendar  year  in  which 
such  fiscal  year  ends  and  the  end  of  such  fiscal  year.” 

1 483  Law  1[251.  Computation  of  Income  and  Tax  when  Accounting  Period  is  Changed. 

— “In  all  of  the  above  cases  the  net  income  shall  be  computed  on  the  basis  of  such 
period  for  which  separate  return  is  made,  and  the  tax  shall  be  paid  thereon  at  the  rate  for 
the  calendar  year  in  which  such  period  is  included;” 

1484  Law  1[252.  Apportioning  the  Specific  Personal  Exemption  when  Accounting  Period 
is  Changed. — “and  the  credits  provided  in  subdivisions  (c)  [Hi  128]  and  (d) 

[1[1138]  of  section  216  shall  be  reduced  respectively  to  amounts  which  bear  the  same  ratio 
to  the  full  credits  provided  in  such  subdivisions  as  the  number  of  months  in  such  period 
bears  to  twelve  months.” 

[In  relation  to  the  above  read  at  1[3024.] 

1485  Law  1[348.  Apportioning  the  Specific  Credit  of  $2,000  in  the  Case  of  Corporations 
When  Accounting  Period  is  Changed. — “When  return  [in  the  case  of  corporations] 

is  made  under  section  226  [1479]  the  credit  provided  in  subdivision  (c)  [2330]  of  section  236 
shall  be  reduced  to  an  amount  which  bears  the  same  ratio  to  the  full  credit  therein  pro- 
vided as  the  number  of  months  in  the  period  for  which  such  return  is  made  bears  to  twelve 
months.” 

Comment. — [In  reading  the  following  regulations  applying  to  the  provisions  of 
the  law  as  it  was  heretofore  it  should  be  borne  in  mind  (Sec.  227  (a)  [1472]),  “That 
returns  shall  be  made  on  or  before  the  fifteenth  day  of  the  third  month  following  the  close 
of  the  fiscal  year,  or  if  the  return  is  made  on  the  basis  of  the  calendar  year,  then  the  return 
shall  be  made  on  or  before  the  fifteenth  day  of  March.”  The  present  law  carries  no  pro- 
vision as  did  the  old,  that  application  for  permission  to  change  from  a calendar  to  a fiscal 


INC, 


150  TAX 


RETURNS  IN  GENERAL. 


year  basis  is  to  be  made  thirty  days  prior  to  the  time  when  the  return  would  be  due  to 
be  filed  on  a calendar  year  basis.  It  must  be  remembered,  also,  that  heretofore  the  privilege 
to  make  returns  on  other  than  a calendar  year  basis  was  limited  to  corporations  and  part- 
nerships, whereas  under  the  present  law,  the  qualified  privilege  is  granted  to  all  classes  of 
taxpayers,  including  individuals,  ^755.] 

1486  It  is  noted  that  some  corporations  are  apt  to  misunderstand  the  rulings  of  this 
office  relative  to  establishing  a fiscal  year  as  the*  basis  of  its  return  of  annual  net 

income.  In  this  connection  you  are  requested  not  to  accept  a return  made  on  any  basis 
other  than  the  calendar  year  ended  December  31,  unless  the  corporation  filing  such  return 
has  properly  established  a fiscal  year.  (Mimeograph  letter  No.  1148  to  Collectors,  Jan. 
16,  1915.) 

1487  No  return  purporting  to  be  rendered  for  a period  other  than  that  ending  with  the 
last  day  of  some  month  should  be  forwarded  to  this  office,  unless  such  return  is  “final” 

and  made  to  the  date  that  the  corporation  ceased  business.  (Mimeograph  letter  No.  1148, 
to  Collectors,  Jan.  16,  1915.) 

1488  Fiscal  Year, — Section  13  (a)  of  this  title  authorizes  corporations  desiring  to  do  so 
to  make  their  returns  on  the  basis  of  a fiscal  year  other  than  the  calendar  year,  pro- 
vided that  30  days  prior  to  the  1st  day  of  March  of  the  year  in  which  the  return  would  be 
due  if  made  on  a calendar-year  basis  they  file  a notice  in  writing  with  the  collector  of 
internal  revenue,  designating  in  such  notice  the  last  day  of  some  month  (other  than  De- 
cember) as  the  close  of  their  fiscal  year.  In  the  case  of  a corporation  which  had  prev- 
iously made  its  return  on  a calendar-year  basis,  notice  designating  a fiscal  year  having  been 
filed  as  hereinbefore  indicated,  such  corporation  will,  on  or  before  March  1 next  following 
the  closing  date  so  designated,  make  a return  for  the  fractional  part  of  the  calendar  year 
ended  with  the  date  designated  as  the  close  of  the  fiscal  year.  All  returns  thereafter  must 
be  made  for  the  full  fiscal  year,  and  must  be  filed  with  the  collector  on  or  before  the  last 
day  of  the  60-day  period  next  following  the  date  designated  as  the  close  of  the  fiscal  year. 
For  instance,  if  a corporation  made  its  return  for  the  calendar  year  ended  December  31, 
1916,  and  desires  thereafter  to  make  returns  as  of  a fiscal  year  ended  May  31,  it  may, 

30  daysprior  to  March  1,  1918,  file  a notice  in  writing  with  the  collector  designating  May  31 
as  the  close  of  its  fiscal  year,  whereupon,  on  or  before  March  1,  1918,  it  will  make  a return 
for  the  fractional  period  from  January  1 to  May  31,  1917.  Thereafter,  on  or  before  July 
30  (60  days  after  May  31)  of  each  year,  it  will  make  a return  for  the  preceding  full  fiscal 
year.  (Art.  211,  1[626,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1489  In  the  Absence  of  Notice,  Fiscal  Year  Returns  Not  Acceptable. — A return  made 
on  the  basis  of  a fiscal  year  other  than  the  calendar  year  can  not  be  accepted, 

unless  such  fiscal  year  shall  have  been  established  by  proper  notice  to  the  collector  of  in- 
ternal revenue  of  the  district  in  which  such  corporation  has  its  principal  place  of  business, 
and  if  in  the  absence  of  such  notice  and  designation  a return  is  filed  subsequent  to  the  date 
when  it  was  required  to  be  filed  if  made  on  a calendar-year  basis,  it  will  be  considered  de- 
linquent and  the  corporation  will  be  liable  to  the  penalty  imposed  for  failure  to  file  the 
return  within  the  prescribed  time.  (Art.  203,  ^610,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1490  Date  of  Filing  and  Execution. — In  all  cases  where  a fiscal  year  is  not  established 
as  above  prescribed,  returns  must  be  made  on  the  basis  of  the  calendar  year,^  in 

which  case  such  returns  must  be  filed  on  or  before  the  1st  day  of  March  next  succeeding 
such  calendar  year.  Such  returns  in  either  case  provided  must  be  verified  under  oath 
or  affirmation  of  its  president  or  other  principal  officer,  and  its  treasurer  or  assistant 
treasurer;  that  is  to  say,  by  two  different  persons  acting  in  the  official  capacitv  indicated. 
(Art.  204,  11611,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1491  New  Corporation. — In  the  case  of  a new  corporation,  which  shall  have  established 

a fiscal  year  in  the  manner  hereinbefore  indicated,  it  may  make  its  first  and  all  , 
subsequent  returns  or.  the  basis  of  the  year  so  established,  provided  that  in  no  case  shall  a 
return  cover  a period  greater  than  12  calendar  months.  In  the  absence  of  a properly 
established  fiscal  year,  returns  must  be  made  on  the  calendar-year  basis.  (Art.  212, 
11627,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1492  A new  corporation  making  a return  for  a properly  established  fiscal  period  less 
than  12  months,  but  embracing  parts  of  two  calendar  years,  must  file  its  return 

within  60  days  from  the  last  day  of  the  designated  fiscal  year.  (Art.  203,  1f609,  Reg.  33, 
Rev.,  Jan.  2,  1918.) 

1493  Change  From  One  Fiscal  Year  To  Another. — In  order  to  change  the  closing  date 
of  the  fiscal  year  from  the  last  day  of  one  month  to  that  of  another  (other  than 

December)  the  corporation  must  at  least  30  days  prior  to  the  first  day  of  March  next 


INC. 


151 


TAX 


RETURNS  IN  GENERAL. 


following  the  closing  date  of  the  previously  established  fiscal  year  file  with  the  collector, 
in  writing,  a notice  designating  the  last  day  of  some  other  month  as  the  close  of  Its  fiscal 
year,  In  which  case  a return  for  the  fractional  period  ending  with  the  date  last  designated  f 

mtist  be  made  on  or  before  the  last  day  of  the  60-day  period  next  following  the  close  of 
•uch  previously  established  fiscal  year.  (Art.  213,  ^628,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1494  Must  Make  Return  For  Fiscal  Year. — When  a corporation  has,  In  the  manner 
provided  by  law,  established  a fiscal  year  other  than  the  calendar  year  as  the 

basis  for  making  its  return,  it  is  bound  by  such  action  to  make  its  returns  on  such  basis 
until  such  fiscal  year  be  properly  changed.  Failing  to  make  its  returns  on  the  basis  des- 
ignated and  within  the  prescribed  time  will  subject  the  corporation  to  the  penalties  im- 
posed by  this  title  for  delinquency.  (Art.  214,  1(629,  Reg.  33,  Rev.,  Jan.  2,  1918.)  r 

1495  If  it  shall  appear  in  any  case  that  returns  have  been  made  to  the  collector  on  the 
basis  of  a fiscal  year  not  designated  as  hereinbefore  indicated,  the  corporation  making 

such  returns  will  be  advised  that  such  returns  can  not  be  accepted,  but  must  be  made  to 
cover  the  business  of  the  calendar  year.  (Art.  215,  K630,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1496  Change  From  Fiscal  To  Calendar  Year. — The  normal  period  for  which  returns 
are  required  to  be  made  is  the  calendar  year  and  the  normal  due  date  for  filing 

such  return  the  1st  day  of  March  next  following  December  31.  If  a corporation,  which  # 

had  previously  established  a fiscal  year  other  than  the  calendar  year  as  the  basis  for 
making  its  return,  desires  to  establish  the  calendar  year  basis,  it  may  do  so  by  filing  not 
less  than  30  days  prior  to  March  1 next  following  the  closing  date  of  the  established  fiscal 
year,  a notice  in  writing  with  the  collector,  designating  December  31  as  the  close  of  its  year, 
in  which  case  it  must  on  or  before  the  Ist  day  of  the  March  next  following  file  a return 
covering  that  period  between  the  closing  date  of  its  previously  established  fiscal  year  and 
December  31.  (Art.  217,  K634,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1497  Assistance  From  Collectors  in  Preparing  Returns. — All  Collectors  of  Internal  Rev- 
enue who  have  not  already  done  so  will  please  arrange  to  inform  the  public,  in  their 

respective  districts,  through  the  press  or  other  means  of  publicity  without  cost  to  the 
Government  or  by  posting  appropriate  notices,  that  any  assistance  or  information  which 
may  be  required  in  connection  with  preparing  and  filing  their  Income  Tax  Returns  will  * 
be  gladly  and  promptly  furnished  by  applying  to  or  calling  at  any  Internal  Revenue  ^ 

Office. 

In  pursuance  of  the  above.  Collectors  should  assign  from  the  present  office  forces, 

1498  an  employee  or  employees,  as  the  case  may  require,  who  should  be  thoroughly 
posted  on  the  provisions  of  the  Income  Tax  law  and  all  Treasury  Decisions  and 

Regulations  in  connection  with  same,  particularly  with  relation  to  the  Personal  Tax  and 
the  filing  of  Individual  Returns,  to  promptly  furnish  the  public  with  information  desired 
when  calling  at  the  various  Internal  Revenue  Offices.  (Letter  to  Collectors,  Feb.  10,  1914.) 

1 499  A large  part  of  the  volume  of  correspondence  coming  to  this  office  asking  for  In- 
formation relative  to  making  return  and  ascertainment  of  net  income,  etc.,  for 

the  income  tax,  is  sufficiently  covered  by  regulations,  and  should  be  answered  in  the  offices 
of  collectors. 

Collectors  are  therefore  advised  that  letters  coming  to  this  office  asking  for  informa-  ^ 

1 600  tion  which  should  be  supplied  by  collectors  in  accordance  with  instructions  and 
regulations  furnished  them,  will  be  referred  to  collectors  for  reply  and  writers  of 

the  letters  advised  of  the  reference.  Collectors,  upon  receipt  of  letters  referred  to  them  by 
this  office,  will  give  immediate  attention  to  the  subject-matter  of  the  inquiry,  in  accord- 
ance with  the  regulations  and  instructions  bearing  upon  the  same.  (T.  D.  1949,  Feb. 

14,  1914,  and  T.  D.  1956,  Feb.  14,  1914.) 

1 601  Law  K447.  Extension  of  Time  For  Filing  Returns  May  Be  Granted  by  the  Collector, 

^ — Sec.  3176,  Revised  Statutes  [second  paragraph].  “If  the  failure  to  file  a return 

or  list  is  due  to  sickness  or  absence,  the  collector  may  allow  such  further  time,  not  exceed- 
ing thirty  days,  for  making  and  filing  the  return  or  list  as  he  deems  proper.”  [See  K3026.] 

1602  In  ordinary  cases  of  citizens  and  residents,  where  failure  to  file  returns  is  due  to 
sickness  or  absence,  the  Collector  of  Internal  Revenue  may  in  his  discretion  and  on 

application  therefor  before  expiration  of  30  days  from  the  time  return  should  have  been 
filed,  allow  such  further  time  as  he  may  deem  proper  (not  exceeding  30  days  from  the 
date^  return  should  have  been  filed),  for  making  and  filing  return.  The  collectors’  au- 
thority in  such  cases  is  limited  to  30  days.  Further  extension  can  be  made  by  the  Com- 
missioner of  Internal  Revenue  only  and  is  confined  to  meritorious  cases  and  upon  satis- 
factory showing  why  return  was  not  or  cannot  be  made  and  filed  within  the  extension 
granted  by  the  collector.  (Art.  22,  K165,  Reg.  33,  Rev.,  Jan.  2,  1918.) 


INC. 


152  TAX 


RETURNS  IN  GENERAL. 


1503  When  the  return  is  not  filed  within  the  required  time  by  reason  of  sickness  or  ab- 
' sence  of  the  individual,  an  extension  of  time,  not  exceeding  30  days  from  March  [15], 

within  which  to  file  such  return  may  be  granted  by  the  collector,  provided  a written  appli- 
cation therefor  is  made  by  the  individual  within  the  period  for  which  such  extension  i& 
desired.  (Art.  23,  Reg.  33,  Jan.  5,  1914.) 

1504  In  cases  wherein  a corporation  fails  or  neglects  to  file  its  return  within  the  pre- 
scribed time,  and  such  neglect  is  due  to  sickness  or  absence,  the  collector  is  author- 
ized to  grant  an  extension  of  the  time  within  which  to  file  the  return,  which  extension 
must  not  exceed  30  days  from  the  normal  due  date.  The  application  for  such  extension 
must  be  made  prior  to  the  expiration  of  the  period  for  which  the  extension  is  desired. 
Otherwise  the  return  will  be  considered  delinquent  and  liability  to  penalty  will  attach. 
(Art.  222,  ^640,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 505  Absence  or  sickness  of  one  or  more  officers,  at  the  time  the  return  is  required  tobe  filed, 
^ will  not  be  accepted  as  a reasonable  cause  for  failure  to  file  the  return  within  the 

prescribed  time,  unless  it  is  satisfactorily  shown  that  there  were  no  other  principal  officers 
available  and  sufficiently  informed  as  to  the  affairs  of  the  corporation  to  make  and  verify 
the  return.  (Art.  223,  1[641,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1506  An  extension  of  time  within  which  a return  may  be  filed  [granted  by  the  collector} 
can  in  no  case  exceed  30  days  from  the  date  on  which  the  return  is  due  and  can  be 

granted  only  upon  written  application  to  the  collector,  and  in  case  of  sickness  or  absence 
of  an  officer  whose  signature  to  the  return  is  required,  such  application  to  be  made  prior 
to  the  expiration  of  the  period  for  which  the  extension  is  desired.  (Art.  173,  Reg.  33,. 
Jan.  5,  1914.) 

Interest  Runs  During  Period  Extension  is  Availed  of,  ^[2346. 

1507  Law  ^255.  Extension  of  Time  for  Filing  Returns  May  be  Granted  by  the  Com- 
missioner.— “The  Commissioner  may  grant  a reasonable  extension  of  time  for 

filing  returns  whenever  in  his  judgment  good  cause  exists  and  fhall  keep  a record  of  every 
such  extension  and  the  reason  therefor.  Except  in  the  case  of  taxpayers  who  are  abroad,, 
no  such  extension  shall  be  for  more  than  six  months.”  fSee^j  )26.] 

1508  The  Commissioner  of  Interna!  Revenue  may,  in  hi?  discretion,  upon  application 
therefor  and  upon  saiisfactcry  showing,  grant  a reasf  aable  extention  of  time,  in 

meritorious  cases  for  h'ing  returns  of  income  by  persons  ♦ * * -who  are  required  to 

make  and  file  return-  of  income  and  who  are  unable  to  file  «aic  returns  on  or  before  March 
[15]  of  each  year.  (Art.  22,  'jlbS,  Reg,  33,  Rev.,  Jan  2,  191S  ) 

1509  In  meritorious  cases  the  Commissioner  of  Internal  Revenue  is  authorized 
to  grant  a further  reasonable  extension  of  time  in  which  returns  may  be  filed, 

provided  the  reason  for  the  request  therefor  is  presented  fully  in  writing  and  is  considered 
good  and  sufficient.  (Art.  224,  ^642,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1510  Time  Extended  in  Which  to  File  Returns  of  Income  by  Certain  Nonresident  Alien 
Individuals  and  Corporations  and  American  Citizens  Residing  or  Traveling  Abroad. 

— The  provisions  of  T.  D.  2445,  February  12,  1917,  (from  time  to  time  amplified  and  ex- 
tended to  include  November  1,  1917)  granting  to  nonresident  alien  individuals  and  cor- 
porations and  American  citizens  residing  abroad  who  because  of  war  conditions  have  not 
been  able  to  file  their  returns  of  income  for  1916,  are  hereby  amended  so  as  to  extend  the 
time  in  which  returns  for  1916  and  subsequent  years  may  be  filed,  for  such  period  as  may  be 
necessary  to  and  including  ninety  days  after  the  proclamation  of  the  President  of  the 
United  States  announcing  the  close  of  the  war  with  Germany. 

In  all  such  cases  there  is  required  to  be  attached  to  the  return  an  affidavit  stating 

1511  the  cause  or  causes  of  delay  in  filing  returns  of  income  within  time  required  by  law, 
in  order  that,  upon  the  showing  made,  the  Commissioner  of  Internal  Revenue 

may  determine  whether  the  failure  to  file  returns  in  time  “was  due  to  a reasonable  cause 
and  not  to  wilful  neglect.”  When  the  showing  justifies  a conclusion  that  the  failure  to 
file  returns  in  time  is  excusable,  no  penalty  by  way  of  addition  to  tax  will  be  imposed. 
(T.  D.  2581,  Nov.  10,  1917.) 

1512  The  provisions  of  T.  D.  2581,  dated  November  10,  1917,  shall  apply  to  returns  by 
American  citizens  residing  or  traveling  abroad,  including  persons  in  the  military 

or  naval  establishments  of  the  United  States  stationed  or  on  duty  beyond  the  limits  of 
the  States  and  the  Territories  of  Hawaii  and  Alaska. 

Any  such  person  filing  his  return  after  April  1,  1918,  but  on  or  before  October  1, 


INC. 


153  TAX 


RETURNS  IN  GENERAL. 


1613  1918,  embodying  therein  or  attaching  thereto  a written  statement  showing  that  he 
comes  within  the  classes  designated  by  T.  D.  2581,  is  relieved  of  the  necessity 
of  filing  the  supporting  affidavit  required  by  that  Decision.  (T.  D.  2672,  March  16,  1918.)  ^ 

1514  Extension  of  Time  for  Filing  Returns  by  Enemies  and  Allies  of  Enemies. — An 

extension  of  time  is  hereby  granted  for  such  period  as  may  be  necessary,  not  exceed- 
ing ninety  days  after  proclamation  by  the  President  of  the  United  States  of  the  end  of  the 
war  with  Germany,  for  filing  returns  of  income  for  1917  and  subsequent  years  under  Sec- 
tions 6(c),  8(b)(c)  and  13  (b)(c)  of  the  Income  Tax  Act  of  September  8,  1916,  as  amended, 
and  under  the  War  Income  Tax  Act  of  October  3,  1917,  by  or  for  enemies  or  allies  of  enemies 
as  defined  by  Section  2 of  the  Trading  with  the  Enemy  Act  of  October  6,  1917,  not  holding 
a license  granted  under  the  provisions  of  said  Act;  Provided^  however,  (1)  that  return  of  ^ 

information  shall  be  made  in  compliance  with  Section  28  of  the  Income  Tax  Act,  and 
(2)  that  all  persons  required  to  withhold  the  normal  tax  pursuant  to  Sections  9(b)  and  13 
(e)(f)  of  the  Income  Tax  Act  shall  make  due  return  and  payment  thereof  for  the  period 
ending  October  6,  1917,  in  respect  of  income  paid  over  before  such  date  to  or  for  any  such 
enemies  or  allies  of  enemies,  and  further  (3)  that,  except  for  such  payment,  all  persons  who 
on  October  6,  1917,  had,  or  since  have  had,  or  may  hereafter  have,  control  of  any  money 
or  other  property  for  any  such  enemy  or  ally  of  enemy,  or  who  on  October  6,  1917,  were, 
or  since  have  been,  or  may  hereafter  be,  indebted  to  any  such  enemy  or  ally  of  enemy, 

(a)  shall  hold  and  deliver  all  said  money  and  property  in  all  respects  subject  to  said  Trading  ^ 

with  the  Enemy  Act  and  to  the  orders  of  the  President  of  the  United  States  and  of  the 
alien  property  custodian  thereunder,  and  (b)  shall  in  due  course  file  returns  of  income  in 
respect  of  all  said  money  and  property  for  such  period  as  may  elapse  or  have  elapsed  prior 
to  the  actual  delivery  of  said  money  and  property  to  said  alien  property  custodian.  (T.  D. 

2673,  March  18,  1918.)  [1[3028.] 

1615  Withholding  at  the  Source  and  Returns  of  Information  in  Connection  with  Income 
Payments  to  the  Alien  Property  Custodian. — With  reference  to  your  telegram 

of  April  30,  and  the  previous  exchange  of  letters,  and  telegrams  concerning  withholding  in 
the  case  of  interest  and  dividends  paid  on  securities  formerly  belonging  to  enemies,  T.  D. 

2673  [^1514]  of  Alarch  18,  1918,  granted  an  extension  of  time  for  filing  returns  of  income 
by  or  for  enemies  provided  certain  conditions  were  observed  and  performed. 

The  first  condition  was  that  return  of  information  should  continue  to  be  made 

1616  in  compliance  with  Section  28  of  the  Income  Tax  Act  and  the  regulations  thereunder. 

In  just  the  same  way  as  if  T.  D.  2763  had  never  been  issued.  ^ 

The  second  condition  was  that  all  persons  required  to  withhold  the  normal  tax 

1617  on  payments  to  enemies  should  make  due  return  of  such  tax  withheld  for  the  period 
ending  October  6,  1917,  in  respect  of  income  paid  over  before  such  date  to  or  for 

any  such  enemies.  As  on  October  6,  1917,  the  Trading  with  the  Enemy  Act  was  passed, 
which  affected  the  status  of  property  and  claims  theretofore  belonging  to  enemies  no  such 
withholding  after  that  date  was  deemed  necessary. 

The  third  condition  was  that,  except  for  such  payment  of  the  tax  withheld  on  income 
1518  paid  over  before  October  6,  1917,  all  persons  who  had  control  of  any  money  or  other 
property  for  or  were  indebted  to  any  enemy  should  hold  and  deliver  all  such  money 
and  property  subject  to  the  orders  of  the  alien  property  custodian,  and  also  should  file 
returns  of  income  in  respect  to  such  money  and  property  for  such  period  as  might  elapse 
or  have  elapsed  before  delivery  of  such  money,  and  property  to  the  alien  property  custodian. 

In  other  words,  if  delivery  was  made  in  November,  1917,  a return  should  be  filed  for  the  ^ 

portion  of  the  year  1917  elapsing  before  such  delivery,  and  if  delivery  was  made  in  March, 

1918  a return  should  be  filed  for  the  year  1917  and  also  before  March  1,  1919,  for  such 
portion  of  the  year  1918  as  elapsed  before  such  delivery. 

The  effect  of  T.  D.  2673,  so  far  as  withholding  is  concerned,  was  to  put  payments 
1619  made  after  October  6,  1917,  to  the  alien  property  custodian  or  to  his  designated 
depositaries  in  exactly  the  same  category  as  payments  made  to  or  for  citizens  or 
-residents  of  the  United  States.  Withholding  at  the  source  should  accordingly  cease,  ex- 
cept in  the  case  of  interest  payments  on  tax-free  bonds  where  no  exemption  is  claimed. 

T.  D.  2673  by  its  terms  did  not  affect  and  was  not  intended  to  affect  the  rules  with  reference  ^ 

to  withholding  in  the  case  of  tax-free  bonds.  Form  1001  should  be  used,  except  where  no 
exemption  is  claimed  with  reference  to  interest  on  tax  free  bonds  in  which  case  Form  1000 
is  proper. 

No  distinction  Is  to  be  made  between  payments  made  directly  to  the  alien  property 

1520  custodian  and  to  his  depositaries  or  between  interest  on  registered  bonds  and 
interest  on  coupon  bonds. 

1521  This  letter  supersedes  the  telegram  from  this  office  dated  April  16,  1918.  (Letter 
to  the  Southern  Pacific  Company,  New  York,  N.  Y.,  signed  by  Commissioner 

Daniel  C.  Roper,  and  dated  May  3,  1918.)  [^3007.] 

1622  Use  of  Ownership  Certificates  by  or  on  Account  of  the  Alien  Property  Custodian: 

Substitution.  Identification  of  Particular  Accounts. — This  office  is  in  receipt 
of  your  letter  dated  May  4,  1918,  inquiring  w'hether  substitute  certificates  may  now  be 


INC. 


154 


TAX 


RETURNS  IN  GENERAL. 


used  in  connection  with  collections  for  the  Alien  Property  Custodian;  whether  exemp-^ 
tion  may  be  claimed  or  not  claimed  in  the  same  manner  as  for  resident  citizens;  and 
k whether  any  identification  of  the  particular  account  will  be  required  on  ownership  certi- 

^ ficates  other  than  designating  Alien  Property  Custodian  as  owner. 

In  reply  you  are  advised  that  it  is  the  opinion  of  this  office  that  payments  of  income 
1523  made  to  the  Alien  Property  Custodian  on  account  of  enemies  or  allies  of  enemies 
fall  into  the  same  class  as  payments  made  to  citizens  or  residents^  of  the  United 
States;  in  which  case  substitute  certificates  may  be  used  in  connection  with  payment  of 
such  income.  However,  in  accordance  with  the  provisions  of  Treasury  Decision  2589 
[Reg.  33,  Rev.  at  ^632.]  the  use  of  substitute  certificates  representing  income  accruing 
to  non-resident  aliens  other  than  enemies  or  allies  of  enemies  has  been  discontinued. 

As  it  would  be  impossible  for  the  Alien  Property  Custodian  or  his  designated  de- 
1 624  positary  to  ascertain  in  each  case  whether  the  recipient  of  the  income  is  entitled 
to  the  specific  exemption,  it  has  been  decided  that  when  coupons  are  detached 
from  bonds  containing  a tax-free  covenant  clause,  Form  1000,  revised,  should  be  executed 
by  the  Alien  Property  Custodian  or  his  designated  depositary,  the  amount  of  interest 
being  entered  on  line  1.  In  all  other  cases.  Form  1001,  revised,  should  be  executed. 
(Letter  to  the  Central  Trust  Company  of  Illinois,  Chicago,  111.,  signed  by  Deputy  Com- 
missioner L.  F.  Speer,  and  dated  June  6,  1918.) 

1625  Receipt  is  acknowledged  of  your  letter  of  June  27,  1918,  relative  to  the  information 
that  is  required  under  the  heading  “Owner  of  Bonds”  in  ownership  certificates: 
executed  to  cover  bond  interest  paid  over  to  the  Alien  Property  Custodian.  You  point  ©>013: 
that  although  you  have  been  informed  that  the  name  and  address  of  the  enemy  or  ally- 
of  enemy,  on  whose  account  any  particular  item  of  interest  may  be  paid  over  to  the  Aliefi. 
Property  Custodian  need  not  be  given  in  the  ownership  certificate  filed,  some  corporations 
h ave  refused  payment  of  interest  when  such  certificates  failed  to  show  the  name  and  address- 
of  the  enemy  or  ally  of  enemy.  ^In  reply  you  are  advised  that  where  ownership  certificate- 
form,  either  1000  or  1001,  is  executed  to  cover  funds  paid  over  to  the  Alien  Property  Cus- 
todian, the  certificate  will  be  sufficiently  complete  for  present  indentification  purposes  of 
this  office  if  the  name  of  the  taxpayer  and  the  trust  number  are  given  under  the  heading 
“Owner  of  Bonds”  with  the  name  and  address  of  the  enemy  or  ally  of  enemy  concerned 
excluded.  (Letter  to  the  Equitable  Trust  Company,  New  York,  N.  Y.,  signed  by  Deputy 
Commissioner  L.  F.  Speer,  and  dated  July  13,  1918.) 

' 1626  Lav/  *|[256.  Where  Returns  are  to  be  Filed  by  Individuals. — “(b)  Returns  shall 

be  made  to  the  collector  for  the  district  in  which  is  located  the  legal  residence, 
or  principal  place  of  business  of  the  person  making  the  return,  or,”  [^3029.] 

1627  Law  ^257.  “if  he  has  no  legal  residence  or  principal  place  of  business  in  the  Uniteef 
States,  then  to  the  collector  at  Baltimore,  Maryland.” 

1628  R cturns  of  income  of  individuals  are  to  be  filed  with  the  collector  of  internal 
revenue  for  the  district  in  which  such  person  has  his  legal  residence  or  principal 

place  of  business,  or  if  there  be  no  legal  residence  or  place  of  business  in  the  United’ 
States,  then  with  the  collector  of  internal  revenue  at  Baltimore,  Md.  The  returns  shall 
be  in  such  form  as  shall  be  prescribed  by  the  Commissioner  of  Internal  Revenue  with  the 
approval  of  the  Secretary  of  the  Treasury.  (Art.  26,  1[172,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

f 

1 629  Where  Returns  may  be  Filed  by  Persons  in  the  Military  or  Naval  Forces. — Per- 
sons in  the  military  or  naval  service  of  the  United  States  may  file  their  returns 
of  income  with  the  collector  of  internal  revenue  of  the  district  in  which  they  have  a legal 
residence,  or  with  the  collector  of  internal  revenue  at  Baltimore,  Md.  (Art.  26,  11174, 
Reg.  33,  Rev.,  Jan.  2,  1918.) 

1630  Law  1(359.  Where  Returns  are  to  be  Filed  by  Corporations. — “(b)  Returns  shall 
be  made  to  the  collector  of  the  district  in  which  is  located  the  principal  place  of 

^ business  or  principal  office  or  agency  of  the  corporation,  or,” 

1631  Law  K360.  “if  it  has  no  principal  place  of  business  or  principal  office  or  agency 
in  the  United  States,  then  to  the  collector  at  Baltimore,  Maryland.” 

1 632  The  principal  place  of  business  of  a corporation  is  the  place  or  office  in  which  are 
kept  the  books  of  account  and  other  data  from  which  the  return  is  to  be  prepared. 
(T.  D.  2090,  Dec.  14,  1914.) 

^ 1 633  Returns  of  Domestic  Corporations  Whose  Books  are  Kept  Abroad. — In  the  case 

of  domestic  corporations  whose  books  of  account  and  other  data  arc  kept  In  foreign 
countries,  the  returns  should  be  made  to  the  collector  of  internal  revenue  of  the  district 


INC. 


155  TAX 


RETURNS  IN  GENERAL. 


in  which  they  have  branch  offices  In  this  country,  if  they  have  such  branch  offices.  Other- 
wise, the  returns  of  annual  net  income  of  such  corporations  should  be  made  to  the  collector 
'of  the  district  in  which  are  located  the  statutory  offices  of  the  corporations.  (T.  D.  2137, 
Jan.  30,  1915.) 

1534  Corporations  Doing  Business  in  the  Philippines  and  Porto  Rico. — [For  the  taxing 

1-  . corporations  under  the  present  law  read  at  ^[511].  Corporations  whose 

business  is  done  wholly  in  Porto  Rico  and  the  Philippine  Islands,  even  though  incorporated 
3n  the  United  States,  are  held  to  be  resident  corporations  of  these  possessions,  and  will 
make  returns  and  pay  the  income  tax  to  the  collectors  of  internal  revenue  having  juris- 
diction there.  (T.  D.  2090,  Dec.  14,  1914.) 

1535  Such  corporations  organized  under  laws  of  the  United  States  or  any  State  thereof, 

United  States  but  doing  business  in  these  possessions  are  taxable  in 
the  United  States.  If  they  are  organized  under  the  laws  of  the  United  States  or  local 
laws^  of  these  possessions  and  resident  in  said  possessions,  they  are  required  to  pay  their 
tax  in  the  Philippines  or  in  Porto  Rico,  as  the  case  may  be.  The  law  provides  that  cor- 
porations shall  make  their  returns  “to  the  collector  of  internal  revenue  for  the  district  in 
which  they  have  their  principal  place  of  business.”  Held:  “Principal  place  of  business” 
of  a corporation  is  the  place  of  office  in  which  are  kept  the  books  of  account  and  other 
data  from  which  the  return  is  to  be  prepared.  (T.  D.  2090,  Dec.  14,  1914.) 

1 536  A domestic  corporation  doing  the  greater  part  of  its  business  In  the  United  States 
• t>  having  its  principal  place  of  business  in  this  country  and  transacting  business 

-in  Porto  RIso  through  a branch  office,  is  required  to  report  in  its  return  of  annual  net 
-income  its  entire  earnings  from  all  sources  including  those  arising  and  accruing  to  the 
branch  in  Porto  Rico  or  elsewhere. 

The  return  of  such  corporation  will  be  made  to  the  collector  of  internal  revenue 
'1537  of  the  district  of  this  country  in  which  is  located  its  principal  place  of  business. 
(T.  D.  2137,  Jan.  30,  1915.) 

1538  Law  ^258.  Understatement  in  Returns  and  Increases  by  the  Collector. — “Sec. 
228.  That  if  the  collector  or  deputy  collector  has  reason  to  believe  that' the 

amount  of  any  income  returned  is  understated,  he  shall  give  due  notice  to  the  taxpayer 
making  the  return  to  show  cause  why  the  amount  of  the  return  should  not  be  increased, 
and  upon  proof  of  the  amount  understated,  may  increase  the  same  accordingly.”  [^1030.] 

1539  Law  1[259.  Taxpayer  May  Appeal  Collector’s  Decision,  to  the  Commissioner. — 
“Such  taxpayer  may  furnish  sworn  testimony  to  prove  any  relevant  facts  and  if 

dissatisfied  with  the  decision  of  the  collector  may  appeal  to  the  Commissioner  for  his 
decision,  under  such  rules  of  procedure  as  may  be  prescribed  by  the  Commissioner  with  the 
approval  of  the  Secretary.” 

1 540  Correction  by  the  Taxpayer  of  Erroneous  Return. — All  returns  should  be  carefully 
scrutinized,  and,  if  improperly  prepared,  they  should  be  returned  to  the  taxpaper 
for  correction,  with  instructions  that  if  a new  return  be  executed,  the  old  one,  showing 
the  date  of  the  receipt  thereon,  should  be  fowarded  to  the  Collector  to  avoid  the  possibility 
of  subjecting  the  taxpayer  to  additional  tax  or  penalties  for  failure  to  file  the  return  wdthin 
the  period  required  by  law. 

A record  of  each  return  sent  back  to  the  taxpayer  for  correction  should  be  made 
1541  in  the  office  of  the  Collector,  so  that  if  the  taxpaper  fails  to  properly  amend  and 
forward  same,  the  Collector  may  take  steps  to  secure  the  return.  (Kxtract  from 
Mimeograph  Letter  No.  1160  to  Collectors,  signed  by  Acting  Commissioner  David  A. 
Gates  and  dated  February  9,  1915.) 

1 542  Correction  of  Erroneous  Returns  at  the  Instance  of  the  Collector. — Referring  to 
the  returns  of  annual  net  income  to  be  filed  by  corporations  for  the  year  [1914], 
you  are  requested  to  examine  each  return  closely  with  a view  to  having  such  returns  as 
nearly  correct  as  possible  before  forwarding  to  this  office.  (Mimeograph  letter  No.  1148 
to  Collectors,  Jan.  16,  1915.) 

1 543  Referring  to  your  statement  that  the  representative  of  this  office  insists  upon  the 
officers  of  corporations  signing  amended  returns  without  giving  any  reasonable 
time  for  investigation  on  the  part  of  the  officers,  you  are  informed  that  examining  officers 
have  been  instructed  by  this  office  to  secure  from  corporations  amended  returns  where- 
cver,  as  a result  of  their  examinations,  it  is  sho'wn  thatthe  original  returns  were  not  correct. 

It  is  not  the  desire  of  this  office,  however,  that  examining  officers  shall  not  give 
1 544  the  officers  of  corporations  the  fullest  opportunity  to  m.ake  any  investigation 
they  may  desire  prior  to  signing-  these  amended  returns,  provided,  of  course,  such 
investigation  does  not  cover  an  unreasonable  length  of  time.  (Extract  from  letter  to 
the  Industrial  Association  of  Cincinnati,  signed  by  Commissioner  W.  H.  Osborn,  and  dated 
February  2,  1915.)  ' 


INC. 


1 56  TAX 


RETURNS  IN  GENERAL. 


1545  Amended  Return  not  Required  When  Audit  or  Investigation  Reveals  Necessity 
.for  a Further  Tax. — Hereafter,  in  cases  where  an  individual,  a fiduciary,  or  a with- 
holding agent  has  been  found  subject  to  a further  tax  as  a result  of  the  audit  of  a return 
in  this  office,  or  of  an  investigation  made  by  a Revenue  Agent  an  amended  return  will  not 
be  required. 

In  cases  where  a further  tax  is  to  be  assessed,  either  against  an  individual,  afidu- 

1546  ciary,  or  a withholding  agent,  collectors  will  be  advised  by  letter  from  this  office 
of  the  amount  of  further  tax  to  be  assessed,  and  the  reason  for  making  such  assess- 
ment will  be  fully  set  forth. 

With  a view  to  minimizing  the  work  in  the  offices  of  Collectors  a carbon  copy  of 
1 547  the  letter  to  them  will  be  enclosed,  which  should  be  forwarded  by  the  Collector 
to  the  individual,  fiduciary,  or  withhholding  agent,  as  the  case  may  be,  in  lieu 
of  writing  a letter  of  explanation. 

The  use  of  Income  Tax  Form  6981  by  Revenue  Agents  will  be  discontinued  in 

1548  connection  with  reports  on  Personal  Income  Tax  Returns.  (Mimeograph  Letter 
No.  1232  to  Collectors,  June  22,  1915.) 

1 549  Law  ^443.  Penalty  for  Failure  to  Make  Return  or  for  False  or  Fraudulent 
Return. — Sec.  3176,  Revised  Statutes.  “If  any  person,  corporation,  company,  or 

association  fails  to  make  and  file  a return  or  list  at  the  time  prescribed  by  law  or  by  regu- 
lation made  under  authority  of  law,  or  makes,  willfully  or  otherwise,  a false  or  fraudulent 
return  or  list,” 

1550  Law  ^444.  “the  collector  or  deputy  collector  shall  make  the  return  or  list  from  his 
own  knowledge  and  from  such  information  as  he  can  obtain  through  testimony 

or  otherwise.” 

1 551  Law  1[445.  ^ “In  any  such  case  the  Commissioner  may,  from  his  own  knowledge  and 
from  such  information  as  he  can  obtain  through  testimony  or  otherwise,  make  a 
return  or  amend  any  return  made  by  a collector  or  deputy  collector.” 

1552  Law  ^446.  “Any  return  or  list  so  made  and  subscribed  by  the  Commissioner,  or 
by  a collector  or  deputy  collector  and  approved  by  the  Commissioner,  shall  be  prima 
facie  good  and  sufficient  for  all  legal  purposes.” 

1 553  Law  ^448.  “The  Commissioner  of  Internal  Revenue  shall  determine  and  assess 
^ all  taxes,  other  than  stamp  taxes,  as  to  which  returns  or  lists  are  so  made  under  the 
provisions  of  this  section.” 

1 554  Law  ^449.  “In  case  of  any  failure  to  make  and  file  a return  or  list  within  the  time 
prescribed  by  law,  or  prescribed  by  the  Commissioner  of  Internal  Revenue  or  the 
collector  in  pursuance  of  law,  the  Commissioner  of  Internal  Revenue  shall  add  to  the  tax 
25  per  centum  of  its  amount,” 

1 555  Law  ^450.  “except  that  when  a return  is  filed  after  such  time  and  it  is  shown  that 
the  failure  to  file  it  was  due  to  a reasonable  cause  and  not  to  willful  neglect,  no 
such  addition  shall  be  made  to  the  tax.” 

1 556  Law  1[451.  “In  case  a false  or  fraudulent  return  or  list  is  willfully  made,  the  Com- 
missioner of  Internal  Revenue  shall  add  to  the  tax  50  per  centum  of  its  amount.” 
(50%  of  the  am.ount  of  the  deficiency  only,  added  in  case  of  income  and  war  excess-profits 
tax  returns,  ^2358.] 

1557  La  w *|452.  “The  amount  so  added  to  any  tax  shall  be  collected  at  the  same  time  and 
in  the  same  manner  and  as  part  of  the  tax” 

1558  I .aw  ^453.  “unless  the  tax  has  been  paid  before  the  discovery  of  the  neglect,  falsity, 
or  fraud,  in  which  case  the  amount  so  added  shall  be  collected  in  the  same  manner 

as  the  tax.” 

[In  relation  to  the  above  see  ^3032.] 

1559  Penalty  25  Per  Cent  Additional. — In  section  3176,  as  [formerly]  incorporated  in 
and  m.ade  a part  of  this  title,  it  is  provided  that — 

In  case  of  any  failure  to  make  and  file  a return  within  the  time  prescribed  by  law  or 
1 560  by  [regulation  made  under  authority  of  law]  the  Commissioner  of  Internal  Revenue 
shall  add  to  the  tax  [25]  per  centum  of  its  amount,  except  that  when  a return  is 
voluntarily  * * ♦ after  such  time  and  it  is  shown  that  the  failure  to  file  it  was 

due  to  a reasonable  cause  and  not  to  willful  neglect,  no  such  addition  shall  be  made  to  the 
tax. 

'rhe  time  “prescribed  by  [law]”  [applies  equally]  to  an  extension  of  time,  not  ex- 
1561  cceding  30  days  from  the  normal  due  date,  on  or  before  which  the  return  is  required 
to  be  filed.  That  is  to  say,  if  upon  application  by  a corporation,  an  extension  of 
time  is  granted  by  the  collector  the  return  must  be  filed  on  or  before  the  last  day  of  the 


INC. 


157 


TAX 


RETURNS  IN  GENERAL. 


extended  period.  Otherwise  the  [25]  per  cent  tax  will  be  added,  subject  to  the  provisions 
above  quoted.  (Art.  228,  ^648-650,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1562  What  Constitutes  Reasonable  Cause  For  Failure  to  File  Return. — Section  3176, 

Revised  Statutes,  as  amended  * ♦ ♦ provides  that  if  after  delinquency  has 

ensued  * * * ^ delinquent  individual  or  corporation  shall  have  filed  with  the 

collector  of  internal  revenue  a return  and  shall  accompany  such  return  with  a showing 
“that  the  failure  to  file  it  (in  time)  was  due  to  a reasonable  cause  and  not  to  willful 
neglect,  no  such  addition  shall  be  made  to  the  tax.” 

“Reasonable  cause,”  for  the  purpose  of  this  article  of  the  regulations,  is  held  to  be 

1563  such  a condition  of  fact  as  had  the  taxpayer  in  default  exercised  ordinary  business 
care  and  prudence  it  would  have  been  impracticable  or  impossible  for  him  to  have 

filed  return  on  the  prescribed  time.  (Art.  54,  ^291-292,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 564  In  case  of  any  failure  to  make  and  file  a return  within  the  time  prescribed  by  law, 
or  within  the  period  of  extension  granted  by  the  collector,  the  Commissioner  of 
Internal  Revenue  shall  add  to  the  tax  [25]  per  cent  thereof,  except  that  where  a return  is 
voluntarily  filed,  after  the  due  date,  * * * ^ and  it  is  shown  that  the  delinquency 

was  due  to  a reasonable  cause  and  not  to  willful  neglect,  no  such  addition  shall  be  made 
to  the  tax.  (Art.  225,  1[643,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 565  Delinquent  returns  must  be  accompanied  by  an  affirmative  showing  of  fact  alleged 
as  reasonable  cause  for  excuse  from  [25]  per  cent  penalty.  The  Commissioner  of 
Internal  Revenue  will  pass  upon  the  validity  of  the  showing.  The  showing  must  be  in  the 
form  of  an  affidavit,  under  oath,  and  should  be  attached  to  the  return.  The  penalty 
of  [25]  per  cent  “additional  to  tax”  will  be  asserted  in  all  cases  where  the  showing  made 
is  not  approved  by  the  Commissioner  of  Internal  Revenue.  (Art.  54,  ^294,  Reg.  33, 
Rev.,  Jan.  2,  1918.) 

1 566  Statement  Under  Oath  of  Cause  of  Delay. — In  all  such  cases  the  collector  will 
* * * procure  from  the  corporation  to  be  forwarded  with  the  return  a state- 

ment, under  oath,  setting  out  in  specific  terms  the  cause  of  the  delay,  and  if  such  cause  is 
found  to  be  reasonable,  that  is,  a cause  which,  had  the  corporation  exercised  ordinary 
business  care  and  prudence,  would  have  made  it  impracticable  or  impossible  to  file  the 
return  within  the  prescribed  time,  the  [25]  per  cent  addition  will  not  be  made  to  the  tax. 

Exemption  from  the  [25]  per  cent  additional  tax  will  not,  however,  necessarily 
1567  relieve  the  corporation  from  liability  to  the  specific  penalty,  viz.,  a penalty  of  not 
to  exceed  [$1,000].  (Art.  225,  ^[644-645,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 668  A 50  per  cent  additional  tax  attaches  upon  all  delinquent  returns  for  1916  and  sub- 
sequent years  [now  25%]  in  the  absence  of  a showing  of  a reasonable  cause  for 

delinquency.  If  the  cause  assigned  is  carelessness,  oversight,  or  other  trivial  cause,  the 
[25]  per  cfent  penalty  will  be  assessed.  (T.  D.  2584,  Nov.  20,  1917.) 

1 669  Ad  Valorem  Penalties  Attach  to  Income. — Ad  valorem  penalties  (those  measured  by 
income)  attach  to  income  and  are  to  be  enforced  regardless  of  the  death  of  the 

owner  of  the  income  by  which  the  penalty  is  measured.  (Art.  52,  1[285,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

1670  The  fifty  [25]  per  cent  addition  to  the  tax  for  failure  to  make  return  and  the  one 
hundred  [50]  per  cent  addition  for  intentional  false  or  fraudulent  return,  will  not 

be  assessed  against  delinquent  withholding  agents  (Mimeograph  letter  No  1265,  to  Col- 
lectors, Sept,  23,  1915.) 

1671  What  Constitutes  a “False”  Return. — [Comment:  In  National  Bank  of  Com- 
merce in  St.  Louis  v.  E.  B.  Allen,  Collector  (223  Fed.  472)  the  question  of  the  100% 

[now  50%]  penalty  for  rendering  a false  return  was  not  at  issue  but  the  following  state- 
ment was  included  in  the  decision:  “It  is  true  that  the  Commissioner  did  not  add  100 
per  centum  of  the  tax  levied  as  provided  for  a false  or  fraudulent  return,  and  we  may 
conclude  from  this  that  the  Commissioner  was  of  the  opinion  that  the  returns  were  not 
false  or  fraudulent  in  the  sense  that  those  words  were  used  in  the  language  of  the  law 
which  authorizes  the  addition  of  the  penalty.”]  [Read  also  at  ^[2380.] 

157  2 Law  ^388.  Specific  Penalties. — “Sec.  253.  That  any  individual,  corporation, 
or  partnership  required  under  this  title 
to  pay  or  collect  any  tax, 
to  make  a return  or 
to  supply  information, 
who  fails 


INC. 


158 


TAX 


RETURNS  IN  GENERAL. 


1573  to  pay  or  collect  such  tax, 
to  make  such  return,  or 

to  supply  such  information 

at  the  time  or  times  required  under  this  title, 

1574  shall  be  liable  to  a penalty  of  not  more  than  $1,000. 

1575  Any  individual,  corporation,  or  partnership,  or  any  officer  or  employee  of  any 

corporation  or  member  or  employee  of  a partnership, 

1 57  6 who  willfully  refuses 

to  pay  or  collect  such  tax, 
to  make  such  return,  or 
to  supply  such  information 

at  the  time  or  times  required  under  this  title,  or 

1577  who  willfully  attempts  in  any  manner 

to  defeat  or  evade  the  tax  imposed  by  this  title, 

157  8 shall  be  guilty  of  a misdemeanor  and 

shall  be  fined  not  more  than  $10,000  or  imprisoned  for  not  more  than  one  year,  or 
both,  together  with  costs  of  prosecution.” 

• 

1579  Specific  penalties  provided  by  the  income-tax  law  are  held  to  attach  to  the  person 
and  in  case  of  death  of  such  person  are  non-enforceable.  (Art.  52,  ^284,  Reg.  33, 

Rev.,  Jan.  2,  1918.) 

1580  The  specific  penalty  to  be  asserted  independently  of  the  ad  valorem  penalty. — 

The  specific  penalty,  subject  to  the  authority  of  the  Commissioner  of  Internal 
Revenue  to  entertain  offers  in  compromise,  * * * ^nd  is  to  be  asserted  inde- 

pendently of  the  penalty  by  way  of  “addition  to  the  tax.”  (Art.  54,  ^[295,  Reg. 
Rev.,  Jan.  2,  1918.) 

1 581  The  Specific  Penalty  WillNotbe  Asserted  under  Certain  Circumstances. — Liability 
to  specific  penalty  attaches  upon  all  delinquent  returns  and  is  recoverable  by  suit. 

By  Section  3214  R.  S.  the  Commissioner  of  Internal  Revenue  may  or  may  not  institute 
suit.  It  has  been  decided  not  to  institute  suit  nor  to  assert  specific  penalty  in  certain  cases. 
The  assertion  of  specific  penalty  does  not  depend  upon  the  fact  of  whether  or  not  the 
[25]%  addition  to  tax  has  been  assessed.  In  some  cases  where  the  [25]%  addition  to  tax 
must  be  assessed  because  the  return  was  filed  after  notice  from  the  collector,  the  specific 
penalty  will  not  be  asserted.  It  will  not  be  asserted,  regardless  of  whether  the  [25]% 
addition  to  tax  has  been  assessed,  in  cases  falling  under  any  of  the  following  designations: 

1.  Extension  granted.  Where  a return  is  filed  within  the  thirty-day  period  of 

1582  extension  granted  by  the  collector  or  within  a further  period  of  extension  granted 
by  the  Commissioner  of  Internal  Revenue,  as  provided  by  Section  14  (c)  of  the  Act 

of  September  8,  1916. 

2.  Return  on  time.  Specific  penalty  will  not  be  asserted  upon  an  amended  return 
1 583  provided  the  original  return  was  filed  within  the  prescribed  time. 

3.  Mailed  in  tim.e.  Where  an  affidavit  is  filed  satisfactorily  establishing  that 
1684  the  return  was  placed  in  the  mails  in  ample  time  to  reach  the  Collector’s  office  in 

ordinary  course  of  mails  before  the  close  of  business  on  the  final  day  for  filing. 

4.  Tentative  return.  Where  an  informal  return  was  filed  within  the  time  pre- 

1585  scribed.  The  return  of  a parent  company  including  therein  the  income  of  a sub- 
sidiary company  v ill  be  accepted  as  a tentative  return  of  the  subsidiary  company, 

if  the  fact  is  stated  that  the  tentative  return  includes  the  income  of  the  subsidiary. 

5.  Filed  in  wrong  district.  Where  the  return  was  filed  in  some  other  collection  district 

1586  within  the  prescribed  time. 

6.  Net  income  under  $3,000.  Where  it  develops  that  the  net  income  of  an  indi- 
1 587  vidual  for  1913,  1914,  1915  or  1916  was  less  than  $3,000,  or  under  the  Act  of  October 

3,  1917,  for  1917,  etc.,  less  than  $1,000  or  $2,000. 

1588  7.  Erroneous  information.  Where  the  delinquency  is  alleged  to  be  due  to  erron- 
eous or  misleading  information  given  by  officials  or  employees  of  the  Internal 

Revenue  Service  and  there  is  no  evidence  in  conflict  therewith. 

8.  Organization  incomplete.  Where  it  is  established  that  the  organization  of 

1589  a corporation,  joint-stock  company  or  association,  or  insurance  company  was  not 
completed  until  after  the  expiration  of  the  period  for  which  the  return  should  have 

been  filed. 

9.  Death.  Where  by  reason  of  the  death  of  an  individual  his  return  for  the 

1590  year  or  portion  of  the  year  prior  to  his  death  is  not  filed  within  the  time  prescribed. 
The  death  of  a delinquent  abates  liability  to  specific  penalty.  An  administrator 

or  executor  is  charged  with  the  duty  of  rendering  a return  for  the  decedent,  and  if  he  is 

159  TAX 


INC, 


RETURNS  IN  GENERAL. 


appointed  in  ample  time  to  make  the  return  prior  to  March  1st  and  fails  to  do  so,  he  should 
be  charged  as  delinquent  and  the  specific  penalty  should  be  asserted  against  him.  The 
administrator  or  executor  will  not  be  relieved  from  specific  penalty  unless  the  return  is 
made  within  a reasonable  time  after  his  appointment. 

10.  Severe  illness  or  unavoidable  absence.  Where  it  is  clearly  established  that 
1 591  t^he  delinquency  in  the  filing  of  a return  of  an  individual  or  of  a corporation  within 

the  time  prescribed  was  due  to  severe  illness  of  the  individual  or  of  an  officer  of 
a corporation  whose  duty  it  was  to  prepare  or  sign  the  return,  or  to  unavoidable  absence 
from  place  of  business  or  place  of  abode. 

11.  Absence  from  the  United  States.  Where  it  appears  that  the  filing  of  a return 
1 592  within  the  time  prescribed  was  rendered  impossible  by  reason  of  absence  from  the 

United  States.  Delinquency  beyond  the  period  of  extension  which  may  be  granted 
by  the  Commissioner  of  Internal  Revenue  will  not  be  excused  under  this  heading. 

12.  Military  or  naval  service  of  United  States.  Where  delinquency  of  an  indivi- 
1 593  dual  was  occasioned  by  service  in  the  military  or  naval  forces  of  the  United  States. 

13.  Not  organized  for  profit.  Comprehends  numerous  small  corporations  not 

1 594  organized  primarily  for  profit,  such  as  local  telephone  companies,  co-operative 
purchasing  societies,  etc.,  concerning  whose  liability  under  the  law  to  make  a return 

there  may  have  been  a reasonable  doubt. 

14.  Inactive  corporations.  Those  which  transacted  no  business  and  had  no 

1595  income  during  the  return  year. 

15.  Fiscal  year.  Corporations  which  have  established  a fiscal  year  in  the  man- 
1 596  ner  prescribed  by  law  which  file  a return  on  dr  before  the  first  day  of  the  third 

month  following  the  close  of  the  fiscal  year. 

16.  Assigned.  Where  corporations  have  made  an  assignment  on  account  of  in- 

1597  solvency  and  do  not  intend  again  to  engage  in  business. 

17.  Insolvent.  Where  the  assets  of  a corporation  are  insufficient  for  the  pay- 

1598  ment  of  its  debts  and  the  corporation  has  ceased  to  do  business. 

18.  Charter  forfeited.  Where,  prior  to  the  date  when  the  return  was  due,  the 

1599  charter  of  a corporation  is  forfeited  on  account  of  noncompliance  with  state  laws. 
It  must  be  clear,  however,  that  business  in  the  name  of  the  corporation  was  sus- 
pended at  the  time  of  such  forfeiture.  If  business  was  continued  under  the  same  name,  the 
concern  wdll  be  held  to  be  an  association  and  the  same  liabilities  will  attach  as  if  the  charter 
had  not  been  forfeited. 

19.  Defunct.  Where  corporations  are  out  of  business,  have  no  assets,  maintain 

1600  no  organization,  and  the  purpose  for  which  organized  has  been  abandoned. 

1601  20.  Dissolved.  Where  all  the  assets  of  a corporation  have  been  distributed. 

21.  Sale.  Where  corporations  have  disposed  of  all  their  assets  and  property 
1 602  by  sale  to  other  corporations,  firms,  or  individuals  and  business  is  not  longer  carried 

on  under  their  charters. 

22.  Consolidated,  merged  or  succeeded.  Where  corporations  have  terminated  their 
1603  existence  as  represented  by  these  terms  and  it  appears  that  no  assets  or  property 

remain  in  the  name  of  the  retiring  corporation. 

23.  No  assets.  Includes  all  corporation  having  no  assets  from  which  to  submit 
1 604  an  offer  in  compromise.  (L.  Mimeograph  Letter  No.  1675  to  Collectors,  November 

3,  1917;  continued  at  ^1696.) 

1 605  Compromises. — “The  Commissioner  of  Internal  Revenue,  with  the  advice  and  con- 
sent of  the  Secretary  of  the  Treasury,  may  compromise  any  civil  or  criminal  case 
arising  under  the  internal  revenue  laws  instead  of  commencing  suit  thereon;  and,  with 
the  advice  and  consent  of  the  said  Secretary  and  the  recommendation  of  the  Attorney- 
General,  he  may  compromise  any  such  case  after  a suit  thereon  has  been  commenced. 
Whenever  a compromise  is  made  in  any  case  there  shall  be  placed  on  file  in  the  office 
of  the  Commissioner  the  opinion,  of  the  Solicitor  of  Internal  Revenue,  or  of  the  officer 
acting  as  such,  with  his  reasons  therefor, with  a statement  of  the  amount  of  tax  assessed,  the 
amount  of  additional  tax  or  penalty  imposed  by  law  in  consequence  of  the  neglect  or  delin- 
quency of  the  person  against  whom  the  tax  is  assessed,  and  the  amount  actually  paid  in 
accordance  with  the  terms  of  the  compromise.”  (Section  3229,  Revised  Statutes.) 

1606  In  cases  not  Included  In  any  of  the  above  classes  [^[1581  to  ^1694],  the  specific 
penalty  will  be  asserted,  and  if  the  delinquency  was  not  due  to  an  intention  to 
delay  the  administration  of  the  law  the  minimum  amount  which,  will  be  accepted  in  com- 
promise is  as  follows: 

$5.00  in  the  case  of  an  individual  or  withholding  agent. 

$10.00  in  the  case  of  a corporation,  joint-stock  company  or  association,  or  insurance 
com.pany. 

These  amounts  will  be  considered  insufficient  and  will  not  be  accepted  in  any  case 
1 607  w'hcre  it  appears  that  a taxpayer  was  intentionally  violating  the  privisions  of  law,  and 
purposely  delaying  the  filing  of  the  returns.  In  all  cases  w'here  revenue  agents  or 
other  exa,mlning  officers  discover  that  any  individual  has  an  appreciable  taxable  income  and 

160 


INC. 


'TAX 


RETURNS  IN  GENERAL. 


the  examining  officer  is  of  the  opinion  that  the  individual  knew  or  should  have  known  that  he 
was  required  to  make  a return,  he  should  make  a recommendation  as  to  the  minimum 
amount  which  should  be  accepted  as  an  offer  in  compromise,  and  where  the  intent  to 
evade  tax  is  plain  he  should  recommend  prosecution.  Special  attention  should  be  called 
to  cases  of  individuals  having  a taxable  income  who  have  failed  to  file  returns  for  a number 
of  years. 

In  the  case  of  delinquent  returns  filed  pursuant  to  the  provisions  of  Section  2 of 

1608  the  Act  of  October  3,  1913,  specific  penalty  will  not  be  asserted  if  the  case  comes 
under  any  of  the  above  designations  [1[1581  to  ^1604,]  nor  against  taxpayers  or 

withholding  agents  specifically  relieved  from  specific  penalty  by  the  proviso  contained 
in  Section  18  of  the  Income  Tax  Law  of  September  8,  1916,  as  amended  by  Section  1209 
of  the  Act  of  October  3,  1917,  [1[734]  which  reads  as  follows: 

“PROVIDED,  That  where  any  tax  heretofore  due  and  payable  has  been  duly  paid 
by  the  taxpayer,  it  shall  not  be  re-collected  from  any  withholding  agent  required  to  re- 
tain it  at  its  source,  nor  shall  any  penalty  be  imposed  or  collected  in  such  cases  from 
the  taxpayer,  or  such  withholding  agent  whose  duty  it  was  to  retain  it,  for  failure 
to  return  or  pay  the  same  unless  such  failure  was  fraudulent  and  for  the  purpose  of 
evading  payment.” 

Furthermore,  specific  penalty  will  not  be  asserted  against  taxpayers  delinquent 

1609  in  filing  returns  for  1913,  nor  against  corporations,  joint-stock  companies  or  asso- 
ciations or  insurance  companies  delinquent  in  filing  returns  for  prior  years,  unless 

it  appears  beyond  a reasonable  doubt  that  there  was  an  intent  on  the  part  of  the  delinquent 
to  violate  the  provisions  of  law.  The  specific  penalty  cannot  in  any  case  be  asserted  after 
five  years  from  date  of  delinquency,  and  no  recommendation  with  respect  to  penalty  in 
such  cases  need  be  made.  The  minimum  amounts  mentioned  above  will  be  accepted  in 
compromise  of  liability  to  specific  penalty  for  each  of  the  years  1914  and  1915,  as  well  as 
for  1916,  except  where  there  was  an  apparent  Intent  to  violate  the  taxing  act,  in  which  case 
the  offer  must  be  increased  in  a substantial  amount. 

In  the  case  of  every  delinquent  return,  the  collector  should  secure  a statement 

1610  [Read  at  ^[1617.]  from  the  delinquent  of  the  cause  of  delinquency,  which  should 
be  attached  to  and  made  a part  of  the  return,  together  with  delinquent  card.  If 

the  delinquent  is  not  relieved  from  specific  penalty  by  clearly  falling  within  one  of  the 
classes  enumerated  in  this  Mimeograph  Letter  [^1581  to  ^1694],  or  if  he  fails,  upon  request, 
to  file  a statement  of  the  reason  for  delinquency,  the  specific  penalty  should  be  promptly 
asserted  and  the  delinquent  advised  of  his  privilege  to  submit  an  offer  in  compromise. 
If  the  collector  is  of  the  opinion  that  the  delinquent  should  be  relieved  from  the  specific 
penalty  under  the  provisions  of  this  Mimeograph  Letter,  he  should  note  on  the  delinquent 
card  “Relieved  under  Mim.  No.  1675.” 

In  all  cases  of  delinquency  discovered  by  revenue  agents  and  other  examining 

1611  officers,  if  the  delinquency  falls  within  a period  for  which  the  penalty  can  be  asserted, 
such  officers  should  secure  from  the  delinquent  a sworn  statement  setting  forth 

the  reason  for  delinquency.  This  statement  should  be  attached  to  the  return  forwarded 
to  the  collector.  The  examining  officer  should  state  in  his  report  the  alleged  reason  for 
delinquency  and  if  he  is  of  the  opinion  that  the  minimum  amount  should  not  be  accepted 
as  an  offer  in  compromise  of  liability  to  specific  penalty,  he  should  make  a recommendation 
as  to  the  minimum  amount  which  should  be  accepted.  Consideration  w’ill  be  given  such 
recommendation  by  this  office  in  accepting  an  offer  in  compromise.  In  forwarding  offers 
in  com.promise  on  Form  656  collectors  should  call  attention  to  revenue  agent’s  reports,  if 
any,  in  which  the  non-acceptance  of  the  minimum  amount  as  an  offer  in  compro  nise  is 
recommended.  The  statement  or  affidavit  attached  to  the  return  setting  forth  the  reason 
for  delinauency  is  not  in  lieu  of  the  affidavit  required  to  be  attached  to  Form  656. 

1612  Mimeograph  Letters  Nos.  1347,  1390,  1465,  1477,  1530  and  CT-Mim.  No.  54  and 
CT-Mim.  No.  56  are  hereby  superseded.  (L.  Mimeograph  Letter  to  Collectors 

No.  1675,  November  3,  1917.) 

1613  Offers  in  Compromise  by  the  Taxpayer. — [A  letter,  similar  in  content  to  the  fol- 
lowing, suitably  modified  if  the  delinquent  was  a corporation,  has  been  used  in  the 

past  by  Collectors  in  charging  taxpayers  with  delinquency  and  in  notifying  them  of  their 
privilege  to  submit  offers  in  compromise.] 

Sir:  Your  return  of  net  income  was  not  received  in  this  office  until 

1614  thereby  involving  you  in  liability  to  a specific  penalty  of  not  * * * more  than 

$1,000  under  the  Act  of , in  addition  to  the  [25]%  additional  tax  which 

will  be  assessed  and  collected. 

The  provisions  of  the  Act  are  mandatory,  and  no  excuse  or  explanation  can  be 

1615  accepted,  except  a showdne  that  a complete  or  tentative  return  was  in  fact  inailed 
in  time  to  have  reached  this  office,  or  a Deputy  Collector,  in  the  ordinary 

course  of  business  on  or  before  Alarch  1, . 

Mowmver,  before  instituting  proceedings  in  Court  for  the  imposition  of  the  specific 

1616  penalty,  I am  directed  to  call  your  attention  to  the  provisions  of  Section  3229  [^1605], 
Rc\  iscd  Statutes,  w'hich  reads  in  part  as  follows: 

TNC.  161  Trx 


RETURNS  IN  GENERAL. 


“The  Commissioner  of  Internal  Revenue  with  the  advice  and  consent  of  the  Secretary 
of  the  Treasury,  may  com.promise  any  civil  or  criminal  case  arising  under  the  internal 
revenue  laws  instead  of  commencing  suit  thereon,”  * * * ^ 

Should  you  desire  to  take  advantage  of  your  privilege  under  this  section  and  to 

1617  submit  an  offer  in  compromise,  the  amount  offered  should  be  forwarded  promptly 
to  this  office  in  the  form  of  cash,  postal  money  order,  or  certified  check  which  can 

be  cashed  without  cost,  payable  to  my  order,  accompanied  by  an  affidavit  substantially 
in  the  following  form: 

“To  the  Commissioner  of  Internal  Revenue: 

I hereby  solemnly  swear  (or  affirm)  that  my  delinquency  in  filing  return  of  net  income 

as  required  by  the  Act  of , was  not  due  to  any  intent  to  violate  the  law  or  evade 

taxation,  but  was  due  to  (here  insert,  concisely  and  clearly,  the  reason  for  delay). 

Desiring  to  compromise  my  liability  I hereby  tender  the  sum  of  $ , which 

I request  be  accepted  in  compromise  of  the  specific  penalty  only.” 

To  be  signed  and  sworn  to  before  a deputy  collector,  notary,  or  other  officer  auth- 

1618  orized  to  administer  oaths. 

This  affidavit  will  then  be  forwarded  by  me,  together  with  the  sum  offered,  to  the 

1619  Commissioner  for  consideration,  and  you  will  be  notified  by  him  of  his  acceptance 
or  rejection  of  your  proposal.  In  the  latter  event,  you  may  increase  your  offer, 

if  you  so  desire. 

*****♦♦*♦♦* 

Respectfully, 


Collector  of  Internal  Revenue. 

1 620  Law  1[429.  The  General  Administrative  Provisions  of  Law  Relative  to  the  Making 
of  Returns,  etc.,  are  Applicable. — “Sec.  1305.  That  all  administrative,  special, 
or  stamp  provisions  of  law,  including  the  law  relating  to  the  assessment  of  taxes,  so  far  as 
applicable,  are  hereby  extended  to  and  made  a part  of  this  Act,  and  every  person  liable  to 
any  tax  imposed  by  this  Act,  or  for  the  collection  thereof,  shall  keep  such  records  and  render, 
under  oath,  such  statements  and  returns,  and  shall  comply  with  such  regulations  as  the 
Commissioner,  with  the  approval  of  the  Secretary,  may  from  time  to  time  prescribe.” 

[^3126.] 

1621  Law  11442.  Collectors  to  Inquire  After  and  Concerning  Persons  Liable  to  Make 

Income  Tax  Returns. — “Sec.  3172.  Every  collector  shall,  from  time  to  time,  f 

cause  his  deputies  to  proceed  through  every  part  of  his  district  and  inquire  after  and 
concerning  all  persons  therein  who  are  liable  to  pay  any  internal-revenue  tax,  and  all  persons 
owning  or  having  the  care  and  management  of  any  objects  liable  to  pay  any  tax,  and  to 
make  a list  of  such  persons  and  enumerate  said  objects.” 

1 622  Income-Tax  Agents  and  Inspectors. — Revenue  agents  in  charge  of  revenue  agents’ 
divisions  and  income-tax  revenue  agents  and  inspectors  are  hereby  instructed  as 

follows : 

1.  Income-tax  agents  and  inspectors  appointed  under  the  provisions  of  the  act 
1623  of  October  3,  1913,  and  paid  from  the  appropriation  for  collecting  the  income  tax 

will  be  assigned  to  duty  under  the  supervision  of  agents  in  charge  of  revenue  agents’ 
divisions. 

2.  Persons  appointed  either  as  income-tax  agents  or  income-tax  inspectors,  when 

1 624  the  appointment  is  sent  from  this  office,  will  be  instructed  by  letter  to  report  to  one  ^ 

of  the  division  revenue  agents  for  duty,  and  until  otherwise  ordered  may  report 
either  in  person  or  by  letter,  and  if  by  letter  await  the  instructions  of  the  agent  in  charge 
of  the  division  to  which  they  are  assigned. 

3.  Officers  of  this  class  are  expected  to  perform  the  duties  of  their  offices  where 
1 625  their  services  are  required,  but  for  the  present,  and  until  they  become  somewhat 

familiar  with  the  duties  of  their  places,  they  will  be  assigned  to  the  revenue  agent 
in  charge  of  the  division  embracing  their  legal  residence. 

4.  Income-tax  agents  and  inspectors  will  be  expected  to  confine  their  operations 

1 626  to  income-tax  work  so  long  as  there  is  income-tax  work  to  be  performed,  and  division  ( 

agents  are  admonished  not  to  employ  officers  of  this  class  for  the  general  or  ordinary 
work  of  the  bureau  except  when  their  services  are  not  required  on  income-tax  work. 

5.  The  duties  of  officers  of  this  class  are  to  ascertain  and  report  the  names  of  persons 
1 627  who  in  their  opinion  are  liable  to  the  income  tax  and  who  have  failed  to  make  return 

as  required  by  law;  to  inquire  into  income-tax  returns  where  there  is  any  suspicion 
that  the  return  made  is  erroneous;  to  examine  the  books  and  accounts  of  persons  who  have 
made  returns,  for  the  purpose  of  ascertaining  and  reporting  as  to  whether  the  law  has  been 
complied  with,  when  so  ordered  by  the  agent  in  charge  of  the  division  to  which  they  are  . 

assigned;  to  inquire  into  the  manner  in  which  income-tax  employees  are  discharging  their  f 

official  duties  and  to  report  those  who  have  failed  in  this  respect.  For  the  purpose  of  secur- 
ing such  information  as  they  may  desire  they  may  visit  the  office  of  any  State,  county,  or 


INC. 


162  TAX 


RETURNS  IN  GENERAL. 


municipal  officer,  and  for  the  general  purpose  of  their  employment  may  confer  with  any 
collector  or  deputy  collector  of  internal  revenue  within  the  territory  in  which  they  are 
authorized  to  operate. 

6.  The  reports  of  these  officers  should  be  made  to  the  agent  in  charge  of  the 
f 628  division  to  which  they  are  assigned,  who  in  turn  will  report  to  the  Comrrissloner 
of  Internal  Revenue  and  the  collector  of  the  proper  district. 

1629  7.  In  the  discharge  of  their  official  duties  officers  of  this  class,  as  well  as  all  officers 
of  the  Internal-Revenue  Bureau,  in  making  inquiries  and  investigations  are  expected 
to  exercise  sound  discretion,  treat  all  persons  with  due  courtesy,  and,  while  acting  firmly 
and  courageously,  to  avoid  all  contention  or  controversy  that  would  give  just  ground  for 
complaint.  (T.  D.  1932,  Jan.  13,  1914.) 

1 630  Law  ^430.  Return  May  Be  Required  of  Any  Person  Whether  Liable  to  Tax  or 
Not. — “Whenever  in  the  judgment  of  the  Commissioner  necessary  Jie  may  require 
any  person,  by  notice  served  upon  him,  to  make  a return  or  such  statements  as  he  deems 
sufficient  to  show  whether  or  not  such  person  is  liable  to  tax.” 

1631  Law  ^431.  Examination  of  Persons,  Books  and  Papers. — “The  Commissioner, 
for  the  purpose  of  ascertaining  the  correctness  of  any  return  or  for  the  purpose  of 
making  a return  where  none  has  been  made,  is  hereby  authorized,  by  any  revenue  agent 
or  inspector  designated  by  him  for  that  purpose,  to  examine  any  books,  papers,  records  or 
memoranda  bearing  upon  the  matters  required  to  be  included  in  the  return,  and  may  require 
the  attendance  of  the  person  rendering  the  return  or  of  any  officer  or  employee  of  such 
person,  or  the  attendance  of  any  other  person  having  knowledge  in  the  premises,  and  may 
take  his  testimony  with  reference  to  the  matter  required  by  law  to  be  included  in  such  return, 
with  power  to  administer  oaths  to  such  person  or  persons.” 

1 632  Law  1[454.  Jurisdiction  of  District  Courts  in  Connection  with  Attendance,  Testi- 
mony or  Production  of  Books. — “Sec.  1318.  That  if  any  person  is  summoned  under 
this  Act  to  appear,  to  testify,  or  to  produce  books,  papers  or  other  data,  the  district  court 
of  the  United  States  for  the  district  in  which  such  person  resides  shall  have  jurisdiction 
by  appropriate  process  to  compel  such  attendance,  testimony,  or  production  of  books, 
papers,  or  other  data.” 

1 633  Law  ^455.  “The  district  courts  of  the  United  States  at  the  instance  of  the  United 
States  are  hereby  invested  with  such  jurisdiction  to  make  and  issue,  both  in  actions 
at  law  and  suits  in  equity,  writs  and  orders  of  injunction  and  of  ne  exeat  republican  orders 
appointing  receivers,  and  such  other  orders  and  process,  and  to  render  such  judgments 
and  decrees,  granting  in  proper  cases  both  legal  and  equitable  relief  together,  as  may  be 
necessary  or  appropriate  for  the  enforcement  of  the  provisions  of  this  Act.  The  remedies 
hereby  provided  are  in  addition  to  and  not  exclusive  of  any  and  all  other  remedies  of  the 
United  States  in  such  courts  or  otherwise  to  enforce  such  provisions.” 

1 634  Annual  Returns  to  be  Forwarded  by  Collectors  to  the  Commissioner. — The  annual 
returns  will  be  forwarded  by  collectors  by  registered  mail  or  express  to  the  Com- 
missioner of  Internal  Revenue  with  the  list  for  the  month  in  which  the  returns  are  filed. 
Collectors  must  provide  that  said  returns  and  all  forms  relating  thereto  are  securely  sealed 
in  envelopes  or  packages  before  forwarding  the  same.  (Art.  25,  Reg.  33,  Rev., 

Jan.  2,  1918.) 

1 636  Collectors  should  not  under  any  conditions  retain  copies  of  returns  in  their  offices, 
but  when  information  relative  to  any  return  of  annual  net  income  filed  by  any 
taxpayer  is  necessary  in  connection  with  the  assessment  and  collection  of  the  income  tax, 
the  same  may  be  secured  from  the  Commissioner  of  Internal  Revenue  at  Washington. 
(T.  D.  2024,  Oct.  15,  1914.) 

1 636  Law  ^403.  Returns  to  be  Public  Records. — “Sec.  257.  That  returns  upon  which 
the  tax  has  been  determined  by  the  Commissioner  shall  constitute  public  records; 

1637  Law  ^404.  Returns  to  be  Open  to  Inspection  Only  on  Order  by  the  President.— 
“but  they  shall  be  open  to  inspection  only  upon  order  of  the  President  and  under 

rules  and  regulations  prescribed  by  the  Secretary  and  approved  by  the  President:” 

1638  Law  ^405.  Returns  to  be  Open  to  Inspection  of  Proper  State  Officers. — ''Provided, 
That  the  proper  officers  of  any  State  imposing  an  income  tax  may,  upon  the  request 

of  the  governor  thereof,  have  access  to  the  returns  of  any  corporation,  or  to  an  abstract 
thereof  showing  the  name  and  income  of  the  corporation,  at  such  times  and  in  such  manner 
as  the  Secretary  may  prescribe:” 


INC. 


163  TAX 


RETURNS  IN  GENERAL. 


1 639  Law  ^[406.  Returns  to  be  Open  to  Inspection  by  Stockholders  of  Record  Owing^ 
One  Per  Cent  or  More  of  the  Outstanding  Stock  of  a Corporation. — "'Provided 
further.  That  all  bona  fide  stockholders  of  record  owning  1 per  centum  or  more  of  the  out- 
standing stock  of  any  corporation  shall,  upon  making  request  of  the  Commissioner,  be 
allowed  to  examine  the  annual  Income  returns  of  such  corporation  and  of  its  subsidiaries.”' 

I 640  Law  ^407.  “Any  stockholder  who  pursuant  to  the  provision  of  this  section  is 

allowed  to  examine  the  return  of  any  corporation,  and  who  makes  known  in  any 

manner  whatever  not  provided  by  law  the  amount  or  source  of  income,  profits,  losses,  ex- 
penditures, or  any  particular  thereof,  set  forth  or  disclosed  in  any  such  return,  shall  be 
guilty  of  a misdemeanor  and  be  punished  by  a fine  not  exceeding  $1,000,  or  by  imprisonment 
not  exceeding  one  year,  or  both.” 

1641  Law  1[40S.  Lists  of  Individuals  Making  Income  Tax  Returns  to  be  Prepared. — 
“The  Commissioner  shall  as  soon  as  practicable  in  each  year  cause  to  be  prepared  and 
made  available  to  public  inspection  in  such  manner  as  he  may  determine,  in  the  office  of  the 
collector  in  each  internal-revenue  district  and  in  such  other  places  as  he  may  determine, 
lists  containing  the  names  and  the  post-office  addresses  of  all  individuals  making  income- 
tax  returns  in  such  district.” 

[In  connection  with  above  read  at  ^30fi3.] 

1 642  Inspection  of  Returns;  Copies  of  Returns. — When  the  assessments  shall  have 

been  made  the  returns  shall  be  filed  in  the  office  of  the  commissioner  and  shall 

constitute  public  records,  subject  to  inspection  upon  the  order  of  the  President,  under 
the  rules  and  regulations  prescribed  by  the  Secretary  of  the  Treasury  and  approved  by 
the  President.  Copies  of  returns  on  file  in  the  Commissioner’s  office  are  not  permitted 
to  be  sent  to  any  person,  except  the  corporation  itself  or  to  its  duly  authorized  attorney. 
A duly  authorized  attorney  for  this  purpose  is  one  possessing  a properly  executed  power 
of  attorney  in  writing  by  the  corporation,  which  designation  shall  be  signed  by  two  officers 
of  the  corporation  and  bear  the  impress  of  the  seal.  (Art.  226,  11646,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

1 643  Certified  Copies. — At  the  request  of  the  Attorney  General  or  a LFnited  States 
district  attorney,  certified  copies  of  returns  may  be  made  by  the  Commissioner 
of  Internal  Revenue  and  delivered  to  the  United  States  district  attorneys  for  their  use  as 
evidence  in  the  prosecution  or  defense  of  suits  in  which  the  collection  or  legality  of  the 
income  tax  assessed  on  the  basis  of  such  returns  is  involved,  or,  by  special  permission  of 
the  Secretary  of  the  Treasury,  such  certified  copies  of  returns  may  be  furnished  as  evidence 
in  any  suit  to  which  the  United  States  Government  and  the  corporation,  etc.,  making 
the  returns  are  parties,  or  as  evidence  before  any  United  States  grand  jury,  and  in  which 
in  the  opinion  of  the  Attorney  General,  such  certified  copies  would  constitute  material 
evidence.  (Art.  227,  1[647,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 644  The  supplementary  statement  which  is  made  a part  of  the  return  form  prescribed 
for  the  use  of  corporations  in  making  returns  of  annual  net  Income  is  by  express 
terms  made  a part  of  the  return,  and  to  the  same  extent  that  the  return  constitutes  a public 
record  and  is  open  to  inspection,  to  that  extent  the  supplementary  statement  is  also  a 
public  record  and  open  to  Inspection  “only  upon  the  order  of  the  President  under  rules 
and  regulations  prescribed  by  the  Secretary  of  the  Treasury  and  approved  by  the  Presi- 
dent.” (T.  D.  2137,  Jan.  30,  1915.) 

1 645  Copies  of  returns  on  file  in  the  Commissioner’s  office  are  not  permitted  to  be  sent 
to  any  person,  except  to  the  corporation  itself  or  to  its  duly  authorized  attornev. 
(Art.  178,  Reg.  33,  Jan.  5,  1914.) 

1646  In  no  case  are  the  original  returns  to  be  removed  from  the  office  of  the  commis- 
sioner, except  upon  order  and  by  direction  of  the  Secretary  of  the  Treasury  or  the 
President.  (Art.  179,  Reg.  33,  Jan.  5,  1914.) 

1 647  The  following  executive  order,  together  with  regulations  signed  by  the  Secretary 
and  approved  by  the  President,  relative  to  the  publicity  feature  of  Section  2 of  the 
Act  of  October  3,  1913,  imposing  an  income  tax,  is  hereby  published  for  your  information. 

EXECUTIVE  ORDER. 

1 648  Pursuant  to  the  provisions  of  Section  2 of  the  Tariff  Act  of  October  3,  1913,  said 
section  providing  for  an  income  tax,  and  which  contains  in  paragraph  G,  sub- 
paragraph  (d)  the  following  provision, 

“When  the  assessment  shall  be  made,  as  provided  in  this  section,  the  returns, 
together  with  any  corrections  thereof  which  may  have  been  made  by  the  Commissioner, 
shall  be  filed  in  the  office  of  the  Commissioner  of  Internal  Revenue  and  shall  constitute 
public  records  and  be  open  to  inspection  as  such;  Provided,  That  any  and  all  such 


INC. 


164  TAX 


RETURNS  IN  GENERAL. 


returns  shall  be  open  to  inspection  only  upon  the  order  of  the  President,  under  rules 
tod  regulations  to  be  prescribed  by  the  Secretary  of  the  Treasury  and  approved  by  the 
President;  Provided  further,  That  the  proper  officers  of  any  State  imposing  a general 
income  tax  may,  upon  the  request  of  the  governor  thereof,  have  access  to  said  returns 
or  to  any  abstract  thereof,  showing  the  name  and  income  of  each  such  corporation, 
joint  stock  company,  association  or  insurance  company,  at  such  times  and  in  such 
manner  as  the  Secretary  of  the  Treasury  may  prescribe,” 
it  is  hereby  ordered,  that  all  such  returns  shall  be  subject  to  inspection  in  accordance 
and  upon  compliance  with  rules  and  regulations  prescribed  by  the  Secretary  of  the  Treasury 
and  approved  by  the  President,  bearing  even  date  herewith. 

WOODROW  WILSON. 


The  White  House, 

July  28,  1914. 

[No.  1999.] 

Inspection  of  Returns. 

1 649  By  Section  2 of  the  Act  of  October  3,  1913,  Congress  imposed  a tax  upon  the  entire 
net  income  arising  or  accruing  from  all  sources  to  every  citizen  of  the  United 
States  whether  residing  at  home  or  abroad  and  to  every  person  residing  in  the  United 
States  though  not  a citizen  thereof,  and  upon  the  entire  net  income  from  all  property 
owned,  and  of  every  business,  trade,  or  profession  carried  on  in  the  United  States  by  per- 
sons residing  elsewhere,  and  upon  every  corporation,  joint  stock  company  or  association, 
and  every  insurance  company,  with  certain  exceptions,  engaged  in  business  in  the  United 
States,  and  prescribed  the  method  of  handling  the  returns  of  annual  net  income  filed  in 
compliance  with  said  law  as  follows: 

“(d)  When  the  assessment  shall  be  made,  as  provided  in  this  section,  the  returns, 
together  with  any  corrections  thereof  which  may  have  been  made  by  the  Commissioner, 
shall  be  filed  in  the  office  of  the  Commissioner  of  Internal  Revenue  and  shall  con- 
stitute public  records  and  be  open  to  inspection  as  such;  Provided,  That  any  and 
all  such  returns  shall  be  open  to  inspection  only  upon  the  order  of  the  President, 
under  rules  and  regulations  to  be  prescribed  by  the  Secretary  of  the  Treasury  and 
approved  by  the  President;  Provided  further.  That  the  proper  officers  of  any  State 
imposing  a general  income  tax  may,  upon  the  request  of  the  governor  thereof,  have 
access  to  said  returns  or  to  an  abstract  thereof,  showing  the  name  and  income  of  each 
such  corporation,  joint-stock  company  or  association  or  insurance  company,  at  such 
times  and  in  such  manner  as  the  Secretary  of  the  Treasury  may  prescribe.” 

For  the  purpose  of  making  effective  the  legislative  intent  thus  expressed,  the 
1 650  President  has  ordered  that  such  returns  shall  be  open  to  inspection  under  the 
following  rules  and  regulations.  The  word  “corporation”  when  used  alone  herein, 
shall  be  construed  to  refer  to  corporations,  joint  stock  companies  of  asociations  and 
insurance  companies. 

1.  The  return  of  every  individual  and  of  every  corporation,  joint  stock  company 

1651  or  association,  and  every  insurance  company,  whether  foreign  or  domestic,  shall 
be  open  to  the  inspection  of  the  proper  officers  and  employees  of  the  Treasury 

Department.  Returns  of  individuals  shall  not  be  subject  to  inspection  by  any  one  except 
the  proper  officers  and  employees  of  the  Treasury  Department. 

2.  Where  access  to  any  return  of  any  corporation  is  desired  by  an  officer  or 

1652  employee  of  any  other  department  of  the  Government,  an  application  for  per- 
mission to  inspect  such  return,  setting  out  the  reasons  therefor,  shall  be  made 

in  writing,  signed  by  the  head  of  the  executive  department  in  which  such  officer  or 
employee  is  employed,  and  transmitted  to  the  Secretary  of  the  Treasury.  If  the  return 
of  a corporation  is  desired  to  be  used  in  any  legal  proceedings  other  than  those  to  which 
the  United  States  is  a party,  or  to  be  used  in  any  manner  by  which  any  information  con- 
tained in  the  return  could  be  made  public,  the  application  for  permission  to  inspect  such 
return  or  to  furnish  a certified  copy  thereof  shall  be  referred  to  the  Attorney  General, 
and  if  recommended  by  him  transmitted  to  the  Secretary  of  the  Treasury. 

3.  All  returns,  whether  of  persons  or  of  corporations,  joint  stock  companies  or 

1653  associations,  or  insurance  companies,  may  be  furnished,  upon  approval  of  the 
Secretary  of  th.e  Treasury,  for  use,  either  in  the  original  or  by  certified  copies 

thereof,  in  any  legal  proceedings  before  any  United  States  grand  jury  or  in  the  trial  of  any 
cause  to  which  both  the  United  States  and  the  person  or  corporation  or  association  ren- 
dering the  return  are  parties  either  as  plaintiff  or  defendant,  and  in  the  prosecution  or 
defense  or  trial  of  which  action,  or  proceeding  before  a grand  jury,  such  return  would  consti- 
tute material  evidence,  but  in  any  case  arising  in  the  collection  of  the  income  tax,  the  Com- 
missioner of  Internal  Revenue  may  furnish  for  use  to  the  proper  officer  either  the  original 
or  certified  copies  of  returns  without  the  approval  of  the  Secretary  of  the  Treasury.  In 
all  cases  where  the  use  of  the  original  return  is  necessary,  it  shall  be  placed  in  evidence 
by  the  Commissioner  of  Internal  Revenue  or  by  some  other  officer  of  the  Bureau  of  Internal 


INC. 


165  TAX 


RETURNS  IN  GENERAL. 


Revenue  designated  by  him  for  that  purpose,  and  after  such  original  return  has  been 
placed  in  evidence  it  shall  be  returned  to  the  files  in  the  office  of  the  Commissioner  of 
Internal  Revenue  at  Washington,  D.  C. 

4.  The  Secretary  of  the  Treasury,  at  his  discretion,  upon  application  to  him  made, 

1 654  setting  forth  what  constitutes  a proper  showing  of  cause,  may  permit  inspection 

of  the  return,  of  any  corporation,  by  any  bona  fide  stockholder  in  such  corporation. 
The  person  desiring  to  inspect  such  return  shall  make  application,  in  writing,  to  the 
Secretary  of  the  Treasury,  setting  forth  the  reasons  why  he  should  be  permitted  to  make 
such  inspection,  and  shall  attach  to  his  application  a certificate  signed  by  the  president, 
or  other  principal  officer,  of  such  corporation,  countersigned  by  the  secretary,  under  the 
corporate  seal  of  the  company,  that  he  is  a bona  fide  stockholder  in  said  company.  (Where 
this  certificate  cannot  be  secured,  other  evidence  will  be  considered  by  the  Secretary  of 
the  Treasury  to  determine  the  fact  whether  or  not  the  applicant  is  a bona  fide  stockholder 
and,  therefore,  entitled  to  inspect  the  return  made  by  such  company.)  Upon  receipt 
of  such  application  the  corporation  whose  return  it  is  desired  to  Inspect  shall  be  notified 
of  the  facts  and  shall  be  given  opportunity  to  state  whether  any  legitimate  reason  exists 
for  refusing  permission  to  inspect  its  returns  of  annual  net  income  by  the  stockholder 
applying  for  permission  to  make  such  inspection.  The  privilege  of  inspecting  the  return 
of  any  corporation  is  personal  to  the  stockholders,  and  the  permission  granted  by  the 
Secretary  to  a stockholder  to  make  such  inspection  cannot  be  delegated  to  any  other  person. 

5.  Returns  of  the  following  corporations  shall  be  open  to  the  inspection  of  any 

1655  person  upon  written  application  to  the  Secretary  of  the  Treasury,  which  applica- 
tion shall  set  forth  briefly  and  succinctly  all  facts  necessary  to  enable  the  Secretary 

to  act  upon  the  request:  [See  new  law  provision  at  1[1639.] 

(a)  The  returns  of  all  companies  whose  stock  is  listed  upon  any  duly  organized  and 
recognized  stock  exchange  within  the  United  States,  for  the  purpose  of  having  its  shares 
dealt  in  by  the  public  generally. 

(b)  All  corporations  whose  stock  is  advertised  in  the  press  or  offered  to  the  public 
by  the  corporation  itself  for  sale.  In  case  of  doubt  as  to  whether  any  company  falls 
within  the  classification  above,  the  person  desiring  to  see  such  return  should  make  applica- 
tion, supported  by  advertisements,  prospectus,  or  such  other  evidence  as  he  may  deem 
proper  to  establish  the  fact  that  the  stock  of  such  corporation  is  offered  for  'general  public 
sale. 

Return  can  be  inspected  only  in  the  office  of  the  Commissioner  of  Internal  Revenue 

1656  in  Washington,  D.  C.  In  no  case  shall  any  collector,  or  any  other  Internal  Revenue 

officer  outside  of  the  Treasury  Department  in  Washington,  permit  to  be  inspected 

any  returns  or  furnish  any  information  whatsoever  relative  to  any  return  or  any  informa- 
tion secured  by  him  in  his  official  capacity  relating  to  such  return,  except  in  answer  to  a 
proper  subpoena,  in  a case  to  which  the  United  States  is  a party. 

6.  Returns  of  individuals  shall  not  be  open  to  the  inspection  of  any  person  other 
1 657  than  the  proper  officers  and  employees  of  the  Treasury  Department  or  person 

rendering  the  same,  and  are  under  no  conditions  to  be  made  public,  except  where 
such  publicity  shall  result  through  the  use  of  such  returns  in  any  legal  proceedings  in 
which  the  United  States  is  a party. 

7.  Upon  request  of  the  governor  of  a State  imposing  a general  income  tax,  the 
1 658  proper  officer  of  such  State,  to  be  designated  by  name  and  official  position  by 

the  Governor  of  such  State  In  his  application  to  the  Secretary  of  the  Treasury, 
may  have  access  to  the  returns  or  to  abstracts  thereof  showing  the  name  and  income 
of  each  corporation,  joint  stock  company  or  association,  or  insurance  company,  at  such 
times  and  in  such  manner  as  the  Secretary  of  the  Treasury  may  prescribe.  Such  applica- 
tion shall  be  made  in  writing,  addressed  to  the  Secretary  of  the  Treasury  and  shall  show 
(first)  that  the  State,  whose  governor  makes  the  request,  imposes  a general  income  tax; 
(second)  the  name  and  address  of  each  corporation,  etc.,  to  which  access  is  desired;  (third) 
why  permission  to  inspect  the  returns  of  the  corporation,  etc.,  named  in  the  request  is 
desired,  and  (fourth)  what  officer  or  officers  are  designated  to  make  the  desired  inspec- 
tion, giving  their  names  and  official  designations.  Such  request  must  be  signed  by  the 
governor  of  the  State  and  sealed  with  the  seal  thereof,  and  shall  be  transmitted  to  the 
Secretary  of  the  Treasury  for  his  consideration  and  action  thereon.  [See  new  law  provision 
at  ^1638.] 

No  provision  is  made  in  the  law  for  furnishing  a copy  of  any  return  to  any  person 
1659  or  corporation,  and  no  copy  of  any  return  will  be  furnished  to  any  other  than  the 

person  or  corporation  making  the  return,  or  their  duly  constituted  attorney,  except 
as  heretobefore  authorized. 

The  provisions  herein  contained  shall  be  effective  on  and  after  the  1st  day  of 
1 660  September,  1914. 

W.  G.  McAdoo, 

Secretary  of  the  Treasury. 

Approved: 

Woodrow  Wilson, 

The  White  House,  July  28,  1914.  (T.  D.  2016,  April  18,  1914.) 

INC. 


166  TAX 


CORPORATIONS. 


1661  Law  ^409.  Annual  Report  by  the  Commissioner  of  Statistical  Information. — 
“Sec.  258.  That  the  Commissioner,  with  the  approval  of  the  Secretary,  shall 
prepare  and  publish  annually  statistics  reasonably  available  with  respect  to  the  operation 
of  the  income,  war-profits  and  excess-profits  tax  laws,  including  classifications  of  taxpayers 
and  of  income,  the  amounts  allowed  as  deductions,  exemptions,  and  credits,  and  any  other 
facts  deemed  pertinent  and  valuable.”  [^3067] 


CORPORATIONS. 

1 662  Law  ^260.  Tax  on  Corporations. — “Sec.  230.  (a)  That,  in  lieu  of  the  taxes  im- 
posed by  section  10  of  the  Revenue  Act  of  1916,  as  amended  by  the  Revenue  Act 
of  1917,  and  by  section  4 of  the  Revenue  Act  of  1917,  there  shall  be  levied,  collected,  and 
paid  for  each  taxable  year  upon  the  net  income  of  every  corporation” 

1 663  Law  1[18.  “Taxable  Year”  Defined. — “The  term  ‘taxable  year’  means  the 
calendar  year,  or  the  fiscal  year  ending  during  such  calendar  year,  upon  the  basis 

of  which  the  net  income  is  computed  under  section  212  [1[754]  or  section  232  [^[1787]”. 

1664  Law  1[19.  “Fiscal  Year”  Defined. — “The  term  ‘fiscal  year’  means  an  accounting 
period  of  twelve  months  ending  on  the  last  day  of  any  month  other  than  December.” 

Changing  a Corporation’s  Accounting  Peiiod. — [Read  at  ^1479.] 

1665  Law  ^[20.  The  First  Taxable  Yealr  Under  me  Revenue  Act  of  1918. — “The  first 
taxable  year,  to  be  called  the  taxable  year  1918,  shall  be  the  calendar  year  1918 

or  any  fiscal  year  ending  during  the  calendar  year  1918;” 

1 666  Law  ffiO.  Application  of  the  Rates  For  Fiscal  Year  Embracing  Parts  of  Calendar 

Years  with  Differing  Rates.  — “Sec.  205.  (a)  That  if  a taxpayer  makes  return  for 

a fiscal  year  beginning  in  1917  and  ending  in  1918,  his  tax  under  this  title  for  the  first 
taxable  year  shall  be  the  sum  of:” 

In  connection  with  the  following  read  beginning  at  ^3117]. 

1 667  Law  ^61.  “(1)  the  same  proportion  of  a tax  for  the  entire  period  computed  under 

Title  I of  the  Revenue  Act  of  1916  as  amended  by  the  Revenue  Act  of  1917  and 
under  Title  I of  the  Revenue  Act  of  1917,  which  the  portion  of  such  period  falling  within 
the  calendar  year  1917  is  of  the  entire  period,  and” 

1 668  Law  lf62.  “(2)  the  same  proportion  of  a tax  for  the  entire  period  computed  under 

this  title  at  the  rates  for  the  calendar  year  1918  which  the  portion  of  such  period 
falling  within  the  calendar  year  1918  is  of  the  entire  period:” 

1 669  Law  1f63.  Provided,  That  in  the  case  of  a personal  service  corporation  the  amount 
to  be  paid  shall  be  only  that  specified  in  clause  (1).” 

1 670  Law  ^64.  “Any  amount  heretofore  or  hereafter  paid  on  account  of  the  tax  imposed 
for  such  fiscal  year  by  Title  I of  the  Revenue  Act  of  1916  as  amended  by  the  Revenue 
Act  of  1917,  and  by  Title  I of  the  Revenue  Act  of  1917,  shall  be  credited  towards  the  pay- 
ment of  the  tax  imposed  for  such  fiscal  year  by  this  act,  and  if  the  amount  so  paid  exceeds  the 
amount  of  such  tax  imposed  by  this  act,  or  in  the  case  of  a personal  service  corporation, 
the  amount  specified  in  clause  (1),  the  excess  shall  be  credited  or  refunded  in  accordance 
with  the  provisions  of  section  252  [^2488].” 

1671  I ..aw  ^65.  “(b)  If  a taxpayer  makes  a return  for  a fiscal  year  beginning  in  1918  and 

ending  in  1919,  the  tax  under  this  title  for  such  fiscal  year  shall  be  the  sum  of:” 

1672  I .aw  ^66.  “(1)  the  same  proportion  of  a tax  fcr  the  entire  period  computed  under 

this  title  at  the  rates  specified  for  the  calendar  year  1918  which  the  portion  of  such 

period  falling  within  the  calendar  year  1918  is  of  the  entire  period,  and” 

1 673  Law  ^67.  “(2)  the  same  proportion  of  a tax  for  the  entire  period  computed  under 

this  title  at  the  rates  specified  for  the  calendar  year  1919  which  the  portion  of 

such  period  falling  within  the  calendar  year  1919  is  of  the  entire  period.” 

1674  Law  ^68.  “(c)  If  a fiscal  year  of  a partnership  begins  in  1917  and  ends  in  1918 

or  begins  in  1918  and  ends  in  1919,  then  notwithstanding  the  provisions  of  sub- 
division (b)  of  section  218  [1I1290j, 


INC. 


167 


TAX 


CORPORATIONS. 


1 675  Law  ^69.  “(1)  the  rates  for  the  calendar  year  during  which  such  fiscal  year  begins 

shall  apply  to  an  amount  of  each  partner’s  share  of  such  partnership  net  income 
(determined  under  the  law  applicable  to  such  year)  equal  to  the  proportion  which  the  part 
of  such  fiscal  year  falling  within  such  calendar  year  bears  to  the  full  fiscal  year,  and” 

1676  Law  ^70.  “(2)  the  rates  for  the  calendar  year  during  which  such  fiscal  year  ends 

shall  apply  to  an  amount  of  each  partner’s  share  of  such  partnership  net  income 

(determined  under  the  law  applicable  to  such  calendar  year)  equal  to  the  proportion  which 
the  part  of  such  fiscal  year  falling  within  such  calendar  year  bears  to  the  full  fiscal  year:” 

1677  Law  ^71.  “ Provided,  That  in  the  case  of  a personal  service  corporation  with  re- 

spect to  a fiscal  year  beginning  in  1917  and  ending  in  1918,  the  am.ount  specified  in 

clause  (1)  shall  not  be  subject  to  normal  tax.” 

167  8 Law  ^72.  Parts  of  Income  Subject  to  Rates  for  Different  Years. — “Sec.  206. 

That  whenever  parts  of  a taxpayer’s  income  are  subject  to  rates  for  different  calendar 
years,  the  part  subject  to  the  rates  for  the  m.ost  recent  calendar  year  shall  be  placed  in  the 
lower  brackets  of  the  rate  schedule  provided  in  this  title,  the  part  subject  to  the  rates  for 
the  next  preceding  calendar  year  shall  be  placed  in  the  next  higher  brackets  of  the  rate 
schedule  applicable  to  that  year,  and  so  on  until  the  entire  net  income  has  been  accounted 
for.” 

1679  Law  ^73.  “In  determ.ining  the  income,  any  deductions,  exemptions  or  credits  of 
a kind  not  plainly  and  properly  chargeable  against  the  incomie  taxable  at  rates  for 
a preceding  year  shall  first  be  applied  against  the  income  subject  to  rates  for  the  most 
recent  calendar  year;” 

1 680  Law  ^74.  “but  any  balance  thereof  shall  be  applied  against  the  income  subject 
to  the  rates  of  the  next  preceding  year  or  years  until  fully  allowed.” 

[In  connection  with  the  above  read  at  ^3122  and  ^3123.] 

1 681  Law  1!261.  Tax  Rates  Applicable  to  Corporations. — “a  tax  at  the  following  rates:” 

1 682  Law  ^262.  Tax  Rates  Applicable  to  Corporations  for  1918.— “(1)  For  the  calendar 
year  1918,  12  per  centum  of  the  amount  of  the  net  income  in  excess  of  the  credits 
provided  in  section  236  [*[[2325];  and” 

1 683  Law  ^263.  Tax  Rates  Applicable  to  Corporations  for  Years  Subsequent  to  1918. — 
“(2)  For  each  calendar  year  thereafter,  10  per  centum  of  such  excess  amount.” 

1 684  Law  ^264.  Funds  From  '^Hiich  Taxes  Imposed  on  Railroads  Under  Government 
Control  Are  To  Be  Paid. — “(b)  For  the  purposes  of  the  Act  approved  March  21,. 
1918,  entitled  ‘An  Act  to  provide  for  the  operation  of  transportation  systems  while  under 
Federal  control,  for  the  just  compensation  of  their  owners,  and  for  other  purposes,*  five- 
sixths  of  the  tax  imposed  by  paragraph  (1)  of  subdivision  (a)  and  four-fifths  of  the  tax 
imposed  by  paragraph  (2)  of  subdivision  (a)  shall  be  treated  as  levied  by  an  Act  in  amend- 
ment of  Title  I of  the  Reveniie  Act  of  1917.” 

1 685  Law  ^3.  What  Constitutes  a Corporation  Under  the  Income  Tax  Law. — “The 
term  ‘corporation’  includes  associations,  joint-stock  companies,  and  insurance 
companies,”  [The  old  law  read  “by  every  corporation,  joint-stock  company  or  association, 
or  insurance  com.pany.”]  [^3074.] 

1 686  Law  ^2.  The  Term  “Person”  As  Used  in  the  Revenue  Act  of  1918. — “The 
term  ‘person’  includes  partnerships  and  corporations,  as  well  as  individuals;”  [^3073.] 

1 687  Corporations  Defined. — “Corporation”  or  “corporations,”  as  used  in  these  regu- 
lations, shall  be  construed  to  include  all  corporations,  joint-stock  companies  and 
associations,  and  all  insurance  companies  coming  within  the  terms  of  the  law,  as  well  as 
all  business  trusts  organized  or  created  for  the  purpose  of  engaging  in  commercial  or  in- 
dustrial enterprises,  the  capital  of  which  is  evidenced  by  certificates  or  shares  of  interest 
issued  or  issuable  to  members  on  the  basis  of  which  profits  are  distributed  or  distributable. 
Such  organizations  will  be  hereinafter  referred  to  as  corporations.  (Art.  57,  ^299,  Reg.  33, 
Rev.,  Jan.  2,  1918.) 

1 688  Joint-Stock  Companies  and  Associations  Defined. — The  term  “joint-stock  com- 
panies” or  ‘ associations”  shall  include  associations,  common-law  trusts,  or  organiza- 
tions by  whatever  name  known  which  carry  on  or  do  business  in  an  organized  capacity, 
whether  created  under  and  pursuant  to  State  laws,  trust  agreements,  declarations  of  trust, 
or  otherwise,  the  net  income  of  which,  if  any,  is  distributed  or  distributable  among  the- 


INC. 


168  TAX 


CORPORATIONS. 


members  or  shareholders  on  the  basis  of  the  capital  stock  which  each  holds,  or,  where 
there  is  no  capital  stock,  on  the  basis  of  the  proportionate  share  or  capital  which  each  has, 
or  has  invested,  in  the  business  or  property  of  the  organization,  all  of  which  joint-stock  com- 
panies or  associations  shall  in  their  organized  capacity  be  subject  to  the  tax  imposed  by 
this  act,  and  shall  rnake  returns  of  annual  net  income  accordingly.  (Art.  58,  1[300,  Reg.  33, 
Rev.,  Jan.  2,  1918.) 

1 689  Massachusetts  Trusts  Held  to  be  Associations. — The  appended  decision  of  the 
United  States  Circuit  Court  of  Appeals  for  the  First  Circuit  in  the  cases  of  Crocker 
ct  al.,  trustees,  v.  John  F.  Malley,  collector  of  internal  revenue,  and  John  F.  Malley,  col- 
lector of  internal  revenue,  v.  Crocker  et  al.,  trustees,  is  published  for  the  information 
of  internal-revenue  officers  and  others  concerned.  (T.  D.  2720,  June  4,  1918.) 

John  F.  Malley,  Collector  vs.  Alvah  Crocker,  et  al..  Trustees. 

U.  S.  Circuit  Court  of  Appeals:  First  Circuit. 

May  3,  1918. 

(5  Dept.  Reports  of  Mass.,  1011.) 

fin  U.  S.  Supreme  Court.  No.  649.  October  1918  Term.] 

The  opinion,  written  by  Judge  Dodge,  follows,  in  part; 

1690  “These  cases  arise  under  the  Federal  income  tax  act,  approved  Oct.  3,  1913  (38r 
stats.  166,  172). 

I 69 1 “The  five  persons  who  were  then  the  trustees  under  a declaration  of  trust  dated 
March  29,  1912,  and  recorded  in  Worcester  County,  Massachusetts,  northern  district, 
registry  of  deeds,  brought  suit,  on  January  15,  1917,  against  the  collector  of  internal  rev- 
enue to  recover  back  certain  amounts  paid  by  them  to  him  under  protest,  as  income  taxes 
claimed  by  him  to  be  due  from  them  under  said  a^'t,  for  years  1913,  1914  and  1915.  The 
case  was  heard  in  the  district  court  without  a jury  on  an  agreed  statement  of  facts.  The 
trustees  recovered  judgment  for  $9,554.07,  with  interest;  which  judgment  the  collector 
seeks  to  reverse  in  No.  1324,  asserting  that  the  allowance  of  any  recovery  was  error.  ^Ry 
their  writ  of  error  in  No.  1323  the  trustees  assert  the  judgment  to  have  been  erroneous 
in  not  allowing  also  the  further  recovery  of  $1,321.33,  included  in  their  total  claim  as  stated 
in  their  declaration.  Neither  party  disputes  the  finding  below  that  all  the  formalities 
required  by  the  statute  to  enable  the  plaintiffs  to  bring  this  suit  have  been  complied  with. 
1 692  “The  declaration  of  trust  provided  that  ‘the  title  of  this  trust  (fixed  for  convenience) 
shall  be  the  Wachusett  Realty  Trust.’ 

1 693  “The  district  court  has  stated  the  question  upon  which  the  trustees’  right  of  re- 
covery depends,  as  follows: 

“ ‘The  principal  question  in  the  case  is  whether  the  plaintiffs  are  trustees  and  subject 
to  the  tax  provisions  of  section  II,  subdivision  D.  of  the  act  of  Oct.  3,  1913,  or  whether  they 
are  an  association  within  section  II,  subdivision  G a,  of  sai,d  act.  The  contention  of  the 
defendant  is  that  the  plaintiffs  are  an  association  and  taxable  under  the  provisions  of  sub* 
division  G,  while  that  of  the  plaintiffs  is  that  they  are  a strict  trust,  not  an  association  or 
partnership,  and  are  subject  to  the  tax  provisions  of  subdivision  D.’ 

“This  question  was  resolved  by  the  district  court  in  favor  of  the  plaintiffs,  and  the 
1 694  case  decided  upon  the  ground  that  they  are  a trust  and  not  an  association. 

“The  district  court,  as  its  opinion  states,  held  the  plaintiffs  to  be  ‘a  trust’  subject 
1 695  to  the  provision  of  section  II,  D,  and  not  ‘an  association,’  In  deference  to  the  de- 
cisions in  W’illiams  v.  Milton  215  Mass.  1;  Crocker  v.  Crocker,  previously  decided 
in  the  district  court  (May  23,  1914),  and  the  authorities  whereupon  those  decisions  were 
based.  Crocker  v.  Crocker  required  construction  by  the  court  of  the  same  trust  declaration 
as  is  now  before  us.  The  bill  in  that  case,  filed  by  one  of  the  beneficiaries,  asked  the  court 
to  enjoin  the  present  plaintiffs  from  making  a re.turn  of  the  income  taxable  under  this 
statute  according  to  section  II,  G a,  thereof. 

“W'e  agree  with  the  district  court,  in  this  case  in  Cfocker  v.  Crocker,  that'-the 
1 696  organization  formed  under  this  trust  declaration  is  not,  in  view  of  the  authorities 
referred  to,  to  be  regarded  as  an  association  in  such  sense  as  to  make  the  bene- 
ficiaries partners  and  the  plaintiffs  their  agents  for  conducting  the  partnership  business. 
Its  income,  therefore,  for  the  calendar  year  in  question,  is  not  for  the  purpose  of  the  statute 
to  be  treated  as  income  of  a partnership.  If  It  were  so  treated  it  would  be  income  arising 
or  accruing  to  the  several  partners  and  subject  to  the  provisions  of  section  II,  D,  regarding 
such  income.  Nor  could  the  organization  be  regarded  as  belonging  to  either  of  the  classes 
mentioned  in  section  II,  G a,  because  the  language  there  expressly  excludes  partnership. 

“But  although  their  beneficiaries  stood,  neither  as  to  the  trust  property,  nor  as  to 
1 697  the  profits  of  its  control  and  management,  nor  as  to  the  Income  therefrom,  as  part- 
ners, but  only  as  beneficiaries  of  a strict  trust;  and  although  the  plaintiffs  were 
not  the  agents  or  representatives  of  a partnership,  but  trustees  in  whose  management 
and  control  of  the  trust  property  and  business  the  beneficiaries  had  no  direct  voice,  we  do 
not  think  it  necessarily  follows  that  the  organization  composed  of  themselves  and  the  in- 


INC. 


169  TAX 


CORPORATIONS. 


dividuals  for  whose  benefit  they  act,  cannot  be  called  an  ‘association’  for  the  pilfp6§6  of 
section  11,  O a.  Though  not  associated  as  partners,  we  fall  to  see  why  they  may  not 
reasonably  be  said  to  be  associated  in  the  sense  contemplated  by  the  statute.  As  pointed 
out  above,  the  statute  for  tne  purposes  of  the  taxation  which  it  imposes  broadly  distin- 
guishes  between  two  classes  of  income  only— that  which  does  not  arise  or  accrue  to  individ- 
uals as  opposed  to  groups  or  bodies  of  Individuals. 

The  plaintiffs  fail  to  satisfy  us  that  the  terms  ‘voluntary  association,’ 


or  associ- 


1 698  ation,  are  entirely  inapplicable  for  any  purpose  to  an  organization  according  to 
whose  constitution  individuals  beneficially  interested  in  various  proportions  in  the 
same  property,  commit  its  control  and  management,  for  profit,  to  trustees  free  from  their  own 
immediate  control  or  mtenerence.  However  important  it  m.ay  be  to  distinguish  between 
trust  under  which  there  is  no  partnership  relation  am.ong  the  beneficiaries,  and  an  asso- 
ciation under  which  such  relation  exists,  for  the  purposes  of  systems  of  taxation  such  as 
that  of  Massachusetts  (Williams  v.  Milton,  215  Mass.  1),  or  for  the  purpose  of  statutes 
construed  in  Smith  v.  Anderson,  50  L.  J.  Ch.  39;  it  does  not  seem  to  us  that 
the  distinction  so  made  necessarily  excludes  an  organization  like  this  from  the  general  class 
to  which  the  terms  ‘voluntary  association,’  or  ‘association’  may  be  properly 
applied.^  1 he  holders  of  assignable  certificates^  representing  the  different  beneficial  interests 
in  this  trust  may  certainly  be  described,  without  using  language  in  any  extraordinary 
or  unusual  sense,  as  associated  together  for  their  common  benefit  or  profit.  Their  indi- 
vidual interests  in  the  trust  property  are  combined  for  the  purposes  of  a joint  business 
venture  managed  for  the  common  benefit  of  all.  The  trust  declaration  in  effect  associates 
them  for  the  purposes  of  allowing  extra  compensation  to  the  trustees,  of  filling  vacancies 
m the  office  of  trustees,  or  of  modifying  the  terms  of  the  declaration  itself,  when  it  requires 
for  those  purposes  written  assent  from  a ‘majority  in  amount’  or  a ‘majority  in  interest.’ 

“Bplieving,  in  view  of  the  entire  scheme  for  taxation  of  income  as  established  by 

1699  this  statute,  that  the  legislative  jntent  as  to  Incomes  such  as  these  plaintiffs  have 
received,  was  to  treat  them  as  arising  or  accruing  to  the  trustees  collectively,  rather 

than  to  the  Individual  beneficiaries  for  whose  ultimate  benefit  they  were  received,  we  are 
obliged  to  hold  that  the  taxes  for  the  years  here  in  question  were  lawfully  assessed  and  col- 
lected, and  that  the  district  court  erred  in  its  decision  to  the  contrary.  This  conclusion 
renders  it  unnecessary  to  consider  the  questions  which  would  have  had  to  be  decided  upon 
the  plaintiffs’  writ  of  error  in  No.  1323,  had  we  agreed  with  the  district  court. 

1700  “In  No.  1323  the  writ  of  error  is  dismissed,  and  the  defendant  in  error  recovers 
his  costs  of  appeal. 

1701  “In  1324,  the  judgment  of  the  district  court  Is  reversed,  and  the  case  is  remanded 

to  that  court,  with  directions  to  enter  judgment  for  the  defendant;  and  the  plain- 
tiff in  error  recovers  his  costs  of  appeal.”  (5  Dept.  Reports  of  Mass.,  1011.)  (T.  D.  2720, 

June  4,  1918.) 


1 702  Corporations  Subject  to  Tax. — ^The  tax  Imposed  by  the  Federal  income  tax  law 
is  not  imposed  only  upon  such  corporations  as  are  organized  and  operated  for 
profit.  Any  corporation,  joint-stock  company,  or  association,  and  any  insurance  company, 
no  matter  how  created  or  organized  or  what  the  purposes  of  its  organization  may  be,  unless 
it  comes  within  the  class  of  organizations  specifically  enumerated  in  the  act  as  exempt, 
will  be  required  to  make  returns  of  annual  net  income  and  pay  income  tax  upon  the  net 
income  which  arises  and  accrues  to  it  during  the  year. 

A corporation  is  not  exempt  simply  and  only  because  it  is  primarily  not  organized 
1 703  and  operated  for  profit.  If  income  within  the  meaning  of  the  law  arises  and  accrues 
to  a corporation  which  is  not  organized  and  operated  for  profit,  such  income  will 
be  subject  to  the  tax  imposed  by  this  act. 

1704  It  is  therefore  held  that  commercial  men’s  associations,  * * * and  like  organ- 

izations come  within  the  requirements  of  the  law.  (T.  D.  2153,  Feb.  12,  1915.) 


1705  Incomplete  Corporations. — Corporations  which  have  applied  for  but  have  never 
received  charters  and  corporations  which  have  received  charters  but  never  perfected 

their  organizations  and  which  as  entities  have  transacted  no  business  and  had  no  income 
whatever  from  any  source  may,  upon  presentation  of  the  facts  to  the  collector,  be  relieved 
from  the  necessity  of  making  returns,  so  long  as  they  remain  in  this  unorganized  condition. 
In  the  absence  of  a showing  to  this  effect  to  the  collector  of  internal  revenue,  such  com- 
panies will  be  required  to  make  returns  and  will  be  liable  to  the  penalties  of  the  law  for  failure 
to  do  so.  (Art.  60,  ^303,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1706  Corporations  Organized  During  Tax  Year. — A corporation  organized  during  the  year 
should  render  a sworn  return  on  the  prescribed  form,  covering  that  portion  of  the 

year  (calendar  or  fiscal)  [for  fiscal  year  read  paragraph  1472]  during  which  it  was  engaged 
In  business  or  had  an  income  accruing  to  it.  (Art.  84,  Reg.  33,  Jan.  5,  1914.) 


INC. 


170  TAX 


CORPORATIOT^S. 


1 707  A corporation  organized  and  transacting  no  business  within  the  calendar  year  of  its 
organziation  must,  nevertheless,  make  and  file  a return  on  the  basis  of  the  calendar 
year  unless  such  corporation  shall  designate  a fiscal  year  other  than  the  calendar  year  in  the 
manner  and  form  as  provided  for  that  purpose.  (T.  D.  2090,  Dec.  14,  1914.) 

1 708  Also  in  the  case  of  a new  corporation  making  a return  for  the  period  from  the  date 
of  its  organization  to  the  close  of  the  calendar  year,  the  tax  will  be  computed  on  the 
entire  net  income  so  returned.  (Art.  82,  ^339,  Reg.  33,  Retv,  Jan.  2,  1918.) 

1 709  Corporations  in  Existence  but  Part  of  Year. — All  corporations  having  an  existence 
as  such  during  all  or  any  portion  of  a year,  unless  coming  within  the  classes  specifi- 
cally enumerated  as  exempt,  are  required  to  make  returns.  Dissolved  corporations  whose 
fiscal  year  coincides  v.dth  the  calendar  year  will  make  returns  covering  the  period  from 
January  1 to  the  date  of  dissolution,  and  corporations  having  a fiscal  year  other  than  the 
calendar  year  will  mmke  returns  covering  the  period  from  the  beginning  of  the  fiscal  year  to 
the  date  of  dissolution  and  new  corporations  wdll  make  return  for  the  period  from  the 
date  of  their  organization  to  December  31.  The  net  income  in  all  such  cases  will  be  as- 
certained in  the  m.anner  ret  out  in  Paragraph  G [i.  e.,  the  provisions  relating  to  corporations, 
^1787,  et  seq.  herein.]  of  the  act.  (T.  D.  2090,  Dec.  14,  1914.) 

Affiliated  Corporations. — [Read  at  ^1405.] 

1710  Subsidiaries  in  Name  Only. — If  subsidiary-  corporations  exist  in  name  only,  or  are 
mere  agents  or  integral  parts  of  the  parent  corporation  and  as  such,  transact  no 

business  and  have  no  income  of  and  for  their  own  account,  and  incur  no  expenses,  all 
business  being  transacted,  all  income  being  received  and  all  expenses  being  paid  directly 
by  the  parent  company,  no  separate  accounts  being  kept  by.''  or  for  such  subsidiaries,  it 
will  be  considered  that  such  subsidiary  concerns  do  not  have  any  taxable  income  within 
the  meaning  of  this  title,  and  so  long  as  they  are  so  operated  no  tax  liability  will  be 
asserted  against  them..  (Art.  208,  1[617,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1711  In  such  cases,  hcv-^\er,  such  subsidiary  corporations  will  be  required  to  make  returns 
of  annual  net  income,  and  shall  indorse  thereon  a statement  to  the  effect  that  the 

corporation  making  th'^  return  is  a subsidiary  or  integral  part  of  the  parent  company 
(naming  it)  and  that,  for  its  own  account,  it  has  no  income  from  any  source  whatever,  that 
it  makes  no  disbursements  and  that  all  the  business  done  in  its  name  is  done  for  the  account 
of  and  is  the  business  of  the  parent  corporation,  and  -wdll  be  accounted  for  in  the  return  cf 
such  parent  corporation.  (Art.  208,  lf618,  Reg,  33,  Rev.,  Jan.  2,  1918.) 

1712  If)  however,  the  subsidiary  concerns  are  mere  partnerships  or  branches  of  the  parent 
com.pany,  and  not  incorporated  organizations,  then  these  subsidiary  concerns  will 

not  be  required  to  make  returns  of  annual  net  income,  but  all  of  their  earnings  and  expenses 
wdll  be  taken  up  and  accrunted  for  in  the  returns  of  the  parent  company  or  corporation. 
(T.  D.  2161,  Feb.  19,  1915.) 

1713  Corporation  Formed  to  Avoid  Selling  at  a Sacrifice  in  Order  to  Partition. — A cor- 
poration formed  as  a family  affair  to  hold  property  together  and  not  to  sacrifice 

in  selling  does  not  come  within  the  class  of  corporations  specifically  enumerated  as  exempt 
from  the  requiremetts  of  the  Federal  income  tax  law,  and  is  required  to  make  a return 
of  annual  net  income  showing  therein  all  income  arising  and  accruing  to  it  from  all  sources 
and  to  pay  any  income  tax  shown  by  such  return  to  be  due.  (T.  D.  2137,  Jan.  30,  1915.) 

1714  Corporations  Owned  by  Exempt  Organizations. — A stock  corporation  all  of  whose 
stock  is  owned  by  “a  corporation  or  association  organized  and  operated  exclusively 

for  religious,  charitable,  scientific,  or  educational  purposes,  no  part  of  whose  net  income 
inures  to  the  benefit  of  any  member,  stockholder,  or  individual,”  is  required  under  the  pro- 
visions of  the  Federal  income  tax  law  to  make  a return  of  annual  net  income  and  pay  income 
tax. 

The  fact  that  all  of  the  stock  of  the  corporation,  except  shares  qualifying  the  direc- 

1715  tors,  is  owned  by  a corporation  which  itself  comes  within  the  class  specifically 
enumerated  as  e.^empt,  does  not  relieve  the  first-named  corporation  from  liability 

under  the  income  tax  law.  The  liability  of  a corporation  to  the  requirements  of  the  Federal 
income  tax  law  is  not  r'-ntingent  upon  the  ownership  of  its  stock.  (T.  D.  2137,  Jan.  30, 
1915.). 

1716  Lessee  and  Lessor*  Corporations. — When  a corporation  shall  have  leased  its  property 
in  consideration  that  the  lessee  shall  pay  in  lieu  of  rental  an  amount  equivalent 

to  a certain  rate  of  dividend  on  its  capital  stock  or  the  interest  on  its  outstanding  indebted- 
ness, together  with  taxe'*^  insurance,  or  other  fixed  charges,  such  payments  shall  be  con- 


INC. 


171  TAX 


CORPORATIONS. 


sidisred  rental  payments  and  shall  be  returned  by  the  lessor  corporations  as  income,  not- 
withstanding the  fact  that  the  dividends  and  interest  are  paid  by  the  lessee  direct  to  the 
stockholders  and  bondholders  of  the  lessor.  The  lessee,  in  making  these  payments  direct 
to  the  bondholders  and  the  stockholders,  does  so  as  the  agent  of  the  lessor,  and  the  latter 
is  none  the  less  liable  to  return  the  amounts  thus  paid  as  income  and  to  pay  any  tax  that 
may  be  due  thereon. 

The  fact  that  a corporation  has  conveyed  or  let  its  property  and  has  thus  parted 
1717  with  its  management  and  cbntrol  or  has  ceased  to  engage  in  the  business  for  which 
it  was  originally  organized  will  not  relieve  it  from  liability  to  income  tax.  If  it  has 
or  may  have  income  directly  or  indirectly  from  any  source,  it  must  make  a return,  account 
for  all  such  income,  and  pay  any  tax  assessable  upon  such  income.  (Art.  102,  ^368-369, 
Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 7 1 8 A railroad  company  operating  leased  or  purchased  lines  as  an  integral  part  of  its 
line  or  system,  and  keeping  no  separate  books  of  account  as  to  such  leased  or  pur- 
chased line,  and  the  income  from  the  operation  of  which  can  not  be  segregated,  shall  include 
in  its  income  all  receipts  derived  therefrom,  and  if  bonded  or  other  indebtedness  of  the 
leased^  or  purchased  line  has  been  assumed  by  the  operating  company,  it  may  deduct 
from  its  gross  income  the  interest  paid  on  such  indebtedness,  provided  the  interest  so 
paid  plus  the  interest  paid  on  its  own  indebtedness  is  not  in  excess  of  the  limit  fixed  by  the 
la_w.  In  this  event  the  leased  or  purchased  line  so  long  as  it  has  a corporate  existence 
will  make  return  of  annual  net  income  setting  out  that  on  its  own  account  it  has  neither 
income  nor  expenses,  and  that  both  are  taken  up  in  the  return  of  the  operating  company, 
naming  it. 

If  the  leased  or  purchased  line  keeps  separate  books  of  account,  or  the  income  from 
1 7 1 9 its  operations  is,  or  can  be  segregated,  or  if  the  lessee  or  operating  company  pays  it 
a certain  rental,  or  in  lieu  of  rental  pays  a certain  per  cent  of  dividends  on  its  stock, 
interest  on  its  bonds,  taxes,  etc.,  it  (the  lessor)  will  return  the  same  as  its  income  and  will  be 
subject  to  tax  accordingly  and  the  lessee  or  operating  company  will  make  its  return  as  though 
it  were  in  no  way  related  to  the  leased  line.  (Art.  125,  ^415-416,  Reg.  33,  Rev.,  Jan.  2, 
i9i8.)f 

1 720  The  Rensselaer  & Saratoga  Railroad  Company  leased  its  properties  to  the  Delaware 
and  Hudson  Company,  which  agreed  to  pay  the  interest  upon  and  discharge  the 
bonds  issued  by  the  former,  to  maintain  the  right  of  way  and  buildings,  and  to  pay  direct 
to  each  stockholder  dividends  at  the  rate  of  8%  per  annum  on  each  share  of  stock.  The 
lessor  received  $1,000  per  annum  from  the  lessee  to  enable  it  to  main^in  its  corporate 
existence.  The  lessor  maintained  that  the  dividend  payments  to  its  stockholders  were  not 
income  to  it  and  paid  income  tax  assessed  thereon  to  it  by  the  Collector  of  Internal  Revenue 
under  protest.  This  action  was  on  demurrer  to  the  complaint  of  the  Rensselaer  & Saratoga 
Railroad  Company,  on  the  ground  that  it  did  not  allege  facts  sufficient  to  constitute  a cause 
of  action.  The  court  sustained  the  denlurrer,  saying; 

It  seems  to  me  clear: 

1721  1.  That  the  moneys  to  be  paid  by  the  Delaware  & Hudson  Canal  Company  to 
the  creditors  and  stockholders  of  the  Rensselaer  & Saratoga  Railroad  Company 
are  rents  or  compensation  to  the  Rensselaer  & Saratoga  Railroad  Company^  for  the  use 
and  occupation  of  its  property,  and,  as  the  plaintiff  corporation  pays  no  operating  or  repair 
expenses,  constitutes,  aside  from  the  interest  paid,  net  income  within  the  meaning  of  the 
law  in  question. 

2.  It  is  immaterial,  so  far  as  that  question  is  concerned,  that  such  dividends 
1 722  are  fixed  as  to  amount  by  the  lease,  and  by  its  terms  paid  directly  to  such  stock- 
holders. 

1 723  3.  It  is  also  immaterial  that  the  plaintiff  corporation  is  not  possessed  of  money 
or  other  cash  revenues  with  which  to  pay  the  tax.  It  has  power  to  borrow. 

1 724  4.  The  corporation  could  not  exonerate  itself  from  liability  for  thls^  tax  subse- 
quently Imposed  under  a law  thereafter  enacted  by  making  a lease  of  its  property 
which  provides  for  the  payment  of  all  its  surplus  revenues  directly  to  its  stockholders. 
On  the  face  of  the  complaint  a cause  of  action  is  not  stated,  and  the  demurrer 

1725  is  sustained.  There  will  be  an  order  and  judgment  accordingly.  (Rennsselaer  & 
Saratoga  Railroad  Company  vs.  Irwin,  Collector,  District  Court,  N.  D.  New  York, 

March  5,  1917 — 239  Fed.  739^Act  of  Oct.  3,  1913.)  (Affirmed  249  Fed.  726.  Writ  of 
certiorari  denied  by  Supreme  Court,  April  15,  1918.) 

1726  I am  of  the  opinion,  however,  that  the  West  End  Street  Railway  Company  was 
a duly  organized  and  existing  corporation  under  the  laws  of  Massachusetts  and  had 

a net  income  which  arose  or  accrued  to  it  during  the  period  from  March  1,  to  December  31, 
1913,. within  the  meaning  of  the  Income  Tax  Statute  of  October  3,  1913,  (c.  16;  38  Stat., 
P..114,  172)  and  was  subject  to  the  imposition  of  the  tax  herein  authorized.  The  rental 
whi^h,  under  the  terms  of  the  lease  of  its  road  to  the  Boston  Elevated  Railway  Company | 


INC. 


172  TAX 


CORPORATIONS. 


was  to  be  paid  by  the  lessee  directly  to  the  shareholders  of  the  West  End  Street  Railway 
Company  was  income  of  the  West  End  Company  and  did  not  cease  to  be  such  because  it 
w'as  not  paid  directly  to  it.  The  Boston  Elevated  Railway  Company,  in  making  the  pay- 
ment to  the  shareholders,  acted  in  no  other  capacity  than  as  agent  of  the  West  End  Com- 
pany. Anderson  v.  Morris  & Essex  R.  R.  Co.,  supra;  Lewellyn  v.  Pittsburgh,  etc.,  R.  R. 
Co.,  222  Fed.  177;  Public  Service  Ry.  Co.  v.  Herold,  219  Fed.  301.  (Opinion  by  the 
Court  in  West  End  Street  Railway  Company  v.  John  F.  Malley,  Collector,  U.  S.  District 
Court,  District  of  Massachusetts,  June  23,  1916.)  (Affirmed  U.  S.  Circuit  Court  of  Appeals, 
First  Circuit,  246  Fed.  625.  (Writ  of  certiorari  denied  by  Supreme  Court,  April  15, 
1918.)  (T.  D.  2620,  Dec.  17,  1917.) 

1727  Public  Utility  Corporation  Intrusted  with  Use,  Merely,  of  Property  Owned  by  State. 
The  fact  that  the  plaintiff  was  a public  utilities  corporation  which,  under  the 

laws  of  the  State,  was  not  the  owner  of  the  property  but  merely  intrusted  with  the  use 
thereof  which  it  must  devote  to  the  public,  does  not  entitle  it  to  more  favorable  treat- 
ment than  other  corporations,  it  being  a corporation  organized  for  profit,  having  a capital 
stock  represented  by  shares,  and  the  act  making  no  exceptions  in  favor  of  public  utilities. 
(Caption:  Union  Hollywood  Water  Co.  vs.  John  P.  Carter,  Collector,  case.  Act  Aug.  5, 
1909  (238  Fed.  329).  (T.  D.  2475,  April  4,  1917.) 

^ . . . 

1 728  Liquidating  Corporations. — A corporation  going  into  liquidation  during  any 
period  may,  at  the  time  of  such  liquidation,  prepare  a “final  return”  covering 

the  income  received  or  accrued  to  it  during  the  fractional  part  of  the  year  during  which 
it  Was  engaged  in  business,  and  immediately  file  the  same  with  the  collector  of  the  dis- 
trict in  which  the  corporation  has  its  principal  place  of  business.  Before  distributing 
its  assets,  a dissolving  corporation  should  reserve  funds  sufficient  to  pay  any  income  tax 
assessable  against  it.  Otherwise  the  tax  may  be  collected  by  suit  against  the  stockholders. 
(Art.  205,  11612,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1729  Colorations  Dissolving  Before  the  Time  for  Making  Returns. — A corporation 
which  has  continued  in  business  through  a calendar  year  cannot  evade  liability 

for  the  special  excise  tax  imposed  by  Act  of  August  5,  1919,  Section  38,  by  dissolving  before 
the  time  when  it  is  required  to  make  a return  of  said  business  to  the  collector  of  internal 
revenue  and  the  assessment  of  the  tax. — United  States  v.  General  Inspection  & Loading 
Co.,  192  Fed.  223. 

Under  Corporation  Act  N.  J.  Sections  53-55,  the  officers  of  a dissolved  corporation 

1730  who  are  also  directors  have  authority  to  make  return  to  the  collector  of  internal 
revenue  of  its  business  of  the  preceding  year  on  which  it  has  incurred  liability  for 

the  special  taxjmposed  by  Act  of  August  5,  1909,  Section  38. , Id. 

1731  Corporation  Dissolved  Prior  to  October  4, 1917. — A corporation  which  was  dissolved 
in  1917,  prior  to  the  passage  of  the  war-revenue  act  of  October  3,  1917,  is  subject 

to  tax  under  the  act  of  September  8,  1916,  as  amended,  and  also  to  the  war  income  tax  and 
the  war  excess  profits  tax  imposed  by  the  act  of  October  3,  1917  (Brady  et  al.  v.  Anderson, 
240  Fed.  665).  A corporation  so  situated  will  make  a return  on  revised  Form  1031,  covering 
the  period  in  1917  during  which  it  was  in  business  prior  to  its  dissolution.  If  it  shall  have 
previously  made  a return  covering  this  period  and  shall  have  paid  any  exeCss  profits  tax 
under  the  act  of  March  3,  1917,  it  shall  be  entitled  to  credit  for  the  amount  of  such  tax 
so  paid  against  any  excess  profits  tax  assessable  against  it  under  Title  II  of  the  act  of 
October  3,  1917.  (Art.  61,  11304,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

Status  of  Partnerships. — [Read  at  1[1269  and  113077.] 

1732  Status  of  Private  Banks. — Private  banks  which  have  the  form  of  corporate  organiza- 
tions, elect  officers  and  a board  of  managers,  have  a distinctive  name,  a fixed  situs, 

and  distribute  their  net  earnings  upon  the  basis  of  the  amount  of  capital  invested  by  the 
members  or  owners,  are  held  to  be  associations  within  the  meaning  of  the  Federal  income 
tax  law,  and  in  their  organized  capacity  should  make  returns  of  annual  net  income  and  pay 
any  income  tax  thereby  shown  to  be  due.  (T.  D.  2137,  Jan.  30,  1915.) 

1733  The  holders  of  the  stock  or  the  owners  of  the  bank  will  be  exempt  from  the  normal 
tax  to  the  extent  of  the  dividends  or  earnings  which  they  receive  from  such  private 

banks  as  make  returns  in  their  organized  capacity  and  pay  income  tax  in  accordance 
therewith.  The  individual  owners  of  the  bank  will  not  be  required  to  return  as  income 
for  the  purpose  of  the  normal  tax  any  dividends  or  earnings  received  from  the  private 
bank  which  pays  the  tax  on  its  net  earnings,  but  for  the  purpose  of  the  supertax  the  divi- 
dends will  be  returned  as  income  by  the  individual  stockholders  or  owners.  (T.  D.  2137, 
Jan.  30,  1915.) 


INC. 


173  TAX 


CORPORATIONS. 


1734  The  attention  of  this  office  has  been  called  to  the  fact  that  many  private  banks, 
which  have  an  organization  similar  in  form  to  that  of  corporations — that  is,  they 
have  articles  of  agreement  or  association,  elective  officers,  and  in  some  instances,  boards 
of  managers — have  not  been  called  upon  by  Collectors  to  make  returns  of  annual  net  in- 
comes pursuant  to  the  requirements  of  the  Federal  income  tax  law,  which  provides,  in  effect, 
that  all  corporations,  joint  stock  companies,  or  associations,  and  all  insurance  companies, 
“no  matter  how  created  or  organized,”  shall  make  returns  and  pay  any  income  tax  thereby 
shown  to  be  due. 

A private  bank  having  a formal  organization,  a distinctive  nanie  and  a fixed  situs, 
1 735  is  held  to  be  an  association  and,  as  an  organization,  comes  within  the  requirements 
of  the  income  tax  law. 

Collectors  are  therefore  urged  to  have  all  such  banks  in  their  respective  districts, 
1 736  make  formal  returns  on  Form  1031  Revised,  and  report  them  for  assessment  on  their 
Forms  ♦ * ♦ , (Mimeograph  letter  No.  1271  to  Collectors,  Oct.  19,  1915.) 

1 737  When  it  can  be  clearly  shown  that  a private  bank  is  owned  by  one  man,  it  is  evident 
that  such  bank  is  not  an  association  within  the  meaning  of  the  Federal  income  tax 
law,  and  that  therefore  such  bank  will  not  be  required  to  make  a return  such  as  corpora- 
tions and  associations  are  required  to  make,  but  the  individual  owner,  if  he  has  a net 
income  of  5^3,000  [$1,000  or  $2,000]  or  more,  will  be  required  to  make  a return  on  Form 
1040,  showing  in  such  return  the  income  which  he  receives  not  only  from  the  bank  but 
from  all  other  sources.  (T.  D.  2137,  Jan.  30,  1915.) 

1738  Private  banks  which  do  not  have  this  formal  organization  [paragraph  1732],  but 
which  transact  business,  not  in  the  name  of  the  bank,  but  in  the  name  of  the  indi- 
viduals who  compose  the  firm,  as  John  Smith  & Co.,  are  held  to  be  co-partnerships  and,  as 
such,  are  not  required  to  make  returns.  In  such  cases  the  individuals  who  compose  the 
firm,  if  they  have  net  incomes  in  excess  of  $3,000  [$1,000  or  $2,000],  will  be  required  to 
make  individual  returns  on  Form  1040,  accounting  for  therein,  their  respective  incomes 
arising  and  accruing  from  the  earnings  of  the  bank.  (Mimeograph  letter  No.  1271  to 
Collectors,  Oct.  19,  1915.) 

1739  Law  51265.  Corporations  that  are  Exempt  from  Tax. — “Sec.  231.  That  the  following 
organizations  shall  be  exempt  from  taxation  under  this  title — 

1 740  Law  ^266.  (1)  Labor,  agricultural,  or  horticultural  organizations; 

1741  Law  ^267.  (2)  Mutual  savings  banks  not  having  a capital  stock  represented  by 

shares; 

1742  Law  ^268.  (3)  Fraternal  beneficiary  societies,  orders,  or  associations,  (a)  oper- 

ating under  the  lodge  system  or  for  the  exclusive  benefit  of  the  members  of  a frater- 
nity itself  operating  under  the  lodge  system,  and  (b)  providing  for  the  payment  of  life, 
sick,  accident  or  other  benefits  to  the  members  of  such  society,  order,  or  association  or  their 
dependents; 

1 743  Law  1(269.  (4)  Dom.estic  building  and  loan  associations  and  cooperative  banks 

without  capital  stock  organized  and  operated  for  mutual  purposes  and  without 

profit; 

1 744  Law  1(270.  (5)  Cemetery  companies  owned  and  operat^ed  exclusively  for  the  bene- 

fit of  their  m.embers; 

1745  Law  1(271.  (6)  Corporations  organized  and  operated  exclusively  for  religious, 

charitable,  scientific,  or  educational  purposes,  or  for  the  prevention  of  cruelty  to 

children  or  animals,  no  part  of  the  net  earnings  of  which  inures  to  the  benefit  of  any  private 
stockholder  or  individual; 

1746  Law  1[272.  (7)  Business  leagues,  chambers  of  commerce,  or  boards  of  trade,  not 

organized  for  profit  and  no  part  of  the  net  earnings  of  which  inures  to  the  benefit 

of  any  private  stockholder  or  individual; 

1 747  Law  1(273.  (8)  Civic  leagues  or  organizations  not  organized  for  profit  but  operated 
exclusively  for  the  promotion  of  social  welfare; 

1748  Law  1(274.  (9)  Clubs  organized  and  operated  exclusively  for  pleasure,  recreation, 

and  other  nonprofitable  purposes,  no  part  of  the  net  earnings  of  which  inures  to  the 
benefit  of  any  private  stockholder  or  member; 


INC. 


1 74  TAX 


CORPORATIONS. 


1 749  Law  ^275.  (10)  Farmers’  or  other  mutual  hail,  cyclone,  or  fire  insurance  companies, 
mutual  ditch  or  irrigation  companies,  mutual  or  cooperative  telephone  companies, 
or  like  organizations  of  a purely  local  chaaracter,  the  income  of  which  consists  solely  of 
assessments,  dues,  and  fees  collected  from  members  for  the  sole  purpose  of  meeting  expenses; 

1760  Law  ^276.  (11)  Farmers’,  fruit  growers’,  or  like  associations,  organized  and  operated 
as  sales  agents  for  the  purpose  of  marketing  the  products  of  members  and  turning 
back  to  them  the  proceeds  of  sales,  less  the  necessary  selling  expenses,  on  the  basis  of  the 
quantity  of  produce  furnished  by  them; 

1751  Law  ^277.  (12)  Corporations  organized  for  the  exclusive  purpose  of  holding  title 

to  property,  collecting  inco:r_e  therefrom,  and  turning  over  the  entire  amount  thereof, 

less  expenses,  to  an  organization  -which  itself  is  exempt  from  the  tax  imposed  by  this  title; 

1752  L aw  ^278.  (13)  Federal  land  banks  and  national  farm-loan  associations  as  pro- 

vided in  section  26  of  the  act  approved  July  17,  1916,  entitled  “An  Act  to  provide 

capital  for  agricultural  development,  to  create  standard  forms  of  Investment  based  upon 
farm  mortgage,  to  equalize  rates  of  interest  upon  farm  loans,  to  furnish  a market  for  United 
States  bonds,  to  create  Governm.ent  depositaries  and  financial  agents  for  the  United  States, 
and  for  other  purposes”; 

1763  Law  ^279.  (14)  Personal  service  corporations.  [For  definition  see  ^1308  and  ^3083.] 

1754  Proof  Necessary  to  be  Filed  by  Certain  Organizations  to  Establish  the  Fact  that 
They  are  Exempt  from  Filing  Income  Tax  Returns  or  Paying  an  Income  Tax. — 

The  exemption  from  filing  returns  and  paying  income  tax  of  corporations  or  associations 
organized  and  operated  exclusively  for  religious,  charitable,  scientific  or  educational 
purposes,  business  leagues,  chambers  of  commerce,  boards  of  trade,  civic  leagues,  cemetery 
companies,  and  pleasure  and  recreation  clubs,  under  the  Act  of  September  8,  1916,  as 
amended  by  the  Act  of  October  3,  1917,  is  conditional. 

In  order  to  establish  exemption  and  thus  be  relieved  of  the  duty  of  filing  returns 

1755  and  paying  income  tax,  it  is  necessary  that  such  organizations,  as  are  specified 
hereinbefore  file  an  affidavit  with  the  Collector  of  Internal  Revenue  of  the  District 

in  which  they  are  located,  W'hich  will  show  the  character  of  the  organization,  the  purpose 
for  which  organized,  the  source  of  income  and  disposition  of  the  same,  and  whether  or 
not  any  of  its  income  is  credited  to  surplus  or  inures  or  may  inure  to  the  benefit  of  any 
private  stockholder  or  individual.  To  such  affidavit  should  be  attached  a copy  of  the 
charter  or  articles  of  incorporation  and  by-laws  of  the  organization. 

Upon  receipt  of  the  affidavit  accompanied  by  the  copies  of  the  charter,  or  articles  of 
1 756  incorporation  and  copy  of  the  by-laws  by  the  Collector  he  will  advise  the  or- 
ganization whether  or  not  it  is  exempt.  If,  however,  the  Collector  is  in  doubt  as  to 
the  taxable  status  of  the  organization  he  will  refer  the  affidavit  and  accompanying  papers 
to  the  Commissioner  of  Internal  Revenue  for  decision.  (T.  D.  2693,  April  8,  1918.) 

1767  Conditional. — Corporations  or  associations  organized  and  operated  exclusively 
for  religious,  charitable,  scientific,  or  educational  purposes,  business  leagues,  cham- 
bers of  commerce,  boards  of  trade,  civic  leagues,  cemetery  companies,  and'pleasure  and  re- 
creation clubs,  are  not,  as  such,  exempt  from  the  requirements  of  this  title.  Their  exemp- 
tion is  conditional,  and  in  order  to  be  relieved  from  liability  under  the  law  they  must  file 
with  the  collector  of  internal  revenue  an  affidavit  setting  out  the  character  and  purpose 
of  the  organizations,  and  showing  that  no  part  of  any  income  which  they  receive  inures 
to  the  benefit  of  any  private  stockholder  or  individual,  and  that  such  income  is  used  exclu- 
sively for  the  promotion  of  the  purposes  for  which  organized  as  indicated  in  the  particular 
paragraphs  under  which  exemption  is  claimed.  (Art.  67,  ^312,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 768  Qualifications  for  Exemption. — In  every  instance  wherein  exemption  is  condi- 
tioned upon  the  ground  that  no  part  of  the  net  income  received  by  corporations 
inures  to  the  benefit  of  any  private  stockholder  or  individual,  it  will  be  necessary,  before 
such  organizations  will  be  classed  as  exempt,  for  them  to  show  to  the  satisfaction  of  the 
collector  or  the  Commissioner  of  Internal  Revenue; 

(1)  The  character  and  purpose  of  the  organization; 

(2)  The  source  from  which  all  its  income  is  derived; 

(3)  What  disposition  is  made  of  such  incomes;  and 

(4)  Whether  or  not  any  of  it  is  credited  to  surplus  or  Inures  or  may  inure  to  the  benefit 
of  any  private  stockholder  or  individual.  (Art.  78,  1[331,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1759  Unconditional. — Among  the  corporations  exempt  from  the  tax,  without  condition, 
are  labor,  agricultural  and  horticultural  organizations,  mutual  savings  bank  not 
having  capital  stock  represented  by  shares,  fraternal  beneficiary  society,  order,  or  asso- 


INC. 


175 


TAX 


CORPORATIONS. 


elation  operating  under  the  lodge  system,  or  for  the  exclusive  benefit  of  the  members  of 
a fraternity  itself  operating  under  the  lodge  system,  domestic  building  and  loan  associations, 
Federal  land  banks,  and  national  farm  loan  associations,  organized  pursuant  to  the  act 
of  July  17,  1916,  joint-stock  land  banks  as  to  income  specified  in  the  law,  and  public  utilities 
whose  income  inures  to  the  benefit  of  any  State,  Territory,  or  political  subdivision  thereof. 
In  all  cases  wherein  the  exemption  is  without  condition,  and  the  collector  is  satisfied 

1760  that  the  organization  comes  within  the  exempted  class,  he  will  be  authorized  to 
eliminate  it  from  his  list  and  relieve  it  from  the  necessity  of  making  returns.  (Art. 

68,  ^313-314,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1761  Organizations  whose  Exemption  is  Doubtful. — ‘Any  corporation  which  entertains 
any  doubt  as  to  its  status  under  the  law,  for  the  reason  that  it  does  not  clearly 

come  within  one  or  another  of  the  classes  of  those  specifically  enumerated  as  exempt, 
should,  within  the  prescribed  time,  file  a return  and  attach  thereto  for  the  consideration 
of  the  collector,  a statement  setting  out  fully  the  nature  and  purpose  of  the  organization, 
the  source  of  its  income,  what  disposition  is  made  of  it,  and  particularly  of  any  surplus 
which  it  may  receive  over  and  above  its  reasonable  needs. 

the  collector  is  in  doubt,  he  will  refer  the  statement  and  return  to  the  Commis- 

1762  sioner  of  Internal  Revenue  for  decision,  and  withhold  listing  for  assessment  until 
a decision  is  reached.  (Art.  79,  ^332-333,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 763  Exemption  having  been  Established. — When  a corporation  or  organization  has 
established  its  right  to  exemption  under  any  of  the  paragraphs  of  section  11  of  this 
title,  it  will  be  unnecessary  for  it  to  make  a return  or  to  make  any  further  showing  thereafter 
with  respect  to  its  status  under  the  law,  unless  it  changes  the  character  of  its  organization 
or  the  purpose  for  which  it  was  originally  created. 

I Collectors  will  keep  a list  of  all  corporations  whose  exemption  is  conditional,  to 
1 764  the  end  that  they  may  occasionally  inquire  into  their  status  and  ascertain  whether 
or  not  they  are  violating  the  conditions  upon  which  their  exemption  is' predicated. 
(Art.  80,  11334-335,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1765  Mutual  Insurance  Companies,  etc. — The  organizations  mentioned  in  paragraph 
“tenth”  of  section  11,  act  of  September  8,  1916,  as  amended,  are  specifically  exempt, 

provided  that  their  entire  income  consists  solely  of  assessments,  dues,  and  fees  collected 
from  members  for  the  sole  purpose  of  meeting  expenses,  incurred  in  pursuance  of  the  pur- 
pose for  which  organized.  If  any  of  such  organizations  have  income  from  any  source 
other  than  assessments,  dues,  and  fees,  such  income  will  be  held  to  be  subject  to  tax,  and 
the  organizations  receiving  the  same  will  be  required  to  make  returns  and  to  pay  any  tax 
thereby  shown  to  be  due.  (Art.  69,  1[316,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1766  Domestic  Building  and  Loan  Associations. — A domestic  building  and  loan  asso- 
ciation entitled  to  exemption  is  one  organized  under  and  pursuant  to  the  laws  of 

the  United  States  or  under  and  pursuant  to  the  laws  of  some  State  or  Territory  thereof, 
and  which  is  actually  carrying  on  for  the  benefit  of  its  members  a building  and  loan  asso- 
ciation business  in  accordance  with  the  laws  under  which  it  is  organized.  The  fact  that 
such  an  association  issues  fully  paid  or  prepaid  shares,  calling  for  a specified  rate  of  interest 
or  dividends,  will  not  disqualify  it  for  exemption.  The  exemption  is  without  qualification 
other  than  that  the  association  is  a domestic  building  and  loan  association.  If  a corpo- 
ration by  any  other  name  is  carrying  on  an  exclusive  building  and  loan  business,  before 
it  is  entitled  to  exemption  it  will  be  incumbent  upon  it  to  show  to  the  satisfaction  of  the 
Commissioner  of  Internal  Revenue  that  it  is  in  fact  a building  and  loan  association.  (Art. 
70,  11317,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1767  Cemetery  Company. — A cemetery  company  having  a capital  stock  represented  by 
shares,  or  which  is  operated  for  profit  or  for  the  benefit  of  others  than  its  members, 

does  not  come  within  the  exempted  class,  and  will  be  required  to  make  returns  of  annual 
net  income  and  pay  any  income  tax  thereby  shown  to  be  due. 

In  the  case  of  such  company  a reserve  set  aside  out  of  profits  as  a “maintenance 
1 768  fund”  is  not  deductible  from  gross  income,  and  any  accretions  to  such  fund  will  be 
^ held  to  be  income,  and,  as  such,  must  be  returned  by  the  corporation.  The  expenses 
of  maintenance  will  be  deductible  as  they  are  paid.  (Art.  71,  1[318-319,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

1769  Social  Clubs. — Social  clubs  organized  and  operated  exclusively  for  pleasure,  recre- 
ation, and  other  nonprofitable  purposes  are  exempt  from  the  tax,  provided  no  part 
of  any  net  income  which  they  receive  inures  to  the  benefit  of  any  private  stockholder^ or 
individual.  This  exemption  will  reach  practically  all  social  and  recreation  clubs  which 
are  supported  by  membership  fees,  dues,  and  assessments. 


INC. 


176  TAX 


CORPORATIONS. 


If  a club,  by  reason  of  the  comprehensive  powers  granted  In  its  charter,  engages 

1770  in  traffic,  in  agriculture,  or  horticulture,  in  the  sale  of  real  estate,  timber,  etc.,  for 
profit,  it  will  be  held  that  such  club  is  not  organized  and  operated  exclusively  for 

pleasure,  recreation,  or  social  purposes.  It  thus  becomes  a business  or  commercial  enter- 
prise, and  any  profit  realized  from  such  activities  is  subject  to  the  tax  imposed  by  this  title, 
and  the  club  so  operated  must  make  returns  of  annual  net  income.  (Art.  72,  ^320-321, 
Reg.  33,  Rev.,  Jan.  2,  1918.) 

1771  Labor,  Agricultural  and  Horticultural  Organizations. — Agricultural  or  horti- 
cultural organizations,  which  are  exempt  under  this  title,  do  not  Include  those 

corporations  engaged  in  growing  agricultural  or  horticultural  products,  raising  live  stock  or 
similar  products  for  profit,  but  will  include  only  those  organizations  W'hich,  having  no  net 
income  inuring  to  the  benefit  of  their  members,  are  educational  or  instructive  in  character, 
and  which  have  for  their  purpose  the  betterment  of  the  conditions  of  those  engaged  in  these 
pursuits,  the  improvement  of  the  grade  of  their  products,  and  the  encouragement  and 
promotion  of  those  industries  to  a higher  degree  of  efficiency. 

Included  in  this  class  as  exempt  are  those  organizations  such  as  county  fairs  and 
17  72  like  associations  of  a quasi-public  character,  which,  through  a system  of  awards, 
prizes,  or  premiums,  are  designed  to  encourage  the  production  of  better  live  stock, 
better  agricultural  and  horticultural  products,  and  whose  income,  derived  from  gate  receipts, 
entry  fees,  donations,  etc.,  is  used  exclusively  to  meet  the  necessary  expenses  of  upkeep  and 
operation. 

Societies  or  associations  which  have  for  their  purpose  the  holding  of  annual  or 

1773  periodical  race  meets,  and  from  which  profits  inure  or  may  inure  to  the  benefit 
of  the  members  or  stockholders  do  not  come  within  the  terms  of  this  exemption. 

(Art.  73,  11322-324,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 774  Corporations  owning  sugar  or  other  plantations  and  disposing  of  the  product 
thereof  are  held  to  be  operating  for  profit  and  are  not  entitled  to  exemption  as  agri- 
cultural organizations.  (T.  D.  2090,  Dec.  14,  1914.) 

1775  Corporations  engaged  In  agricultural  or  horticultural  pursuits  for  profit  are  liable 
under  the  law  to  make  returns  and  to  pay  the  income  tax  thereby  shown  to  be  due. 

(T.  D.  2090,  Dec.  14,  1914.) 

1 77  6 Societies  Not  Agricultural  or  Horticultural. — A corporation  engaged  in  the 
business  of  raising  stock  or  poultry,  or  growing  grain,  fruits,  or  other  products 
of  this  character,  as  a means  of  livelihood  and  for  the  purpose  of  gain,  is  an  agricultural  or 
horticultural  society  only  in  the  sense  that  its  name  indicates  the  kind  of  business  in  which 
it  is  engaged  and,  as  such,  is  not  exempt  from  the  requirements  of  the  law , and  must  make 
returns  and  pay  any  income  tax  thereby  shown  to  be  due.  (Art.  74,  1f325,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

1 7 7 7 Cooperative  Associations  Defined. — Cooperative  associations.  In  order  to 
come  within  the  exemption  provided  in  paragraph  “eleventh”  must  establish  to 
the  satisfaction  of  the  collector  or  Commissioner  of  Internal  Revenue  the  fact  that,  for 
their  own  account,  they  have  no  net  income,  their  business  being  to  market  the  products 
of  their  members,  and  that  the  entire  proceeds  of  such  marketing,  less  necessary  selling 
expenses,  are  turned  back  or  paid  to  the  members  on  the  basis  of  the  quantity  of  produce 
furnished  by  them — quality  and  grade  being  considered — as  the  purchase  price  of  such 
produce. 

If  in  the  course  of  their  business  such  associations  purchase  for  cash  at  a stipulated 

1778  price  articles  of  produce  with  a view  to  selling  them  for  gain,  it  will  be  held  that  such 
associations  are  organized  for  profit  and  such  associations  will  be  required  to  make 

returns  of  annual  net  income  and  include  therein,  for  the  purpose  of  the  tax,  all  income 
derived  from  such  transactions.  If  amounts  paid  to  members  are  based  solely 
upon  the  quantity  of  produce  furnished,  such  amounts  may  be  deducted  from  the 
gross  proceeds  of  sales,  and  the  taxable  net  income  will  be  the  amount  of  earnings  passed 
to  surplus,  or  distributed  or  distributable  among  members  on  the  basis  of  their  stock 
holdings.  (Art.  75,  1f326-327,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1779  Fruit-growers’  associations  whose  purpose  is  to  promote  the  mutual  benefit  of  their 
members  in  marketing  their  products  and  which  are  not  organized  for  profit  and  have 

no  capital  stock  represented  by  shares,  and  whose  income  is  derived  wholly  from  mernber- 
ship  fees,  dues,  and  assessments  to  meet  necessary  expenses  are  horticultural  societies 
within  the  meaning  of  the  law  and  are  not  subject  to  tax  or  required  to  make  returns. 
(T.  D.  2090,  Dec.  14,  1914.) 


INC. 


177 


TAX 


CORPORATIONS. 


1780  Co-operative  societies,  associations  or  corporations  which  make  a periodical  refund 
— sometimes  called  a dividend — to  member  or  to  prospec'tive  members  or  to  patrons 

generally,  in  proportion  to  the  purchases  made  by  the 'recipient,  are  not  within  any  of  the 
exceptions  or  exemptions  of  the  Act  of  September  8,  1916,  as  amended  by  the  Act  of  October 
3,  1917,  and  are  subject  to  its  provisions. 

Where  such  refund  payments  are  made  in  accordance  with  by-laws  or  published 

1781  rules  regularly  adhered  to,  they  are  to  be  regarded  as  discounts  or  rebates  tending 
to  reduce  the  taxable  net  income  of  the  organization.  Like  discounts  generally, 

they  should  appear  as  an  added  item  of  cost  in  the  detailed  schedule  of  cost  items  submitted 
with  the  organization’s  return  of  incomb. 

T,his  ruling  is  in  accordance  with  settled  practice  in  the  administration  of  the 

1782  income  tax  laws,  adopted  because  the  real  purpose  of  such  organizations  is  to 
furnish  goods  at  cost. 

So-called  “dividends”  of  this  character  are  wholly  different  from  ordinary  dividends 

1783  based  on  stock-holdings,  and  they  need  not  be  listed  as  income  by  the  recipient. 
However,  If  the  recipient  is  claiming  the  right  to  deduct  as  business  expenses  any 

expenditure  on  which  the  refund  is  based  in  whole  or  in  part,  the  sum  claimed  as  a deduction 
must  be  reduced  in  proportion  to  the  refund  received.  (T.  D.  2737,  June  19,  1918.) 

1 7 84  Cooperative  Dairy  Defined. — Cooperative  dairy  companies  or  associations  not 
having  capital  stock  and  engaged  in  collecting  milk  and  disposing  of  the  same 
or  the  products  thereof,  and  distributing  the  proceeds  of  the  business,  less  necessary  oper- 
ating expenses,  among  their  patrons,  upon  the  basis  of  the  quantity  of  butter  fat  in  the 
milk  furnished  by  such  patrons,  are  held  to  be  exem.pt  from  the  tax  imposed  by  this  title. 

If,  however,  a dairy  company  purchases  milk  at  a stipulated  price  and  disposes 
17  85  of  the  same,  or  its  products,  through  sale  or  otherwise,  at  a profit,  and  such  profit 
inures  to  the  benefit  of  the  company  or  its  members,  on  any  basis  other  than  the 
butter-fat  content  of  m.ilk  furnished,  such  company  will  come  within  the  requirements  of 
the  law,  and  will  be  subject  to  the  tax.  fArt.  76,  ^328-329,  Reg.  33,  Rev.,  jan.  2,  1918.) 

1 786  Lodge  System  Defined. — A society  or  association  “operating  under  the  lodge  system” 
is  one  organized  under  a charter  or  dispensation  with  properly  appointed  or  elected 
officers,  with  an  adopted  ritual  or  ceremonial,  holding  meetings  at  stated  intervals.  An 
order,  society,  or  association  coming  within  this  definition  is  exempt  from  the  requirements 
of  the  income  tax  law.  (Art.  77,  ^330,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1787  Law  ^[280.  Net  Income  of  a Corporation  Defined. — “Sec.  232.  That  in  the  case 
of  a corporation  subject  to  the  tax  imposed  by  section  230  [^1662]  the  term  “net 
income”  means  the  gross  income  as  defined  in  section  233  [111788]  less  the  deductions  allowed 
by  section  234  [1[1922],  and  the  net  income  shall  be  computed  on  the  same  basis  as  is  pro- 
vided in  subdivision  (b)  of  section  212  [1[755]  or  in  section  226  [returns  when  accounting 
period  is  changed,  1[1479].” 

1 788  Law  11281.  Gross  Income  of  a Corporation  Defined. — “Sec.  233.  (a)  That  In  the 
case  of  a corporation  subject  to  the  tax  imposed  by  section  230  [111662]  the  term 
“gross  income”  means  the  gross  income  as  defined  in  section  213  [11763],”  [See  112841.] 

1789  Gross  Income  Defined. — Gross  income  embraces  not  only  the  operating  revenues 
but  also  income,  gains,  or  profits  from  all  other  sources,  such  as  rentals,  royalties, 

interest,  and  dividends  from  stock  owned  in  other  corporations;  and  also  profits  made  in 
other  corporations;  and  also  profits  made  from  the  sale  of  assets,  investments,  etc.  A 
true  and  accurate  record  of  all  income  received,  as  well  as  of  all  disbursements  or  charges 
against  income,  should  be  kept,  in  order  that  it  may  be  identified  and  verified  by  an  internal- 
revenue  officer  if  an  examination  of  the  books  should  be  deemed  advisable.  (Art.  88, 
11349,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1790  Banks  and  Financial  Institutions. — Gross  Income  of  banks  and  other  financial 
institutions  consist  of  the  total  revenue  received  within  the  year  for  which  the 

return  is  made  from  the  operation  of  the  business,  including  income,  gains,  or  profits  from 
the  sale  of  capital  assets  and  from  all  other  sources. 

In  cases  where  securities  or  other  assets,  real,  personal,  or  mixed,  acquired  prior  to 

1791  March  1,  1913,  are  disposed  of  during  the  year,  the  gain  or  loss  thereon  will  be 
based  upon  the  difference  between  the  price  at  which  disposed  of  and  the  fair 

market  price  or  value  of  such  assets  as  of  March  1,  1913,  or  the  difference  between  the 
price  at  which  disposed  of  and  the  cosl  if  acquired  subsequent  to  that  date.  (Art.  90, 
11351-352,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1792  Bank  Discounts. — In  cases  wherein  banks  or  other  corporations  loan  money  by 
discounting  bills  or  notes,  one  or  two  methods  shall  be  used  In  determining  the 

amount  of  discount  that  is  to  be  reported  as  income,  namely  (1)  if  the  bank  or  corporation 

INC.  178  TAX 


CORPORATIONS. 


makes  a practice  of  crediting  such  discount  directly  to  a “discount  account”  or  to  profit 
and  loss,  the  total  amount  thus  credited  during  the  year  shall  be  considered  income  and  shall 
b'e  so  reported,  regardless  of  the  fact  that  a portion  of  this  amount  may  represent  discount 
paid  in  advance  and  not  then  earned;  (2)  if  the  bank  or  corporation  follows  tbe  practice 
of  crediting  such  discount  to  an  “unearned  discount  account,”  and  later,  as  the  discount 
becomes  earned,  debits  the  unearned  account  and  credits  an  “earned  discount  account” 
with  the  amount  so  earned,  the  total  amount  credited  to  the  “earned  discount  account” 
during  the  year  shall  be  considered  income  and  shall  be  so  returned.  The  corporation 
having  income  of  this  character  should  state  in  a memorandum  attached  to  its  return 
which  of  the  two  methods  was  used  in  determining  the  amount  of  discount  returned  as 
incom.e.  (Art.  114,  ^385,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 793  Dividends  On  Federal  Reserve  Bank  Stock. — The  Federal  reserve  statute,  section 
3,  of  the  act  of  October  22,  1914,  provides  that  Federal  reserve  banks  and  the 
capital  stock  and  surplus  therein,  are  exempt  from  taxation. 

Under  this  provision  of  law  the  exemption  provided  for  in  the  Federal  reserve 
1 794  act  attaches  to  and  follows  the  income  derived  from  dividends  on  stock  of  Federal 
reserve  banks  into  the  hands  of  stockholders,  that  is  to  say,  the  dividends  received 
on  the  stock  of  Federal  reserve  banks  are  exempt  from  the  taxes  imposed  by  the  acts  of 
Septem-ber  8,  1916,  as  amended,  and  of  October  3,  1917. 

This  ruling  does  not  contemplate,  however,  that  dividends  paid  by  member  banks 
1 795  are  [not  to  be  included  in  gross  Income  as  provided]  by  this  title,  but  such  dividends 
in  so  far  as  they  may  be  received  by  other  corporations,  may  be  treated  as  a [de- 
duction] against  [gross]  income  in  computing  [net  income].  (Art.  86,  ^345-347,  Reg.  33, 
Rev.,  Jan.  2,  1918.)  [1[2867.] 

1796  Manufacturing  Corporations. — Gross  Income  for  the  purpose  of  returns  of  manu- 
facturing companies  shall  consist  of  the  total  sales  plus  the  inventory  at  the  end 

of  the  year  less  the  sum  of  the  cost  of  goods  or  materials  purchased  during  the  year  and  the 
inx'entory  at  the  beginning  of  the  year.  Instructions  as  to  how  inventories  shall  be  taken 
will  be  included  in  special  regulations  [^1862]  to  be  furnished  upon  application  to  the 
collector  of  internal  revenue.  To  the  gross  manufacturing  income  should  be  added  the  in- 
come, including  dividends,  received  from  other  corporations,  and  gains  or  profits  from  all 
sources.  (Art.  91,  1[353,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1797  Mercantile  Corporations. — For  the  purpose  of  returns  gross  income  of  mercantile 
companies  shall  consist  of  the  total  sales  plus  the  inventory  at  the  end  of  the  year 

less  the  sum  of  the  cost  of  goods  purchased  during  the  year  and  the  Inventory  at  the  begin- 
ning of  the  year.  As  to  method  of  taking  inventory  [^[1862],  see  preceding  [^1796]  para- 
graph. To  the  amount  of  income  thus  ascertained  should  be  added  the  Income,  gains, 
or  profits  derived  from  all  other  sources. 

All  sales  made  during  the  year,  whether  compensated  for  by  accounts  receivable, 

1 798  bills  receivable,  cash,  or  other  property  at  a determined  cash  value,  must  be  included 
in  gross  income  of  the  year  in  which  the  sales  were  made.  (Art.  92,  ^[354-355, 
Reg.  33,  Rev.,  Jan.  2,  1918.) 

1799  Miscellaneous  Corporations. — Gross  Income  of  miscellaneous  corporations  consist 
of  total  revenue  derived  from  the  operation  and  management  of  the  business  and 
property  of  the  corporation  making  the  return,  together  with  all  amounts  of  income, 
including  the  income,  gains,  or  profits  from  all  other  sources,  including  dividends  received. 
(Art.  93,  ^356,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 800  Contracting  Corporations. — Corporations  engaged  in  contracting  operations  and 
which  have  numerous  uncompleted  contracts,  which  In  some  cases  run  for  periods 
of  several  years,  will  be  allowed  to  prepare  their  returns  so  that  the  gross  Income  will  be 
arrived  at  on  the  basis  of  completed  work — that  is,  on  jobs  which  have  been  finally  com- 
pleted— any  and  all  moneys  received  in  payment  for  completed  jobs  will  be  returned  as 
income  for  the  year  in  which  the  work  was  completed.  If  ‘■he  gross  income  is  arrived  at 
by  this  method,  the  deduction  from  gross  Income  should  be  limited  to  the  expenditures 
made  on  account  of  such  completed  contracts.  [See  ^2843.] 

Or  the  percentage  of  profit  from  the  contract  may  be  estimated  on  the  basis  of  per- 
1801  centage  of  completion  and  payments  made  thereon,  in  which  case  the  income  to 
be  returned  each  year  during  the  performance  of  the  contract  will  be  computed 
upon  the  basis  of  the  expenses  incurred  on  such  contract  during  the  year;  that  is  to  say, 
if  one-half  of  the  estimated  expenses  necessary  to  the  full  performance  of  the  contract  are 
'incurred  during  one  year,  one-half  of  the  gross  contract  price  should  be  returned  as  income 
for  that  year;  all  under  or  over  statements  of  income  to  be  adjusted  upon  completion 
the  contract  and  return  made  accordingly.  [See  1[2843.] 


INC. 


179  TAX 


CORPORATIONS. 


In  cases  wherein  contracts  are  fully  performed  in  one  year,  although  payment 
1 802  therefor  may  be  deferred  until  the  next,  the  income  resulting  from  the  performance 
of  the  contract  shall  be  returned  for  the  year  in  which  it  was  actually  earned  and 
determined.  (Art.  121,  ^398-400,  Reg.  33,  Rev.,  Jan.  2,  1918  ) [See  1(2843.1 

1 803  Warrants  of  City,  etc. — In  cases  wherein  warrants  are  issued  by  a city,  town,  or  other 
political  subdivision  of  a State,  and  are  accepted  by  the  contractor  in  payment 
for  public  work  done,  the  face  value  of  such  warrants  must  be  returned  as  income  for  the 
year  in  which^  they  are  received.  If,  for  any  reason,  the  contractor  upon  conversion  of 
the  warrants  into  cash,  does  not  receive  and  can  not  recover  the  full  face  value  of  the 
warrants  so  returned,  he  may  allowably  deduct  from  gross  income  for  the  year  in  which  the 
warrants  are  converted  into  cash,  any  loss  sustained,  which  loss  will  be  measured  by  the 
dlifference  between  the  face  value  of  the  warrants  returned  as  income  and  the  amount 
actually  received  for  them  in  cash,  or  its  equivalent,  when  redeemed  or  disposed  of.  (Art. 
108,  lf378,  Reg.  33,  Rev.,  Jan.  2,  1918.)  [1(2844.] 

Farming  Corporations.— [Read  at  K913  and  at  K2845.] 

I 804  Gross  Income  of  Corporations  Conducting  More  Than  One  Class  of  Business. — 
Where  a corporation  is  engaged  in  carrying  on  more  than  one  class  of  business, 
gross  income  derived  from  the  different  classes  of  business  shall  be  ascertained  according 
to  the  definitions  above,  and  which  are  applicable  thereto.  (Art.  112,  Reg.  33,  Jan.  5, 
1914.) 

I 805  Bad  Debts  Recovered. — Bad  debts  or  accounts  charged  off  by  a corporation  because 
of  the  fact  that  they  were  determined  to  be  worthless,  and  subsequently  recovered, 
constitute  income  for  the  year  in  which  recovered,  regardless  of  the  date  when  the  amounts 
were  charged  off.  Neither  the  date  at  which  the  debt  was  charged  off  nor  the  fact  that 
it  was  or  was  not  deducted  from  gross  income  in  any  return  made  for  tax  purposes,  will  in 
any  way  affect  its  character  as  income  of  the  year  in  which  recovered.  (Art.  110,  1^380 
Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 806  Compromise  of  Indebtedness. — This  office  is  in  receipt  of  your  letter  of  the  30th 
ultimo  in  which  you  submit  for  ruling  the  following  proposition: 

1 807  “A  company  which  has  been  unable  to  pay  any  Interest  on  its  bonded  indebtedness 
for  some  years  proposes  to  settle  thatindebtedness,  part  in  new  securities  and  part  in 
cash,  the  creditors  to  reduce  the  face  of  the  bonds  by  $100,000  as  an  inducement  for  the 
raising  of  $100,000  cash. 

“By  this  process  the  apparent  financial  condition  of  the  debtor  company  is  im- 

1808  proved  by  $100,000,  not  through  any  earnings,  but  by  effecting  a settlement  with 

its  creditors  by  which  $200,000  of  its  bonds  are  cancelled  at  a cost  to  it  of  $100,00^ 
in  cash,  namely  at  50c  on  the  dollar.” 

In  reply  to  your  inquiry  as  to  whether  such  a compromise  of  indebtedness  is  taxable 

1809  as  income,  you  are  informed  that  while  in  fact  the  earnings  of  the  corporation 
are  in  no  wise  increased  by  this  compromise,  the  liabilities  are  reduced  and  to  that 

extent  the  corporation  gains  in  its  n'et  worth. 

In  somewhat  similar  cases  to  this,  in  which  the  creditor  has  forgiven  the^  debt 
1 81  0 of  the  debtor,  this  office  has  held  that  the  amount  of  the  debt  forgiven  constitutes 
income,  in  this  particular  case^  in  the  opinion  of  this  office,  the  difference  between 
the  amount  realized  by  the  corporation  when  the  bonds  were  sold  and  the  amount  which 
it  now  is  required  to  pay  upon  the  redemption  of  the  same,  constitutes  income  which  income 
may  be  prorated  over  the  period  elapsing  between  the  date  of  the  bond  issue  and  the  date 
of  their  payment,  and  that  portion  of  such  income  apportioned  to  the  years  subsequent 
to  January  1,  1909,  will  be  returned  as  taxable  income  for  the  year  in  which  the  bonds 
are  redeemed.  (Letter  signed  by  Commissioner  W.  H.  Osborn,  and  dated  July  10,  1915.) 

1811  [The  Circuit  Court  of  Appeals,  Second  Circuit,  held  in  U.  S,  vs.  Oregon-Washing- 
ton  R.  & Nav.  Co.,  April  24,  1918  (251  Fed.  211),  that  a debt  forgiven  is  not  in- 
come to  the  debtor.  (Page  665,  1918  Income  Tax  Service.)] 

1812  Prevailing  Rates  of  Exchange  at  Time  Income  on  Foreign  Investments  was  Credited 
to  Govern  in  Computing  Tax  Liability  on  Such  Income. — This  office  acknowledges 

receipt  of  your  letter  of  January  4,  1916,  wherein  you  cite  the  case  of  a resident  American 
citizen  who  had  accruing  to  him  from  time  to  time  income  from  foreign  investments  which 
was  not  remitted  to  the  United  States  but  was  placed  to  his  credit  in  different  foreign 
countries,  and  request  to  be  advised  whether  in  computing  income  tax  liability  it  will  be 
proper  to  use  the  rates  of  exchange  prevailing  at  the  time  the  amounts  were  credited  abroad. 


INC. 


180  TAX 


CORPORATIONS. 


In  reply  you  are  advised  that,  in  the  case  cited,  it  will  be  proper  for  the  individual 

1813  to  return  each  item  of  income  at  the  rate  of  exchange  which  prevailed  on  the  date 
it  was  credited  to  his  account.  (Letter  to  Herbert  M.  Teets,  New  York,  N.  Y., 

signed  by  Deputy  Commissioner  L.  F.  Speer,  and  dated  January  11,  1916.) 

1814  Sinking  Funds  Invested  in  Bonds  of  Corporation. — If  the  trustees  of  a sinking 
fund  established  by  a corporation  have  invested  the  amount  of  the  sinking  fund 

reserve  or  any  portion  of  it  in  the  bonds  of  the  corporation  and  such  corporation  pays  to 
the  trustees  the  interest  on  these  bonds,  such  corporation  will  be  permitted  to  deduct 
such  interest  from  its  gross  income,  provided  the  amount  of  the  interest  thus  paid,  plus 
the  interest  on  any  other  outstanding  indebtedness  which  it  may  have,  does  not  exceed 
the  limit  fixed  by  law.  The  interest  paid  to  the  trustees,  together  with  all  other  earnings 
on  investments  made  by  the  trustees  of  the  sinking  fund,  must  be  included  in  the  gross 
income  of  the  corporation.  (Art.  189,  ^577,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1815  Sale  of  Patents. — A corporation  disposing  of  patents  by  sale,  should  determine 
the  profit  or  loss  arising  therefrom,  by  computing  the  difference  between  the  selling 

price  and  the  cost,  or  value  as  of  March  1,  1913,  if  acquired  before  that  date.  The  apparent 
profit  or  loss  should  be  increased  or  decreased,  as  the  case  may  be,  by  the  amounts  deducted 
since  March  1,  1913,  as  a return  of  capital  invested  in  such  patents.  (Art.  109,  ^379, 
Reg.  33,  Rev.,  Jan.  2,  1918.)  [1[2847.] 

1816  Royalties  from  Patent  Rights. — [Read  1[889.]  Royalties  received  by  a corporation 
in  accordance  With  a contract  by  which  it  has  assigned  the  patent  rights  to  manu- 
facture machines,  etc.,  are  income  and  should  be  so  accounted  for.  I’he  owner  of  the 
patent  may  deduct  from  gross  income  each  year,  until  the  capital  invested  therein  is  ex- 
tinguished a sum  ascertained  by  dividing  the  cost  of  the  patent  by  the  number  of  years 
constituting  its  life  or  by  a number  representing  the  years  of  its  life  remaining  after  the 
date  of  acquirement.  (Art.  113,  1[384,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1817  Royalties  from  Mines. — In  the  case  of  mines  operated  by  a lessee  on  a royalty 
basis  it  is  held  that  the  lessor  in  disposing  of  his  ores  or  natural  deposits  on  the 

basis  of  royalties  has  a measure  of  profit  in  every  ton  of  ore  disposed  of  in  this  way,  and  that 
•o  much  of  the  gross  receipts  on  account  of  royalties  as  is  in  excess  of  depletion,  * * * 

plus  any  incidental  expenses  to  which  the  corporation  mav  be  subject,  is  income  within  the 
meaning  of  the  Federal  incom^  tax  law  and  should  be  so  returned  by  the  lessor.  (T.  D, 
2152,  Feb.  12,  1915.) 

1818  [It  was  so  held  under  Act  of  Aug.  5, 1909, in  the  Sargent  Land  Company  Case  by  the 
Supreme  Court,  June  15,  1917,  (252  U.  S.  503)  (T.  D.  2436)  (Page  220,  1918  Income 

Tax  Service).] 

1819  Interest  Received  and  Paidby Brokers  in  Connection  with  Purclrse  and  Carrying 
of  Securities  for  Customers. — The  appended  decision  [captions  only]  of  the  United 

States  Circuit  Court  of  Appeals,  in  the  case  of  Altheimer  & Rawlings  Investment  Co. 
V.  Allen,  collector,  is  published  for  the  information  of  internal-revenue  officers  and  others 
concerned. 

(U.  S.  Circuit  Court  of  Appeals,  Eighth  Circuit.  248  Fed.  688.) 

1.  Gross  Income.  A corporation  which  did  a brokerage  business  and  bought 

1820  securities  for  its  customers.  Who  paid  only  a part  of  the  purchase  price,  paying 
interest  on  balances,  the  corporation  also  paying  for  the  securities  purchased 

only  part  of  the  purchase  price  and  owing  balances  on  which  it  paid  interest,  including 
in  return  of  gross  income  the  difference  between  the  interest  received  and  the  interest 
paid,  made  incorrect  return.  • 

2.  Interest.  The  interest  received  by  plaintiff  from  its  customers  should  be 

1821  included  in  gross  income.  In  determining  net  income,  interest  can  be  deducted 
only  to  an  amount  not  exceeding  the  paid-up  capital  stock  outstanding  at  the  close 

of  the  year. 

3.  Judgment  Affirmed.  The  judgment  of  the  United  States  District  Court 

1822  (246  Fed.,  270;  T.  D.  2441)  is  affirmed.  (248  Fed.  688.)  (T.  D.  2686,  April  1, 
1918.) 

1823  Interest  Allowed  on  Advance  Payments  of  Income  and  Excess  Profits  Tax  during 
1918. — Treasury  Decision  2622,  dated  December  26,  1917,  is  amended  by  the 

revocation  of  the  following  paragraph: 

“The  interest  at  the  rate  of  3%  per  annum  (365  days),  allowed  to  a taxpayer  on 
advance  payments  on  income  and  excess  profits  taxes,  must  be  considered  income  and 
accounted  for  as  income  by  the  taxpayer  in  his  return  for  the  year  in  which  said  interest 
is  allowed."  (T.  D.  2695,  April  11,  1918.) 


INC. 


181 


TAX 


CORPORATIONS. 


1 824  Interest  Received  from  Tax-free  Bonds. — The  law  requires  the  debtor  corporation 
to  deduct  one  normal  tax  from  the  interest  on  bonds  containing  a tax-free  covenant, 
and  to  account  for  same.  In'terest  received  by  a corporation  or  indivudial  on  bonds  held, 
whether  they  are  guaranteed  to  be  tax-free  or  not,  rhust  be  included  in  the  income  of  the 
corporation  or  individual  receiving  the  same  and  must  be  so  accounted  for  in  the  return 
of^annual  net  income. 

The  matter  of  complying  with  the  covenant  of  the  bond  is  a matter  to  be  adjusted 
1 825  between  the  debtor  corporation  and  the  bondholder. 

If,  however,  it  is  clearly  established  by  affidavit  or  otherwise  that  the  debtor  cor- 
1 826  poration  has  actually  withheld  and  paid  to  the  proper  officers  of  the  United  States 
the  tax  on  such  interest  income,  the  recipient,  having  returned  such  interest  as 
Income,  may  take  credit  against  any  tax  to  which  subject  on  the  basis  of  return,  for  the 
tax  so  paid  by  the  debtor  corporation.  (Art.  122,  ^401-403,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1827  Discount  for  Cash  in  Relation  to  Income  and  Capital  Account. — Reference  Is  made 
to  your  letter  of  the  15th  instant,  in  which  you  state  that  a corporation  has  pur- 
chased a large  quantity  of  equipment  and  in  consideration  of  making  a prompt  payment 
therefor  has  been  allowed  a cash  discount.  You  ask  to  be  advised  whether  or  not  this  dis- 
count should  be  reported  as  income.  l[In  reply  you  are  informed  that  the  discount  allowed 
to  the  corporation  purchasing  this  new  equipment  need  not  be  reported  as  income,  but 
the  cost  of  the  equipment  as  charged  to  capital  must  represent  only  the  net  cost  after 
making  allowance  for  the  discount  in  question.  (Letter  to  E.  G.  Shorrock  & Co.,  Seattle, 
Washington,  signed  by  Deputy  Commissioner  L.  F.  Speer,  and  dated  November  26,  1918.) 

1 823  Proceeds  of  Sale  of  Rights  Income. — In  cases  wherein  corporations  desiring  to 
secure  additional  capital  propose  to  issue  and  sell  further  shares  of  stock,  reserving 
to’their  stockholders  the  right  to  subscribe  for,  at  par  or  any  other  stipulated  price,  a certain 
number  of  shares  of  the  new  stock  issue,  proportioned  to  the  number  previously  held,  and 
if  such  stockholders  shall  sell  their  rights,  it  will  be  held  that  the  proceeds  of  such  sale  are 
in  their  entirety  Income  for  the  year  in  which  the  rights  are  sold,  and  should  be  so  returned 
by  the  stockholders,  whether  they  be  individuals  or  corporations.  (Art.  95,  11359,  Reg.  33, 
Rev.,  Jan.  2,  1918.) 

1 829  Sale  of  Rights. — Amount  realized  from  sale  of  rights  to  subscribe  to  stock  is  held 
to  be  income  to  the  seller.  (Art.  4,  1[61,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 830  Sale  of  Capital  Stock. — The  proceeds  from  the  sale  by  a corporation  of  its  shares 
of  capital  stock,  whether  such  proceeds  be  in  excess  of  or  less  than  the  par  value  of 
the  stock  subscribed  for  and  issued,  constitute  the  capital  of  the  company. 

If  the  stock  is  sold  at  a premium,  the  premium  is  not  income.  Likewise,  if  the  stock 
1 83 1 is  sold  at  a discount,  the  amount  of  the  discount  is  not  a loss  deductible  from  operat- 
ing inc'ome.  (Art.  97,  1[361-362,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 832  Treasury  Stock — ^When  Taxable. — Treasury  stock,  wherever  and  whenever  that 
term  is  used  in  connection  with  the  accounts  of  the  corporation  or  for  income-tax 
purposes,  will  be  held  to  mean  stock  which  had  been  previously  issued  by  the  corporation 
and  which  had  been  repossessed  by  it  through  purchase  or  otherwise  and  then  carried 
on  its  books  as  an  asset.  If  such  stock  is  resold  at  a price  in  excess  of  its  cost  upon  repos- 
session, such  excess  shall  be  returned  as  income  for  the  year  in  which  resold.  Unissued  stock, 
which  had  been  retained  by  the  corporation  for  the  purpose  of  future  sale,  will  not,  for  the 
purpose  of  the  income  tax,  be  considered  “Treasury  stock,”  and  when  sold  no  part  of  the 

f)roceeds  of  such  sale  will  be  considered  taxable  income.  Nor  will  there  be  any  deductible 
oss  if  such  stock  is  sold  at  a price  less  than  par.  (Art.  98, 1[363,  Reg.  33,  Rev.,  J an.  2,  1918.) 

1 833  Donations  to  Corporations  of  Capital  Stock. — If,  for  the  purpose  of  enabling  a 
corporation  to  secure  working  capital  or  for  any  other  purpose,  the  stockholders 
donate  or  return  to  the  corporation  to  be  resold  by  it  certain  shares  of  stock  of  the  com- 
pany previously  issued  to  them,  the  sale  of  such  stock  will  be  considered  a capital  trans- 
action, and  the  proceeds  of  such  sale  will  be  treated  as  capital  and  will  not  constitute 
income  to  the  corooration.  (Art.  99,  1f364,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 834  Voluntary  Payments  by  Stockholders. — In  cases  wherein  a corporation  requirea 
additional  funds  for  conducting  its  business  and  obtains  such  needed  money  through 
voluntary  pro  rata  payments  by  its  stockholders,  and  such  amounts  received  are  credited 
to  its  surplus  account  or  to  a special  capital  account,  the  amounts  so  received  will  not 
be  considered  income,  although,  as  representing  this  additional  fund,  there  is  no  increase 
in  outstanding  shares  of  stock  or  liability  of  the  corporation.  The  payments  under  such 
circumstances  are  in  the  nature  of  voluntary  assessments  upon,  and  represent  an  additional 
price  paid  for,  the  shares  of  stock  held  by  the  individual  stockholders,  and  will  be  treated 
as  an  addition  to  and  as  a part  of  the  operating  capital  of  the  company.  (Art.  96,  11360, 
Reg.  33,  Rev.,  Jan.  2,  1918.) 


INC. 


182 


TAX 


CORPORATIONS. 


1 835  Dividends  Received. — Section  10  of  this  title  specifically  sets  out  that  corpora- 
tions shall  return  as  gross  income  all  income  received  from  all  sources  during  the 
year  for  which  the  return  is  made.  Among  the  items  to  be  Included  in  income  are  divi- 
dends on  stock  and  interest  on  bonds  or  other  interest-bearing  obligations  received  from 
other  corporations.  Such  dividends  are,  however,  not  subject  to  the  ♦ * ♦ income 

tax  ♦ ♦ ♦ jpqj.  “Dividends  as  a Deduction,”  read  at  ^[2102.]  (Art,  105,  1f372, 

Reg.  38,  Rev.,  Jan.  2,  1918.) 

1836  Payments  Made  by  Lessee  Direct  to  Bondholders  or  Stockholders  of  Lessor. — 
While  the  payments  made  by  the  lessee  direct  to  the  bondholders  or  stockholders 

are  rentals  to  both  it  and  the  lessor,  rentals  paid  in  one  case  and  rentals  received  in  the 
other,  to  the  bondholders  and  the  stockholders  they  are  interest  and  dividend  payments 
received  as  from  the  lessor,  and  as  such  will  be  accounted  for  in  their  returns  of  annual 
net  income.  (Art.  103,  1[370,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1837  Payments  Made  to  Holders  of  Stock  Trust  Certificates. — Stock  trust  certificates 
or  leased  line  certificates,  as  the  case  may  be,  issued  by  the  lessee  for  the  purpose 

of  securing  or  holding  control  of  the  stock  of  the  lessor  are  held  to  be  issued  in  lieu  of  the 
certificates  of  capital  stock,  and  for  the  purpose  of  this  tax  will  be  treated  as  capital  stock 
and  the  amounts  received  by  the  holders  of  these  certificates  are  dividends  to  the  holders 
to  be  treated  as  rentals  by  both  lessee  and  lessor  and  constitute  an  allowable  deduction 
in  the  one  case  and  an  Item  of  income  in  the  other,  accordingly  as  they  are  paid  and 
received.  (Art.  104,  lf37I,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1838  Income  from  Damages  Recovered. — [Read  ^[1840  below.]  When  a corporation 
as  a result  of  suit  or  otherwise  secures  payment  for  damages  which  it  may  have 

sustained,  and  the  amount  of  such  payment  Is  in  excess  of  an  amount  necessary  to  make 
good  the  damage  or  damaged  property,  the  amount  of  such  excess  shall  be  considered 
and  returned  as  Income  for  the  year  in  which  received.  If  the  entire  or  an  estimated 
amount  of  the  damage  shall  have  been  previously  charged  off  and  deducted  from  gross 
income,  then  the  amount  recovered  shall  be  returned  as  income. 

If  the  amount  recovered  is  less  than  the  damage  sustained  or  less  than  an  amount 
1 839  necessary  to  make  good  the  damage,  the  difference  between  the  actual  amount 
of  damage  sustained  and  the  amount  recovered  will  be  deductible  as  a loss.  (Art. 
94,  ^357-358,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1840  Compensation  for  Property  Requisitioned  or  Lost  or  Destroyed  Through  War 
Hazards;  Replacement  Fund;  Taxation  Deferred. — [Read  at  1[2861.]  Regulations 
No.  33  Revised  provided  in  Article  94  ]1[1838]  as  follows: 

“Art.  94.  Income  from  damages  recovered. — When  a corporation  as  a result  of 
suit  or  otherwise  secured  payment  for  damages  which  it  may  have  sustained,  and  the 
amount  of  such  payment  is  in  excess  of  an  amount  necessary  to  make  good  the  damage 
or  damaged  property,  the  amount  of  such  excess  shall  be  considered  and  returned  as 
income  for  the  year  in  which  received.  If  the  entire  or  an  estimated  amount  of  the 
damage  shall  have  been  previously  charged  off  and  deducted  from  gross  income, 
then  the  amount  recovered  shall  be  returned  as  income. 

“If  the  amount  recovered  is  less  than  the  damage  sustained  or  less  than  an  amount 
necessary  to  make  good  the  damage,  the  difference  between  the  actual  amount  of 
damage  sustained  and  the  amount  recovered  will  be  deductible  as  a loss.” 

In  the  case  of  property,  title  to  which  has  been  requisitioned  for  war  uses,  or 
1 841  property  which  has  been  lost  or  destroyed  in  whole  or  in  part  through  war  hazards, 
the  amount  received  by  the  owner  as  compensation  for  the  property  may  show 
an  excess  over  the  value  of  the  property  on  March  1,  1913,  or  over  Its  cost  If  it  was  acquired 
after  that  date.  This  excess  of  the  amount  received  over  the  value  or  cost  of  the  property 
except  as  far  as  actually  used  for  the  replacement  of  the  property  in  kind,  is  subject  to 
the  income,  war  income  and  excess  profits  taxes. 

Although  the  intention  or  obligation  of  the  taxpayer  in  such  case  may  be  to  use 
1 842  the  entire  sum  received  as  compensation  for  the  replacement  in  kind  of  the  lost 
or  damaged  property,  it  is  recognized  that  it  may  not  be  practicable,  owing  to 
war  conditions,  to  make  such  replacement  for  a considerable  time.  In  such  case,  the 
taxpayer  may  establish  a “replacement  fund”  in  which  the  entire  amount  of  the  com- 
pensation so  received  shall  be  held,  and  pending  the  disposition  thereof,  the  accounting 
for  gain  or  loss  thereupon  may  be  deferred  for  a reasonable  period  of  time  to  be  determined 
by  the  Commissioner  of  Internal  Revenue.  Where  the  property  requisitioned,  lost  or 
damaged  constituted  all  or  part  of  the  security  under  a mortgage  or  trust  indenture,  the 
amount  carried  to  the  replacement  fund  may,  subject  to  the  approval  of  the  Commissioner 
of  Internal  Revenue,  be  the  amount  of  compensation  received  less  the  amount,  if  any, 
which  becomes  payable  out  of  such  compensation  under  the  terms  of  such  instrument 
or  the  obligations  thereby  secured. 


INC. 


183  TAX 


CORPORATIONS. 


In  any  such  case  the  taxpayer  should  make  application  to  the  Commissioner  of 
1 843  Internal  Revenue  for  permission  to  establish  such  replacement  fund  and  in  his 
application  should  recite  all  the  facts  relating  to  the  transaction  and  undertake 
that  he  will  proceed  as  expeditiously  as  possible  to  replace  or  restore  such  property  and 
an  affidavit  as  to  the  truthfulness  of  the  statements  made  should  be  attached  to  the 
application. 

The  taxpayer  will  be  required  to  furnish  a bond  with  such  security  or  surety  as 
1 844  the  Commissioner  of  Internal  Revenue  may  require  for  an  amount  not  less  than 
the  estimated  additional  excess  profits  and  income  taxes  assessable  by  the  United 
States  upon  the  income  so  carried  to  the  replacement  fund;  or  at  the  option  of  the  tax- 
payer and  in  lieu  of  such  bond  the  taxpayer  may  deposit,  as  security  for  such  estimated 
additional  amount  of  tax,  obligations  of  the  United  States  issued  after  September  1,  1917, 
•uch  obligations  to  be  held  in  trust  as  such  security  under  such  agreement  as  may  be 
prescribed  by  the  Commissioner  of  Internal  Revenue,  in  a bank  or  trust  company  approved 
by  him. 

In  any  such  case,  when  the  replacement  or  restoration  is  made  the  new  or  restored 

1 846  property  shall  not  be  valued  in  the  accounts  of  the  taxpaper  at  an  amount  in 
excess  of  that  at  which  the  requisitioned,  damaged,  or  destroyed  property  was 

carried,  except  and  to  the  extent  that  such  new  or  restored  property  has  an  increased 
productive  capacity. 

Article  94  of  Regulations  No.  33  (Revised)  as  hereby  modified  shall  apply  to 
1 846  individuals  and  partnerships  as  well  as  to  corporations.  (T.  D.  2706,  April  25 
1918.) 

1847  Form  for  Instruments  Required  Under  Above  Regulation. — The  following  form 
is  prescribed  to  facilitate  compliance  with  T.  D.  2706  [lfl840]  regarding  the  establish- 
ment of  a replacement  fund  in  the  case  of  property  requisitioned  for  war  uses  or  lost  or 
destroyed  in  whole  or  in  part  through  war  hazards: 

1848  Form  1114.  U.  S.  Internal  Revenue. 

INCOME  AND  EXCESS  PROFITS  TAXES. 

APPLICATION  UNDER  T.  D.  2706  FOR  PERMISSION  TO  ESTABLISH  A 

REPLACEMENT  FUND. 

To  THE  Commissioner  of  Internal  Revenue: 

1.  The  undersigned  (individual)  (partnership)  (corporation)  represents  that  as  a 
result  of  suit  or  otherwise  he  has  secured  payment  by  way  of  damages  or  compensation 
for  property  title  to  which  has  been  requisitioned  for  war  uses,  or  property  which  has 
been  lost  or  destroyed  in  whole  or  in  part  through  war  hazards,  to  an  amount  in  excess 
of  the  value  of  the  property  on  March  1,  1913,  or  of  its  cost  iif  acquired  after  that  date, 
and  that  he  desires  and  intends  to  use  the  entire  sum  received  as  compensation  for  the 
replacement  in  kind  of  the  lost  or  damaged  property. 

2.  It  being  impracticable  owing  to  war  conditions  to  make  such  a replacement  for  a 
considerable  time,  the  undersigned  hereby  makes  application  for  permission  to  establish 
a replacement  fund  in  which  the  entire  amount  of  the  compensation  so  received  will  be 
held  (unless  the  property  requisitioned,  lost  or  damaged,  constituted  all  or  part  of  the 
security  under  a mortgage  or  trust  indenture,  in  which  event  the  amount  carried  to  the 
replacement  fund  will,  subject  to  the  approval  of  the  Commissioner  of  Internal  Revenue, 
be  the  amount  of  compensation  received,  less  the  amount,  if  any,  which  becomes  payable 
out  of  such  compensation  under  the  terms  of  such  instrument  or  the  obligations  thereby 
•ecured). 

3.  Attached  hereto  as  Schedule  A and  made  a part  hereof  Is  a statement  reciting  all 
the  facts  relating  to  the  transaction,  including  the  nature  of  the  property,  the  character 
and  extent  of  the  loss,  the  manner  and  date  of  securing  compensation,  the  date  of  acquisi- 
tion of  the  property  and  its  cost  or  fair  value  on  March  1,  1913,  the  amount  of  compensa- 
tion, the  amount  necessary  to  make  the  damage  good,  a description  of  the  replacement 
intended  and  the  steps  already  taken  to  that  end,  the  probable  date  of  completion,  the 
estimated  additional  excess  profits  and  income  taxes  assessable  upon  the  income  carried 
to  the  replacement  fund,  and  all  other  matters  which  might  affect  a determination. 

4.  The  undersigned  (a)  has  executed  and  will  cause  to  be  executed  by  a surety  company 
in  good  standing  the  bond  hereto  annexed  as  Schedule  B in  an  amount  not  less  than  the 
estimated  additional  excess  profits  and  income  taxes  assessable  by  the  United  States 
upon  income  carried  to  the  replacement  fund,  or  (b)  has  executed  the  agreement  hereto 
annexed  as  Schedule  C and  will  deposit  as  security  for  such  estimated  additional  amount 
of  tax  obligations  of  the  United  States  issued  after  September  1,  1917,  to  at  least  an  equal 
amount,  to  be  held  in  trust  as  such  security  in  a bank  or  trust  company  approved  by  the 
Commissioner  of  Internal  Revenue. 


INC. 


184  TAX 


CORPORATIONS. 


5.  The  undersigned  undertakes  that  he  will  proceed  as  expeditiously  as  possible 
to  replace  or  restore  such  property,  and  covenants  that  when  the  replacement  or  restoration 
is  made,  the  new  or  restored  property  will  not  be  value^d  in  his  accounts  at  an  amount 
in  excess  of  that  at  which  the  requisitioned,  damaged  or  destroyed  property  was  carried, 
except  and  to  the  extent  that  such  new  or  restored  property  has  an  increased  productive 
capacity. 

IN  WITNESS  WHEREOF  the  undersigned  individual  has  hereunto  set  his  hand  and 
seal,  or  the  undersigned  partnership  has  executed  this' instrument  under  the  hand  and  seal 
of  one  of  its  members,  or  the  undersigned  corporation  has  caused  these  presents  to  be 

subscribed  by  one  of  Its  officers  and  its  corporate  seal  to  be  hereunto  affixed,  all  the 

day  of 19. in  triplicate. 

(L.  S.) 

(L.S.) 

State  of \ 

County  of / * . , . i ■ ^ . . • . 

being  duly  sworn,  deposes  and  says  that  he  is  the  individual 

applicant  above-named,  'or  is  a member  of  the  partnership  above-named,  or  is  an  officer 
of  the  corporation  above-named,  and  that  the  statements  made  in  the  foregoing  application 
are  true  to  the  best  of  deponent’s  knowledge,  information  and  belief.  | < ! 

Subscribed  and  sworn  tol  , .■  > 

before  me / 


1849  \ ■ Schedule  A.  ’ * ’ 

STATEMENT  OF  FACTS/ 

Name  of  applicant 1 . . 

Address . .1  . , 

Business . .K  . 

Nature  of  property  involved 


How  requisitioned,  lost  or  destroyed 


How  com.pensation  secured 


Date  of  receipt  of  payment 


Cost  (or  fair  value  on  March  1,  1913) $ 

Amount  of  compensation $ 

Excess  over  cost  or  value  on  March  1,  1913 $ 

Amount  necessary  to  make  damage  good $ 

Nature  of  replacement  intended 


Steps  already  taken 


Probable  date  of  completion  of  replacement • • • 

Amount  deductible  from  replacement  fund  pursuant  to  any  mortgage $...... 

Estimated  additional  excess  profits  tax $ 

Estimated  additional  income  tax ■ 

Surety  on  bond  or  bank  for  deposit  of  securities 


1850  Schedule  B.  ■ 

BOND. 

KNOW  ALL  MEN  BY  THESE  PRESENTS  that  

as  principal,  and  , as  surety,  are  held  and 

firmly  bound  unto  the  United  States  of  America  in  the  sum  of  dollars, 

lawful  money  of  the  United  States,  for  the  payment. whereof  we  bind  ourselves,  our  heirs, 
executors,  administrators,  successors,  and  assigns,  jointly  and  severally,  firmly  by  these 
presents.  - . 

WHEREAS  the  above-bounden  principal  has  made  application  to  the  Commissioner 
of  Internal  Revenue  for  permission  to  establish  a replacement  fund  pursuant  to  Treasury 
Decision  2706  of  April  25,  1918,  and  it  appears  that  the  amount  of  this  bond  is  not  less 
than  the  estimated  additional  excess  profits  and  income  taxes  assessable  by  the  United 
States  upon  the  income  to  be  carried  to  the  replacement  fund; 

^ NOW,  THEREFORE,  the  condition  of  the  foregoing  obligation  Is  such  that  If  the 
principal  shall  either  dispose  of  said  replacement  fund  as  specified  in  said  application  and 

18i5 


INC. 


.TAX 


CORPORATIONS. 


complete  said  replacement  on  or  before  the  final  date  set  in  the  permit  granted  by  the 
Commissioner  of  Internal  Revenue,  or  account  for  and  pay  the  additional  excess  profits 
and  income  taxes  assessable  upon  the  income  so  carried  to  the  replacement  fund  at  the 
rate  of  tax  in  force  at  the  time  of  the  original  receipt  of  such  income,  and  shall  otherwise 
well  and  truly  perform  and  observe  all  the  covenants  and  conditions  contained  in  the 
instruments  annexed  and  hereto  and  all  the  provisions  of  law  and  the  regulations,  then 
this  obligation  is  to  be  void,  but  otherwise  to  remain  in  full  force  and  virtue. 


WITNESS  our  hands  and  seals  in 
Signed,  sealed  and  de- 
livered in  the  pres- 
sence  of 

triplicate  this  . . . . 

Principal. 

19.  . 

....(L.  S.) 
....(L.  S.) 

. . . . ru  s.') 

..  fL.  S.') 

BOND  ^APPROVED  this 

Surety. 

, 19.... 

Commissioner  of  Internal  Revenue. 


1851 


Schedule  C, 

DEPOSIT  AGREEMENT. 
of 


, a corporation  of  the  State  of 


AN  AGREEMENT  between  

party  of  the  first  part,  and  

party  of  the  second  part. 

WHEREAS  the  party  of  the  first  part  has  made  application  to  the  Commissioner  of 
Internal  Revenue  for  permission  to  establish  a replacement  fund  under  Treasury  Decision 
2706  of  April  25,  1918,  in  accordance  with  the  instrument  hereto  annexed,  and  has  elected 
in  lieu  of  a bond  to  deposit  as  security  for  the  estimated  additional  excess  profits  and  income 
taxes  assessable  by  the  United  States  upon  the  income  to  be  carried  to  the  replacement 
fund  obligations  of  the  United  States  issued  after  September  1,  1917; 

NOW,  THEREFORE,  in  consideration  of  a valuable  consideration  to  each  of  the 
parties  hereto  in  hand  paid  by  the  other,  the  receipt  whereof  is  hereby  acknowledged,  it 
IS  covenanted  and  agreed  as  follows: 

1.  The  party  of  the  first  part  has  deposited  with  the  party  of  the  second  part  obliga- 
tions of  the  United  States  issued  after  September  1,  1917,  for  a principal  amount  not 
less  than  the  estimated  taxes  aforesaid,  in  bearer  form  or  with  transfer  power  attached, 
described  as  follows: 

No.  Name  Denomination  Total 


Aggregate  total.  . $ 

2.  Such  obligations  are  to  be  held  in  trust  by  the  party  of  the  second  part  as  security 
for^  the  payment  of  the  additional  excess  profits  and  income  taxes  assessable  by  the 
United  States  upon  the  income  carried  to  said  replacement  fund  at  the  rate  of  tax  in  force 
at  the  time  of  the  original  receipt  of  such  income;  provided  the  party  of  the  first  part  shall 
not  dispose  of  said  replacement  fund  as  specified  in  said  application  and  complete  said  re- 
placement on  or  before  the  final  dates  set  in  the  permit  hereto  annexed  granted  by  the 
Commissioner  of  Internal  Revenue. 

3.  Honor  before  the  date  set  in  said  permit  said  replacement  shall  be  completed,  as 
evidenced  by  an  acknowledgment  in  writing  to  such  effect  signed  by  the  Commissioner  of 
Internal  Revenue,  the  party  of  the  second  part  shall  thereupon  surrender  said  obligations 
to  the  party  of  the  first  part  or  upon  his  order,  and  the  receipt  therefor  of  the  party  of  the 
first  part  shall  constitute  full  satisfaction  and  discharge  of  any  liability  of  the  party  of  the 
second  part  hereunder.  The  Commissioner  of  Internal  Revenue  may  similarly  at  any  time 
and  from  time  to  time  authorize  the  surrender  of  such  portion  of  said  obligations  as  In  his 
judgment  the  progress  of  said  replacement  shall  justify. 

4.  If  on  the  date  set  in  said  permit  the  party  of  the  second  part  shall  not  have  received 
such  final  written  acknowledgment  from  the  Commissioner  of  Internal  Revenue,  it  shall 
hold  and  deliver  said  obligations,  or  the  remainder  of  them,  in  all  respects  subject  to  the 
order  of  the  Commissioner  of  Internal  Revenue,  and  at  his  direction  shall  proceed  to  sell 
said  obligations  at  public  or  private  sale,  with  or  without  notice  thereof,  and  shall  apply 
the  proceeds  thereof  to  the  payment  of  said  taxes  and  any  other  taxes  due  from  the  party 
of  the  first  part,  and  Interest,  penalties  and  expenses  of  the  sale,  paying  the  residue.  If  any, 
to  the  party  of  the  first  part.  After  said  date  the  receipt  of  the  Commissioner  of  Internal 
Revenue  shall  constitute  full  satisfaction  and  discharge  of  any  liability  of  the  party  of  the 
second  part  hereunder. 

5.  The  party  of  the  second  part  accepts  the  trust  hereunder  and  acknowledges  the 
receipt  and  deposit  of  said  obligations. 


INC. 


186  TAX 


CORPORATIONS. 


WITNESS  our  hands  and  seals  inTriplicate  this  day  of 

Signed,  sealed  and  

delivered  in  the  

presence  of  


AGREEMENT  APPROVED  this day  of 


, 19.. 

(L.  S.) 

(L.  S.) 

(L.  S.) 

(L.  S.) 

(L.  S.) 

(L.  S.) 

19 


Commissioner  of  Internal  Revenue. 
PERMIT  TO  ESTABLISH  REPLACEMENT  FUND. 

Treasury  Department, 

Office  of  Commissioner  of  Internal  Revenue, 
Washington,  D.  C., , 19.  . . , 

UPON  the  application  and  schedules  hereto  annexed  the  Commissioner  of  Internal 
Revenue  hereby  grants  permission  to  establish  a replacement  fund  pursuant  thereto,  and 
directs  that  pending  the  disposition  of  the  amount  held  therein  the  accounting  for  gain 

or  loss  thereupon  m.ay  be  deferred  for  the  period  of  time  ending 19.  . . .,^ 

or  such  further  date  as  he  may  determine  to  be  reasonable  and  endorse  hereupon.  This 
permit,  however,  is  expressly  conditioned  upon  the  applicant  forthwith  furnishing  a bond 
in  the  prescribed  form  approved  by  the  Commissioner  of  Internal  Revenue,  or  executing 
an  agreement  in  the  prescribed  form  and  depositing  subject  thereto  obligations  of  the 
United  States  issued  after  September  1,  1917,  in  an  amount  and  in  a bank  or  trust  company 
approved  by  the  Commissioner  of  Internal  Revenue. 


Commissioner  of  Internal  Revenue. 

1 852  INSTRUCTIONS 

1.  The  applicant  should  execute  the  form  of  application  in  triplicate  and  fill  out 
Schedule  A.  He  should  also  attach  to  Schedule  A a statement  of  any  other  special  features 
of  the  situation  which  might  help  the  Commissioner  in  arriving  at  a decision. 

2.  The  applicant  should  execute  the  bond  (Schedule  B)  or  the  deposit  agreement 
(Schedule  C)  in  triplicate,  inserting  the  amount  and  indicating  the  surety  or  bank  proposed. 

3.  The  applicant  should  then  forward  all  three  copies  of  the  for  n to  the  Commissioner 
of  Internal  Revenue,  who  will  consider  the  application  and  if  he  grants  it  will  sign  the  permit 
and  return  the  form  of  the  applicant. 

4.  The  applicant  should  then  forthwith  procure  the  completion  of  the  bond  or  deposit 
agreement  in  triplicate  and  submit  it  for  approval  by  the  Commissioner,  which  must  be 
given  before  the  permit  will  become  effective.  (T.  D.  2733,  June  17,  1918.) 


1 853  Depositaries  and  Sureties  Acceptable  under  Above  Regulations. — To  facilitate 
compliance  with  the  provisions  of  T.  D.  2706  [^1840]  of  April  25,  1918,  which  permits 
the  establishment  of  a replacement  fund  in  the  case  of  property  requisitioned  for  war 
uses  or  lost  or  destroyed  in  whole  or  in  part  through  war  hazards,  applicants  are  notified 
that  only  active  depositaries  of  public  moneys  and  surety  companies  holding  certificates 
of  authority  from  the  Secretary  of  the  Treasury  as  acceptable  sureties  on  Federal  bonds 
will  be  approved  as  sureties  or  depositaries  under  Schedules  B and  C of  Form  114,  pre- 
scribed by  T.  D.  2733  [^1850  and  1l851]  of  June  17,  1918.  (T.  D.  2755,  August  26,  1918.) 


1 854  Law  1(43.  Basis  For  Determining  Gain  or  Loss. — “Sec.  202.  (a)  That  for  the 
purpose  of  ascertaining  the  gain  derived  or  loss  sustained  from  the  sale  or  other 
disposition  of  property,  real,  personal,  or  mixed,  the  basis  shall  be — ” [^3102.] 


1 855  Law  ^44.  Basis  For  Determining  Gain  or  Loss  in  the  Case  of  Property  Acquired 
Prior  to  March  1,  1913. — “(1)  In  the  case  of  property  acquired  before  March  I, 
1913,  the  fair  market  price  or  value  of  such  property  as  of  that  date;  and”  [^3102.] 

1856  Method  of  Determining  Value  as  of  March  1,  1913. — Np  method  of  determining 
this  value  can  be  stated  by  the  department  which  will  adequately  meet  all  cir- 
cumstances. What  that  value  was  is  a question  of  fact  to  be  established  by  any  evidence 
which  will  reasonably  and  adequately  make  it  appear.  (Art.  4,  ^63,  Reg.  33,  Rev.,  Jan. 
2,  1918.) 


1 857  Determination,  in  the  Case  of  Stock,  of  ^‘Fair  Market  Price  or  Value”  as  of  March 
1,  1913. — This  office  is  in  receipt  of  your  letter  of  November  20,  1916,  in  matter  of 
computing  gain  or  loss  on  sale  of  property  acquired  prior  to  March  1,  1913,  and  asking 
whether 

“In  case  of  the  sslc  of  stock  traded  in  on  the  exchange,  shall  the  opening  price  on 


INC. 


187  TAX 


CORPORATIONS. 


March  1st,  or  the  closing  price,  or  the  average  price  for  the  day,  be  taken  as  the  basis?” 
Under  paragraph  (c)  of  Section  2 and  paragraph  (4)  of  Section  5,  Act  of  September 

1858  8,  1916,  in  case  of  property  acquired  prior  to  March  1,  1913,  “the  fair  market  price 
or  value  of  such  property  as  of  March  1,  1913,  shall  be  the  basis  for  determining 

the  amount  of  gain  or  loss”  upon  sale  or  other  disposition  of  the  property. 

“The  fair  market  price  or  value  as  of  March  1”  is  held  to  be  the  fair  market  price 

1859  or  value  as  of  the  entire  day  of  March  1,  which,  in  the  case  of  variation  between 
“opening  and  closing  price”  for  the  day,  would  mean  the  average  price  for  the 

day.  This,  however,  would  be  conditioned  upon  showing  that  the  exchange  quotation 
represented  the  fair  market  price  or  value  of  the  stock,  as  it  is  this  “fair  market  price  or 
value”  which  is  to  control,  however  that  fact  may  be  ascertained.  (Letter  to  The  Corpo- 
ration Trust  Companv,  signed  by  Commissioner  W.  H.  Osborn,  and  dated  November 
21,  1916.) 

1 860  Law  f45.  Basis  For  Determining  Gain  or  Loss  in  the  Case  of  Property  Acquired 
Subsequent  to  March  1,  1913. — “(2)  In  the  case  of  property  acquired  on  or  after 
that  date  [March  1,  1913],  the  cost  thereof;  or  the  inventory  value,  if  the  inventory 
is  made  in  accordance  with  section  203  [^[1861].”  tf3102.] 

1 861  Law  ^50.  Inventories. — “Sec.  203.  That  whenever  in  the  opinion  of  the  Commis- 
sioner the  use  of  inventories  is  necessary  in  order  clearly  to  determine  the  income 
of  any  taxpayer,  inventories  shall  be  taken  by  such  taxpayer  upon  such  basis  as  the  Com- 
missioner, with  the  approval  of  the  Secretary,  may  prescribe  as  conforming  as  nearly  as 
may^  be  to  the  best  accounting  practice  in  the  trade  or  business  and  as  most  clearly  re- 
flecting the  income.”  [For  “Inventories”  in  Reg.  No.  45,  see  ^3109.] 

[Heretofore  there  has  been  no  specific  reference  to  inventories  in  the  law.] 

1 862  L For  the  purposes  of  income  and  excess  profits  tax  returns,  inventories  of  mer- 
chandise, etc.,  and  of  securities,  will  be  subject  to  the  following  rules: 

1 863  A.  Inventories  of  supplies,  raw  materials,  work  in  process  of  production  and  unsold 
merchandise,  must  be  taken  either  (a)  at  cost,  or  (b)  at  cost  or  market  price  which- 
ever is  lower;  provided  that  the  method  adopted  must  be  adhered  to  in  subsequent  years 
unless  another  be  authorized  by  the  Commissioner  of  Internal  Revenue. 

B.  A dealer  in  securities  who  in  his  books  of  account  regularly  inventories  unsold 
1 864  securities  on  hand  either  (a)  at  cost,  or  (b)  at  cost  or  market  price  whichever  is  lower, 

may  for  purposes  of  income  and  excess-profits  taxes  make  his  return  upon  the 
basis  upon  which  his  accounts  are  kept;  provided  that  a description  of  the  method  em- 
ployed shall  be  included  in  or  attached  to  the  return,  that  all  the  securities  must  be  in- 
ventoried by  the  same  method,  and  that  such  method  must  be  adhered  to  in  subsequent 
years  unless  another  be  authorized  by  the  Commissioner  of  Internal  Revenue. 

C.  Gain  or  loss  resulting  from  the  sale  or  disposition  of  assets  inventoried  as 
1 865  above  must  be  computed  as  the  difference  between  the  inventory  value  and  the 

price  or  value  at  which  sold  or  disposed  of. 

1 866  2.  In  all  other  cases  inventories  must  be  taken  at  cost  or  at  value  as  of  March  1, 
1913,  as  the  case  may  be.  (T.  D.  2609,  Dec.  19,  1917.) 

1867  T.  D.  2609  [1[1862],  issued  under  date  of  December  19,  1917,  authorizes  dealers  in 
merchandise  and  dealers  in  securities  to  make  their  incomp-tax  and  excess-profits 

ta;^  returns  upon  the  basis  of  inventories  taken  “at  cost  or  at  market  price,  whichever  is 
lower.” 

The  legality  of  this  authorization  having  been  questioned,  the  matter  was  referred 

1868  to  the  Attorney  Genera].,  who  advises  that  the  general  principle  at  issue  is  involved 
In  cases  pending  in  the  Supreme  Court  of  the  United  States  and  that  an  early  de- 
cision may  be  reasonably  expected.  Pending  this  decision  [^1871]  returns  made  upon  the 
basis  of  T.  D.  2609  will  be  tentatively  accepted. 

If  the  ruling  of  the  Attorney  General  should  be  adverse  to  the  principle  enunciated 
1 869  in  the  Treasury  decision  referred  to,  dealers  in  merchandise  or  in  securities  who 
shall  have  made  returns  on  the  basis  of  inventories  taken  at  a value  other  than 
cost  will  be  required  to  make  amended  returns  upon  the  basis  of  inventories  taken  at  cost. 
In  making  their  returns  in  the  first  instance,  for  the  taxable  year  1917,  dealers  in  mer- 
chandise or  In  securities  will  be  required  to  indorse  upon  or  attach  to  such  returns  a state- 
ment specifying  the  basis  upon  which  the  inventories  were  taken,  whether  at  cost  or  market 
price. 

For  the  purposes  of  T.  D.  2609  and  this  decision,  a dealer  in  securities  is  a mer- 
1870  chant  of  securities,  whether  an  individual,  partnership,  or  corporation,  with  an 
.established  place  of  business  and  whose  principal  business  is  the  purchase  of  se- 
curities and  their  resale  to  customers,  that  is,  one  who,  as  a merchant,  buys  securities  and 


INC. 


188 


TAX 


CORPORATIONS. 


sells  them  to  customers  with  a view  to  the  gains  and  profits  that  may  be  derived  therefrom. 
Taxpayers  who  buy  and  sell  or  hold  securities  for  investment  or  speculation,  and  not  in  the 
course  of  an  established  business,  officers  of  corporations  or  members  of  partnerships 
who  in  their  individual  capacities  buy  and  sell  securities  are  not  “dealers  in  securities’* 
within  the  meaning  and  purpose  of  T.  D.  2609  or  this  decision,  and  in  all  such  latter  cases 
inventories,  if  taken,  must  be  taken  at  cost  and  the  gain  or  loss  will  be  determined  and  taken 
into  account  as  the  securities  are  sold  and  the  transactions  closed.  (T.  D.  2649,  Feb.  16, 
1918.) 

1 87  1 A question  had  arisen  as  to  the  legality  of  the  authorization  by  Treasury  Decision 
No.  2609  [^1862]  of  returns  for  income  and  excess-profits  tax  purposes  upon  the 
basis  of  inventories  taken  “at  cost  or  market  value,  whichever  is  lower,”  the  matter  was 
referred  to  the  Attorney-General.  (See  T.  D.  2649  [^1867]).  The  Attorney-General  has 
advised  upon  the  basis  of  a recent  decision  of  the  Supreme  Court  (Doyle  v.  Mitchel 
Brothers,  decided  May  20th  last  [(247  U.  S.  179)  (Page  579,  1918  Income  Tax  Service)]) 
that  the  methods  of  taking  inventories  authorized  by  Treasury  Decision  No.  2609  are  per- 
missible. That  decision  supplemented  by  the  last  paragraph  [^1870]  of  Treasury  Decision 
No.  2649  defining  “a  dealer  in  securities”  therefore  continues  to  stand  as  a regulation  of  the 
Department.  (T.  D.  2744,  July  3,  1918.) 

1872  Sale  of  Property  in  General. — Section  10  of  this  title  provides  that  for  the  purpose 
of  ascertaining  the  gain  derived  from  the  sale  or  other  disposition  of  property,  real, 

personal,  or  mixed,  acquired  prior  to  March  1,  1913,  the  fair  market  price  or  value  of  such 
property,  as  of  that  date,  shall  be  the  basis  for  determining  the  amount  of  such  gain  derived. 

1873  This  provision  contemplates  that  all  such  gain  realized  and  so  ascertained,  in  cash 
or  its  equivalent,  upon  the  sale  or  disposition  of  capital  assets,  shall  be  returned  as 

gross  income.  In  the  case  of  property  acquired  subsequent  to  March  1,  1913,  and  later 
sold  or  disposed  of  the  difference  between  the  cost  and  the  selling  price  will  be  returned 
as  income  for  the  year  in  which  the  sale  Is  made.  (Art.  116,  ^[387-388,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

1 874  In  the  case  of  the  sale  of  assets — real,  personal,  or  mixed — the  loss  will  be  the 
difference  between  the  cost  thereof,  or  the  value  as  of  March  1,  1913,  if  acquired 
before  that  date,  and  the  price  at  which  disposed  of.  When  the  loss  is  claimed  through 
the  destruction  of  property  by  fire,  flood,  or  other  casualty  the  amount  deductible  will  be 
the  difference  between  the  value  as  of  March  1,  1913,  or  the  cost  of  the  property  and  the 
salvage  value  thereof,  including  in  the  latter  value  the  amount,  if  any,  that  has  been  or 
should  have  been  set  aside  and  deducted  in  the  current  or  previous  years  from  gross  in- 
come on  account  of  depreciation  and  which  has  not  been  paid  out  in  making  good  the 
depreciation  sustained.  (Art.  147,  ^458,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1875  Sale  of  Stock. — When  stock  is  sold  from  lots  purchased  at  different  times  and  at 
different  prices  and  the  identity  of  the  lots  can  not  be  determined  as  to  the  dates 

of  purchase,  the  stock  sold  shall  be  charged  against  the  earliest  purchases  of  such  stock. 
The  excess  of  the  amount  realized  on  the  sale  over  the  cost  of  the  stock,  or  its  fair  market 
price  or  value  as  of  Marcii  1,  1913,  if  purchased  before  that  date,  will  be  the  profit  to  be 
accounted  for  as  income.  In  the  case  of  stock  received  as  a stock  dividend  out  of  surplus 
other  than  earnings  or  profits  accrued  since  March  1,  1913,  or  of  stock  in  respect  of  which 
any  such  dividend  was  paid,  the  cost  of  each  share  of  such  stock  shall  be  ascertained  as 
specified  in  paragraph  28  [1f826]  hereof.  (^60.  of  Art.  4,  Rev.  33,  Rev.  fan.  2,  1918, 
as  amended  by  T.  D.  2734,  June  17,  1918.)  ' [112846.] 

1876  Sale  of  Property  Acquired  for  Stock  of  Excessive  Aggregate  Far  Value. — Incases 
wherein  property  was  taken  over  in  exchange  for  the  capital  stock  of  a corporation 

at  a par  value  in  excess  of  the  fair  market  value  of  the  property,  and  such  property  should 
be  later  sold,  it  will  be  necessary  to  ascertain  as  nearly  as  possible  the  fair  market  value 
of  the  property  at  the  time  it  was  taken  over  or  as  of  March  1,  1913,  if  acquired  before 
that  date,  and  any  excess  over  this  ascertained  fair  market  value  at  which  the  property 
is  sold  will  be  held  to  be  profit  or  income  to  the  corporation  for  the  year  in  which  the  sale 
was  made.  (Art.  Ill,  1[381,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1877  Sale  of  Property  Acquired  for  Nominal  Sum  Merely. — Similar  action  may  be  taken 
in  cases  wherein  corporations  acquire  property  prior  to  March  1,  1913,  for  a mere 

nominal  sum  and  which  had,  as  of  March  1,  1913,  a value  greatly  In  excess  of  such  nominal 
sum.  A careful  estimate  of  the  fair  market  value  of  such  property  as  of  March  1,  1913, 
may  be  made  and  set  up  as  the  capitrd  invested  in  the  property,  and  if  such  property  is 
thereafter  disposed  of  at  a price  in  excess  of  such  fair  market  value,  the  amount  so  in 
excess  will  be  treated  as  income  to  be  accounted  for  in  preparing  the  return  of  annual  net 


INC. 


189 


TAX 


CORPORATIONS. 


income  of  the  year  in  which  the  property  is  sold.  The  value  of  the  property  fixed  in  the 
manner  and  for  the  purpose  hereinbefore  indicated  will  be  subject  to  the  approval  of  the 
Commissioner  of  Internal  Revenue. 

If  the  property  was  acquired  subsequent  to  March  1,  1913,  the  amount  for  which 
1 878  it  is  later  sold  or  disposed  of  in  excess  of  the  cost  price,  regardless  of  the  fact  that 
it  may  have  been  acquired  for  a mere  nominal  price,  will  constitute  income  for  the 
year  in  which  the  property  was  disposed  of  and  must  be  so  returned.  (Art.  112.  ^382- 
383,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1879  Sale  of  Real  Estate. — The  entire  profits  realized  by  individuals  or  corporations 
from  the  sale  of  real  estate  will  be  taxable  except  where  the  property  in  connection 
with  which  the  profit  is  obtained  was  acquired  prior  to  March  1,  1913,  * * * (T.  D. 

2090,  Dec.  14,  1914.) 

The  cost  of  property  acquired  subsequent  to  the  incidence  of  the  tax  will  be  the 
1 880  actual  price  paid  for  it,  together  with  the  expense  incident  to  the  procurement  of 
the  property  in  the  first  instance,  and  its  sale  thereafter,  and  the  cost  of  improve- 
ment or  betterment,  if  any.  (T.  D.  2005,  July  8,  1914.) 

1881  In  determining  the  cost  of  the  property  for  the  purpose  of  arriving  at  the  profit 
realized  upon  the  sale  it  will  be  permissible  for  the  corporation  to  add  to  the  initial 
cost  such  carrying  charges  as  interest,  taxes,  insurance,  etc.,  provided  such  carrying  charges 
have  not  been  deducted  from  net  income  which  the  corporation  may  have  had  and  returned 
for  years  subsequent  to  January  1,  1909,  and  prior  to  the  date  of  the  sale  to  the  property. 

T.  D.  2005  is  not  intended  to  be  so  construed  that  carrying  charges,  if  they  consist 
1 882  of  such  expenditures  as  constitute  allowable  deductions  from  gross  incomes,  arc 
to  be  added  to  the  cost  of  the  property  if  there  is  a gross  income  from  which  such 
charges  as  constitute  allowable  deductions  may  be  deducted.  It  is  intended,  however, 
that  in  the  case  of  a holding  or  developing  company  which  has  not  yet  reached  the  stage 
of  having  any  income  of  consequence  resulting  from  its  corporate  operations,  the  carrying 
charges  or  other  excess  over  the  incidental  income  received  may  be  added  to  and  made  a 
part  of  the  cost  of  the  property.  (T.  D.  2137,  Jan.  30,  1915.) 

1 883  In  reply,  you  are  informed  that  special  assessments,  if  any,  actually  paid  as  local 
benefits  in  connection  with  real  estate  are  held  to  be  expenditures  which  add  to  the 
value  of  the  property  and  should  be  capitalized.  Whether  such  expenditures  were  made 
prior  to,  or  subsequent  to,  the  incidence  of  the  tax;  that  is  to  say,  such  expenditures,  no 
matter  when  paid,  became,  in  effect,  a part  of  the  cost  of  the  property. 

All  carrying  charges  in  excess  of  the  income  which  may  have  been  received  prior 
1 884  to  the  sale  of  the  property  may  be  included  as  a part  of  the  cost  of  such  property, 
and  the  cost  thus  determined  will  be  excluded  from  the  gross  proceeds  of  the  sale 
when  the  property  is  sold,  and  the  excess  of  such  cost  will  be  returned  as  income. 

This  ruling  is  based  upon  the  presumption  that  the  corporation  is  doing  business, 
1 885  and,  having  income  as  a result  of  the  business  done,  must  use  such  income  to  offset 
in  as  far  as  it  will  do  so,  the  expense  necessary  to  the  operation  and  maintenance 
of  the  business. 

If  the  carrying  charges  are  less  than  the  income,  such  carrying  charges,  unless 
1 886  they  be  for  improvements  and  betterments,  will  not  be  added  to  and  made  a part  of 
the  cost  of  the  property,  but  will  be  deducted  from  the  gross  income  received, 
in  which  case  it  would  appear  that  the  return  of  the  corporation  would  show  a net  income 
subject  to  tax. 

The  Treasury  Decision  (T.  D.  2005)  referred  to  is  not  intended  to  be  so  construed 
1 887  that  the  carrying  charges,  if  they  consist  of  such  expenditures  as  constitute  allow- 
^ able  deductions  from  gross  income,  are  to  be  added  to  the  cost  of  the  property,  if 
there  is  a gross  income  from  which  such  charges  as  constitute  allowable  deductions  may  be 
deducted.  It  is  intended,  however,  that  in  the  case  of  a holding  or  developing  company 
which^  has  not  yet  reached  the  stage  of  having  any  income  of  consequence  resulting 
from  its  corporate  operations,  the  excess  of  the  carrying  charges  over  the  incidental  in- 
comfe  received  may  be  added  to  and  made  a part  of  the  cost  of  the  property.  (Letter  to 
The  Corporation  Trust  Company,  signed  by  Commissioner  W.  H.  Osborn,  and  dated 
December  22,  1914.) 

1 888  Real  Estate  Subdivisions. — In  the  case  of  real  estate  corporations,  which  purchase, 
or  shall  have  purchased,  a tract  of  land  with  a view  to  dividing  it  into  lots  or 
parcels  of  ground  to  be  sold  as  such,  the  entire  value,  as  of  March  1,  1913,  or  cost,  if 
acquired  subsequent  to  that  date,  shall  be  equitably  apportioned  to  the  several  lots  or 
parcels,  to  the  end  that  any  gain,  derived  from  the  sale  of  any  such  lots  or  parcels  may  be 
returned  as  income  for  the  year  in  which  the  sale  was  made. 


INC. 


190  TAX 


CORPORATIONS. 


This  rule  contemplates  that  there  will  be  a measure  of  gain  or  loss  in  every  lot  of 
I 889  parcel  sold,  and  does  not  contemplate  that  the  capital  invested  in  the  entire  tract 
'shall  be  extinguished  before  any  taxable  income  shall  be  returned.  The  sale  of 
each  lot  or  parcel  will  be  treated  as  a separate  transaction  and  the  gain  will  be  accounted 
for  accordingly.  If  a loss  results  from  the  sale  of  capital  assets,  the  amount  of  the  loss 
to  be  deducted  will  be  ascertained  in  a like  manner  as  if  a gain  had  been  realized,  and 
will  be  the  amount  by  which  the  selling  price  is  less  than  the  value,  as  of  March  1,  1913, 
or  less  than  the  cost,  if  acquired  subsequent  to  that  date,  as  the  case  may  be.  (Art.  117, 
11391-392,  Reg.  33,  Rev.,  Jan.  2,  1918.)  [1f2850.] 

1890  Sale  of  Real  Estate  or  other  Property  on  the  Installment  Plan. — [Amended  by 
T.  D.  2707,  which  see  at  1[1894.]  In  the  case  of  a contract  to  sell  real  estate  or 

other  property  on  the  installment  plan,  title  remaining  in  the  vendor  until  the  property 
is  fully  paid  for,  the  income  to  be  returned  by  the  vendor  will  be  that  proportion  of  each 
installment  payment  which  the  gross  profit  to  be  realized  when  the  property  is  paid  for 
bears  to  the  gross  contract  price.  If,  for  any  reason,  the  Vendee  defaults  in  his  install- 
ment payments  and  the  vendor  repossesses  the  property,  the  entire  amount  received  on 
installment  payments,  less  the  proportion  of  profit  previously  returned,  will  be  income  to 
the  vendor,  and  will  be  so  returned  for  the  year  in  which  the  property  was  repossessed. 
(Art.  117,  11390,  Reg.  33,  Rev.,  Jan.  2,  1918.)  [1[2851-6.] 

1891  Sale  of  Merchandise  on  Installments. — [Amended  by  T.  D.  2707,  which  see  at 
1[1894.]  Corporation  selling  furniture,  musical  instruments,  clothing,  furnishings, 

etc.,  on  the  installment  basis,  title  passing  to  the  vendee  at  the  time  of  sale,  will  treat 
such  contracts  as  accounts  receivable  and  as  “sales  during  the  year”  at  their  face  value, 
thus  accounting  for  as  income  the  difference  between  the  cost  and  the  sales  price.  If  the 
purchaser  defaults  in  payment  and  the  account  becomes  uncollectible  and  the  uncollected 
balance  is  charged  off,  the  amount  so  charged  off  may  be  deducted  as  a loss. 

In  all  cases  where  inventories  are  taken  (and  they  must  be  taken  where  the  business 

1892  consists  of  buying  and  selling  commercial  commodities)  for  the  purpose  of  ascer- 
taining the  gain  or  loss  resulting  from  the  business  of  the  year,  the  inventories 

must  be  taken  in  accordance  with  instructions  to  be  included  in  special  regulations  [1[1862] 
which  will  be  furnished  upon  application  to  the  collector  of  internal  revenue.  (Art.  120, 
1[395-396  Reg.  33,  Rev.,  Jan.  2,  1918.)  [1[2849.] 

1893  Income  From  Contract  Sales.— -[Amended  by  T.  D.  2707,  which  see  at  1[1894.1 
When  property  or  merchandise  is  disposed  of  under  a contract  of  sale,  payments 

to  be  made  in  installments,  title  remaining  in  the  vendor  until  the  contract  price  is  fully 
paid,  the  vendor  will  return  as  income  that  proportion  of  each  installment  payment, 
which  the  gross  profit  to  be  realized  when  the  contract  is  fully  performed,  bears  to  the 
gross  contract  price.  If  by  reason  of  the  default  in  payment  or  for  any  other  reason  the 
vendor  repossesses  the  property  he  will  return  as  income  the  entire  amount  of  the  install- 
ments up  to  that  time  received,  less  the  proportion  of  profits  previously  returned,  and  the 
repossessed  property  will  be  taken  into  stock  at  its  then  value,  that  is,  at  cost  less  a rea- 
sonable allowance  for  depreciation.  (Art.  120,  1[397,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 894  Amending  Instructions  Relative  to  Reporting  Income  Derived  From  the  Sale 
of  Personal  Property  on  the  Installment  Plan. — It  has  been  ascertained  that  dealers 

in  personal  property  who  sell  on  the  installment  plan  adopt  one  of  four  ways  of  protecting 
themselves  in  case  of  default,  namely: 

1.  A provision  that  title  is  to  remain  in  the  seller  until  the  buyer  has  performed 
his  part  of  the  agreement. 

2.  A conveyance  of  title  to  the  purchaser  subject  to  a lien  for  the  unpaid  portion 
of  the  purchase  price. 

3.  The  conveyance  to  the  purchaser  and  an  immediate  reconveyance  by  way  of 
chattel  mortgage  to  the  seller. 

4.  Conveyance  to  a trustee  in  trust  to  hold  the  title  pending  performance  of  the 
contract  and  subject  to  its  provisions. 

1 896  The  purpose  is  the  same  in  all  of  these  transactions. 

In  view  of  the  fact  that  in  a number  of  States  it  is  held  that  the  form  first  mentioned 
1896  shall  not  be  enforced  according  to  its  terms  but  tvill  be  regarded  as  a sale  with  a 
chattel  mortgage  back  to  secure  the  unpaid  purchase  price,  it  is  desirable  that 
a uniform  rule  be  established  which  will  be  equitable  and  applicable  to  all. 

The  rule  prescribed  is  that  in  the  sale  or  contract  for  sale  of  personal  property 
1 897  on  the  installment  plan,  whether  or  not  title  remains  in  the  vendor  until  the  property 
is  fully  paid  for,  the  income  to  be  returned  by  the  vendor  will  be  that  proportion 
of  each  installment  payment  which  the  gross  profit  to  be  realized  when  the  property  is 
paid  for  bears  to  the  gross  contract  price.  If,  for  any  reason,  the  vendee  defaults  in  his 


INC. 


191 


TAX 


CORPORATIONS. 


installment  payments  and  the  vendor  repossesses  the  property,  the  entire  amount  received 
on  installment  payments  less  the  profit  originally  returned  will  be  Income  to  the  vendor 
to  be  so  returned  for  the  year  In  which  the  property  was  repossessed. 

This  ruling  amends  Articles  117  [^1890]  and  120  [^[1891-1893]  of  Regulations  33, 
1 8S8  revised  and  revokes  all  previous  decisions  and  rulings  which  are  in  conflict  herewith. 
(T.  D.  2707,  April  25,  1918.)  1112849.] 

1 899  Method  of  Computing  Profit  or  Loss  from  Sale  of  Standing  Timber  or  of  Lumber 
Manufactured  Therefrom. — In  compliance  with  your  request  of  the  1st  instant, 
you  are  advised  that  the  following  information  is  furnished  you  in  regard  to  the  preparation 
of  your  returns  of  annual  net  income  under  the  provisions  of  the  Act  of  September  8,  1916, 
as  far  as  the  calculation  of  the  value  of  standing  timber  as  of  March  1,  1913,  is  concerned, 
and  it  also  represents  the  regulations  of  this  office  in  regard  to  allowances  to  be  deducted 
from  gross  income  for  the  value  of  stumpage:  ^Corporations  owning  timber  land  and  log- 
ging off  the  tim.ber  and  manufacturing  it  into  lumber,  will.  If  the  timber  was  acquired 
prior  to  March  1,  1913,  be  permitted  to  exclude  from  gross  Income  either  through  a de- 
duction from  gross  receipts  or  through  a charge  Into  the  cost  of  manufacturing  the  timber 
into  lumber,  an  amount  equivalent  to  the  fair  market  price  or  value  of  the  standing  timber 
as  of  March  1,  1913.  1[In  order  to  secure  the  benefit  of  this  deduction  such  corporations 
must  set  up  on  their  books  as  of  March  1,  1913,  the  fair  market  price  en  bloc^  of  all  the 
timber  then  owned  by  them,  and  then,  by  dividing  this  en  bloc  value  by  the  estimated 
num.ber  of  feet  (board  measure)  in  the  entire  timber  holdings,  the  per  unit  value  or  price 
as  of  March  1,  1913,  will  be  ascertained,  wffilch  per  unit  price  or  value  wdll  be  the  basis  for 
measuring  the  amount  wdiich  may  be  added  to  the  cost  of  manufacture,  or  deducted  from 
gross  income,  until  the  en  bloc  value  of  the  entire  holdings  as  of  March  1,  1913,  shall  have 
been  extinguished,  after  which  no  further  deduction  on  this  account  shall  be  allowed. 
^The  sam.e  rule  will  apply  In  the  case  of  timber  or  timber  lands  purchased  subsequent  to 
March  1,  1913,  the  only  difference  being  that  actual  cost,  that  is  the  gross  purchase  price, 
«hall,  in  miaking  the  computations,  be  substituted  for  en  price  or  value  as  of  that  date. 
If  the  entire  m.arket  price  or  value  of  both  timber  and  lands,  as  of  March  1,  1913.  or  the 
entire  cost,  if  acquired  subsequent  to  that  date,  is  extinguished  through  a deduction  from 
gross  incom.e  for  timber  used,  or  through  a per  unit  charge  to  cost  of  manufacturing  lumber, 
then  the  entire  amount  realized  from  the  logged-off  lands  or  for  other  salvage,  will  be 
returned  as  incom.e  of  the  year  In  ’.vhich  such  lands  are  sold  or  disposed  of.  1[If  the  timber 
or  timber  lands  are  sold  en  blor,  the  gain  or  loss  v/ill  be  ascertained  on  the  basis  of  the  dif- 
ference between  the  fair  market  price  or  cost  and  the  selling  price,  accordingly  as  the 
property  was  acquired  prior  or  subsequent  to  March  1,  1913.  lIThe  fair  market  price  or 
value  of  timber  or  tim.ber  lands,  as  of  March  1,  1913,  is  the  price  at  which  the  property 
in  its  then  condition  and  with  the  circumstances  then  surrounding  it,  could  have  been  sold, 
for  cash  or  its  equivalent.  This  value  must  not  be  speculative,  but  must  be  determined 
without  taking  into  account  any  prospective  profits  that  may  result  from  the  manu- 
facture of  the  tim.ber  into  lumber.  It  must  be,  as  the  law'  contemplates,  a fair  .market  value, 
and,  once  determ.ined,  must  be  set  up  on  the  books,  and,  as  the  measure  of  a stumpage 
deduction  for  Income  tax  purposes  must  remain  constant  and  cannot  be  increased.  The 
value  so  set  up  as  of  March  1,  1913,  will  be  subject  to  the  approval  of  the  Commissioner 
of  Internal  Revenue.  IfYou  are  also  Informed  that  this  office  is  not  prepared  to  express 
an  opinion  at  the  present  time  as  to  what  stum.page  value  would  constitute  a fair  value  of 
short  leaf  North  Carolina  pine  as  of  March  1,  1913,  and  in  regard  to  your  further  request 
you  are  informed  that  the  ruling  contained  in  the  above  regulation  wdll  refer  equally  as 
well  to  the  years  1913,  1914  and  1915,  w ith  the  exception  that  the  cost  of  the  timber  shall 
be  the  governing  basis  instead  of  its  value  as  of  htarch  1,  1913.  (Letter  to  a subscriber, 
signed  by  Deputy  Comm.issioner  L.  F.  Speer,  and  dated  March  3,  1917.) 

In  reply  [to  your  further  inquiry]  you  are  informed  that  in  preparing  returns  of  annual 
1 900  net  income  of  your  corporation  you  should  state  therein  your  opinion  of  the  fair 
market  price  or  value  of  your  timber  as  of  March  1,  1913,  and  calculate  your  income 
based  on  that  estimate.  When  an  examnnation  of  your  return  is  made,  the  figure  given 
therein  which  represents  the  fair  market  price  or  value  of  your  timber  as  of  hlarch  1,  1913, 
will  be  given  due  consideration,  and  in  the  event  that  it  appears  to  this  office  that  it  does 
not  represent  a fair  m.arket  price  or  value  of  your  ti;nber  as  of  March  1,  1913,  you  wdll  be 
so  advised  and  be  given  an  opportunity  to  present  reasons  and  facts  as  to  w'hy  the  figures 
given  in  your  returns  should  be  accepted.  (Letter  to  a subscriber — same  as  in  1[1899 — , 
signed  by  Deputy  Commissioner  L.  F.  Speer,  and  dated  iMarch  10,  1917.) 

ISOl  Sale  of  Property  for  Stock  or  Bonds  of  the  Purchasing  Corporation. — If 

corporation  sells  its  capital  assets  in  whole  or  in  part,  it  will  include  in  its  gross 
income  for  the  year  in  which  the  sale  was  juade  an  amount  equivalent  to  the  excess  of  the 
sales  price  over  the  fair  market  price  or  value  of  such  assets,  as  of  March  1,  1913,  if  acquired 
prior  to  that  date,  or  over  cost  If  acquired  subsequent  to  that  date. 


INC. 


192 


TAX 


CORPORATIONS . 


If  the  purchase  price  is  paid  with  stock  issued  by  a purchasing  company,  the  pur- 

1902  chase-price  will  be  the  actual  value  at  the  time  of  the  stock  issued  in  payment 
for  such  assets.  (Art.  101,  ^366-367,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1903  In  determining  the  profits  realized  or  the  loss  sustained  upon  the  sale  of  capital 

y assets  by  one  corporation  to  another,  payment  therefor  being  made  in  the  stocks 

or’bonds  of  the  purchasing  corporation,  the  profit  or  loss,  as  the  case  may  be,  from  such 
sale  will  be  ascertained  upon  the  basis  of  the  difference  between  the  cost  of  such  assets 
to  the  seller,  in  case  they  were  acquired  subsequent  to  March  1,  1913,  or  the  fair  market 
value  as  of  March  1,  1913,  if  acquired  prior  to  that  date,  and  the  fair  cash  value  of  the  stock 
or  bonds  at  the  time  the  sale  was  made.  (Art.  118,  ^393,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 904  Where  a subsidiary  or  other  corporation  sells  or  transfers  its  assets  to  a parent 
or  other  corporation  accepting  in  exchange  therefor  the  stock  or  bonds  of  the 
purchasing  corporation,  the  question  of  gain  or  loss  resulting  from  this  transaction  will 
be  determined  upon  the  basis  of  the  difference  between  the  cost  or  market  value  as 
above  indicated  of  the  assets  sold  and  the  actual  value  of  the  stock  or  bonds  given  in  ex- 
change therefor.  Any  gain  or  loss  thus  ascertained  as  resulting  from  such  a transaction 
will  be  added  to  or  deducted  from  the  entire  gross  income,  as  the  case  may  be,  of  the 
selling  corporation  in  the  year  in  which  the  capital  assets  were  sold.  (Art.  119,  ^394, 
Reg.  33,  Rev.,  Jan.  2,  1918.) 

1905  In  a case  wherein  a corporation  acquires  from  stockholders  the  stock  of  another 
corporation,  giving  in  exchange  therefor  its  owm  stock,  it  is  held  the  transaction  is 

one  by  which  the  corporation  acquiring  the  stock  becom.es  the  sole  stockholder  of  the  other 
corporation.  As  a result  of  this  transaction  no  income  accrues  to  the  corporation  whose 
stock  is  thus  acquired.  Neither  will  any  income  accrue  to  this  corporation  if  later  the 
holding  corporation  should  cause  the  assets  of  the  underlying  company  to  be  transferred 
to  it  for  mere  nominal  consideration. 

If,  however,  one  corporation  buys  the  assets  of  another  and  issues  direct  to  the 

1906  selling  company  its  own  capital  stock  in  payment  for  the  assets  acquired,  the 
transaction  will  be  treated  by  the  selling  company  as  a sale  of  its  assets,  and  the  ques- 
tion as  to  W'hether  profit  or  loss  results  from  the  sale  will  depend  upon  whether  or  not 
the  value  of  the  stock  taken  in  payment  for  the  assets  is  in  excess  of  the  fair  market  price 
or  value  as  of  March  1,  1913,  of  the  assets  sold  or  of  their  cost  accordingly  as  they  were 
acquired  by  the  selling  company  prior  or  subsequent  to  that  date.  ^If  the  value  of  the 
stock  is  so  in  excess,  the  amount  of  such  excess  will  be  taxable  income  for  the  year  in  which 
the  assets  were  sold  and  must  be  so  returned. 

If  the  excess  over  value  as  of  March  1,  1913,  or  over  cost,  as  the  case  may  be  includes 

1907  any  surplus  earned  since  March  1,  1913,  upon  which  the  income  tax  has  been 
paid,  the  excess  or  profits  resulting  from  the  sale  maybe  reduced  by  the  amount 

of  such  tax-paid  surplus. 

If  the  purchasing  corporation  takes  over  all  the  assets  including  accounts  receivable, 

1908  bills  receivable,  surplus,  etc.,  of  the  selling  corporation  and  assumes  its  liabilities, 
the  amount  so  assumed  will  be  considered  a part  of  the  purchase  price,  and  to  the 

extent  that  the  entire  purchase  price  exceeds  the  cost  or  value,  as  of  March  1,  1913,  as 
the  case  mav  be  of  the  assets  disposed,  income  will  accrue  to  the  selling  company.  (Art. 
124,  11410-414,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1909  Law  1146.  Property  Exchanged  for  Other  Property. — “(b)  When  property  is  ex- 
changed for  other  property,  the  property  received  in  exchange  shall  for  the  purpose 

of  determining  gain  or  loss  be  treated  as  the  equivalent  of  cash  to  the  amount  of  its  fair 
market  value,  if  any;”  [Read  at  1(3104-6.] 

1910  Law  1[47.  Stocks  or  Bonds  Exchanged  for  Stocks  or  Bonds  of  Equal  Aggregate 
Face  Value  in  Connection  with  Reorganizations,  Mergers,  or  Consolidations. — 

“but  when  in  connection  with  the  reorganization,  merger,  or  consolidation  of  a corporation 
a person  receives  in  place  of  stock  or  securities  owned  by  him  new  stock  or  securities  of  no 
greater  aggregate  par  or  face  value,” 

1911  Law  1(48.  “no  gain  or  loss  shall  be  deemed  to  occur  from  the  exchange,  and  the 
new  stock  or  securities  received  shall  be  treated  as  taking  the  place  of  the  stock, 

securities,  or  property  exchanged.”  [Read  at  113107.] 

1912  Law  1(49.  Securities  exchanged  for  securities  of  greater  par  or  face  value. — 
“When  in  the  case  of  any  such  reorganization,  merger  or  consolidation  the 

aggregate  par  or  face  value  of  the  new  stock  or  securities  received  Is  in  excess  of  the 
aggregate  par  or  face  value  of  the  stock  or  securities  exchanged,  a like  amount  in  par 
or  face  value  of  the  new  stock  or  securities  received  shall  be  treated  as  taking  the  place  of 


INC. 


193 


TAX 


CORPORATIONS. 


the  stock  or  securities  exchanged,  and  the  amount  of  the  excess  in  par  or  face  value  shall 
be  treated  as  a gain  to  the  extent  that  the  fair  market  value  of  the  new  stock  or  securities 
is  greater  than  the  cost  (or  if  acquired  prior  to  March  1,  1913,  the  fair  market  value  as  of 
that  date)  of  the  stock  or  securities  exchanged.”  [Read  at  ^3108.] 

1913  Law  1f51.  A Net  Loss  Suffered  in  One  Year  to  be  Allowed  as  a Deduction  in 
Computing  Net  Income  of  the  Previous  or  Succeeding  Year.  “Net  loss”  Defined. — 

“Sec.  204  (a).  That  as  used  in  this  section  the  term  “net  loss”  refers  only  to  net  losses  result- 
ing from  either”  jin  connection  with  “net  loss”  read  at  ^3114.] 

1914  Law  ^52.  “(1)  the  operation  of  any  business  regularly  carried  on  by  the  taxpayer, 

or” 

1915  Law  ^[53.  “(2)  the  bona  fide  sale  by  the  taxpayer  of  plant,  buildings,  machinery, 

equipment  or  other  facilities,  constructed,  installed  or  acquired  by  the  taxpayer 

on  or  after  April  6,  1917,  for  the  production  of  articles  contributing  to  the  prosecution  of 
the  present  war;” 

1916  Law  ^54.  “and  when  so  resulting  means  the  excess  of  the  deductions  allowed 
by  law  (excluding  in  the  case  of  corporations  amounts  allowed  as  a deduction  under 

paragraph  (6)  [dividends,  ^2102]  of  subdivision  (a)  of  section  234)  over  the  sum  of  the  gross 
income  plus  any  interest  received  free  from  taxation  both  under  this  title  and  under  Title 
III.” 

1917  Law  ^55.  Net  Loss  as  a Deduction  for  the  Preceding  Taxable  Year. — “(b)  If 
for  any  taxable  year  beginning  after  October  31,  1918,  and  ending  prior  to  January 

1,  1920,  it  appears  upon  the  production  of  evidence  satisfactory  to  the  Commissioner  that 
any  taxpayer  has  sustained  a net  loss,  the  amount  of  such  net  loss  shall  under  regulations 
prescribed  by  the  Commissioner  with  the  approval  of  the  Secretary  be  deducted  from  the 
net  income  of  the  taxpayer  for  the  preceding  taxable  year;” 

1918  Law  ^56.  Redetermination  of  Income  Tax  and  War  Excess-Profits  Tax  for  the 
Preceding  Year. — “and  the  taxes  Imposed  by  this  title  and  by  Title  III  [war  excess- 

profits  tax]  for  such  preceding  taxable  year  shall  be  redetermined  accordingly.” 

1919  Law  ^57.  Credit  for  or  Refund  of  Amount  Found  to  be  Due  the  Taxpayer  by 
Redetermination  of  Taxes  for  Prior  Year. — “Any  amount  found  to  be  due  to  the 

taxpayer  upon  the  basis  of  such  redetermination  shall  be  credited  or  refunded  to  the  tax- 
payer in  accordance  with  the  provisions  of  section  252  [^2488].” 

1 920  Law  1[58.  If  the  Net  Loss  to  be  Deducted  be  Greater  than  the  Net  Income  of 
the  Preceding  Year,  the  Excess  May  be  Deducted  from  the  Net  Income  of  the 
Succeeding  Year. — “If  such  net  loss  is  in  excess  of  the  net  income  for  such  preceding 
taxable  year,  the  amount  of  such  excess  shall  under  regulations  prescribed  by  the  Com- 
missioner with  the  approval  of  the  Secretary  be  allowed  as  a deduction  in  computing  the 
net  income  for  the  succeeding  taxable  year.” 

1921  Law  1[59.  Benefit  of  the  Net  Loss  Provision  Accrues  to  Members  of  a Partnership 
and  to  Beneficiaries  of  an  Estate  or  Trust. — “(c)  The  benefit  of  this  section  shall 

be  allowed  to  the  members  of  a partnership  and  the  beneficiaries  of  an  estate  or  trust  under 
regulations  prescribed  by  the  Commissioner  with  the  approval  of  the  Secretary.” 

In  connection  with  the  above  read  at  ^3114.[ 

1922  Law  1[287.  Items  Deducted  in  Computing  Net  Income  of  a Corporation. — “Sec.  234. 
(a)  That  in  computing  the  net  income  of  a corporation  subject  to  the  tax  imposed 

by  section  230  there  shall  be  allowed  as  deductions:” 

1923  Law  1[28.  “Paid  or  Incurred”  and  “Paid  or  Accrued”  Construed,— “The  term 
“paid,”  for  the  purposes  of  the  deductions  and  credits  under  this  title,  means 

“paid  or  accrued”  or  “paid  or  incurred,”  and  the  terms  “paid  or  incurred”  and  “paid  or 
accrued”  shall  be  construed  according  to  the  method  of  accounting  upon  the  basis  of  which 
the  net  income  is  computed  under  section  212  [1[754].”  [^2834.] 

1924  “Paid”  or  “actually  paid,”  within  the  meaning  of  this  title,  does  not  necessarily 
contemplate  that  there  shall  be  an  actual  disbursement  in  cash  or  its  equivalent. 

If  the  amount  involved  represents  an  actual  expense  or  element  of  cost  in  the  production 
of  the  income  of  the  year,  it  will  be  properly  deductible  even  though  not  actually  disbursed 
in  cash,  provided  it  is  so  entered  upon  the  books  of  the  company  as  to  constitute  a liability 
against  its  assets,  and  provided  further  that  the  income  is  also  returned  upon  an 
accrued  basis. 


INC. 


194  TAX 


CORPORATIONS, 


If  In  the  course  of  its  business,  a corporation  credits  the  accounts  of  individuals, 

1 925  firms,,  or  corporations  with  the  amount  of  any  expenses,  interest,  rentals,  wages, 
etc.,  due  them,  thereby  making  them  subject  to  the  personal  drawings  of  such 

creditors,  or  if  expenses  actually  Incurred  are  vouchered  in  definite  amounts,  the  amounts 
80  credited  or  vouchered  may  be  treated  as  paid,  and  if  the  amounts  so  credited  or  vouchered 
are  expenses  incurred  concurrently  with  and  in  the  production  of  the  income  of  the  year, 
they  may  be  allowably  deducted  therefrom. 

This  ruling  must  not  be  construed  to  allow  as  a deduction  any  accrued  charges 

1926  which  if  paid  in  cash  or  otherwise  would  not  be  deductible.  (Art.  126,  ^418-420. 
Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 927  Pursuant  to  the  foregoing  provision,  corporations  keeping  their  accounts  In  strict 
accord  with  the  methods  prescribed  by  municipal,  State,  or  Federal  authorities, 
or  In  accord  with  approved  standard  accounting  practices  consistently  followed  from 
year  to  year,  will  be  permitted  to  make  their  returns  of  annual  net  income  on  the  basis 
of  the  accounts  so  kept,  provided  such  systems  of  accounting  clearly  and  correctly  reflect 
the  net  income  of  each  year.  (Art.  127,  1[421,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 928  Under  this  provision  it  will  be  permissible  for  corporations  which  accrue  on  their 
books  monthly  or  at  other  stated  periods,  amounts  sufficient  to  meet  fixed  annual 
or  other  charges,  to  deduct  from  their  gross  income  the  amounts  so  accrued,  provided 
such  accruals  approximate  as  nearly  as  possible  the  actual  liabilities  for  which  the  accruals 
are  made,  and  provided  that  In  cases  wherein  deductions  are  made  on  the  accrual  basis  as 
hereinbefore  Indicated,  Income  from  fixed  and  determinable  sources  accruing  to  the  cor- 
porations must  be  returned,  for  the  purpose  of  the  tax,  on  the  same  basis. 

In  cases  wherein,  pursuant  to  the  consistent  practice  of  accounting  of  the  corpora- 
1 929  tion,  or  pursuant  to  the  requirements  of  some  Federal,  state,  or  municipal  super- 
vising authority,  corporations  set  up  and  maintain  reserves  to  meet  liabilities, 
the  amount  of  which  and  the  date  of  payment  or  maturity  of  which.  Is  not  definitely 
determlnedor  determlnableatthetime  the  liability  is  incurred,  it  will  be  permissible  for  the 
corporations  to  deduct  from  their  gross  income  the  amounts  credited  to  such  reserves 
each  year,  provided  that  the  amounts  deductible  on  account  of  the  reserves  shall  approxi- 
mate as  nearly  as  can  be  determined,  the  actual  amounts  which  experience  has  demon- 
strated would  be  necessary  to  discharge  the  liabilities  incurred  during  the  year  and  for 
the  payment  of  which  additions  to  the  reserves  were  made;  and  provided  if  it  shall  be 
found  that  the  amount  credited  to  any  such  reserve  Is  In  excess  of  the  reasonable  or  prob- 
able needs  of  the  corporation  to  meet  and  discharge  the  liabilities  for  which  the  reserve 
is  credited,  the  excess  of  such  reserves  over  and  above  the  reasonable  or  probable  needs 
for  the  purpose  indicated,  shall  be  at  once  disallowed  as  a deduction  and  restored  to  income 
for  the  purpose  of  the  tax;  and  provided  further,  that  In  no  event  will  sinking  funds  or 
other  reserves  set  up  to  meet  additions,  betterments  or  other  capital  obligations,  con- 
stitute allowable  deductions  from  gross  income. 

This  ruling  contem.plates  that  the  Income  and  authorized  deductions  shall  be  com- 
1 930  puted  and  accounted  for  on  the  same  basis,  and  that  the  same  practice  shall  be  con- 
sistently followed  year  after  year.  Amounts  paid  in  discharge  of  any  liability  or 
obligation  for  which  a reserve  has  been  set  up,  as  hereinbefore  outlined,  will,  when  paid 
be  changed  to  the  reserve  created  to  meet  it,  in  so  far  as  such  reserve  is  sufficient  to 
meet  the  liability,  provided  always  that  the  liability  is  of  a character,  which  constitutes 
an  allowable  deduction  within  the  meaning  of  the  law. 

If  upon  investigation.  It  shall  be  found  that  returns  made  upon  the  basis  of  accruals 
1931  and  reserves,  do  not  reflect  the  true  net  income,  the  corporation  so  failing  in  this 
way  to  return  the  true  net  income,  will  not  thereafter  be  permitted  to  make  its 
returns  upon  any  basis  other  than  that  of  actual  receipts  and  disbursements. 

The  reserves  contemplated  by  the  foregoing  rulings,  are  those  reserves  only,  which 
1 932  are  set  up  to  meet  some  actual  liability  incurred,  the  amount  necessary  to  discharge 
which  can  not  at  the  time  be  definitely  determined,  and  do  not  contemplate  reserves 
to  meet  losses  contingent  upon  shrinkage  in  values,  losses  from  bad  debts,  capital  invest- 
ments, etc.,  which  losses  are  deductible  only  when  definitely  determined  as  the  result  of  a 
closed  or  completed  transaction,  and  are  charged  off.  (T.  D.  2433,  Jan.  8,  1917.) 

1933  Changing  from  a Cash  to  an  Accrual  Basis,  and  Vice  Versa. — May  an  Investment 
corporation  change  from,  a cash  to  an  accrual  basis,  and  vice  versa,  whenever  it 
wishes  to  and,  if  not,  under  what  conditions  may  It  change?  (Answer.)  In  rej)ly  you  are 
advised  that  the  change  from  a cash  to  an  accrual  basis  and  vice  versa  may  be  effected 
at  any  time,  provided,  however,  that  the  method  adopted  is  consistently  followed  from  year 
to  year.  If  it  be  assumed  that  the  change  to  a different  basis  is  made  during  1918,  an 
amended  return  for  1917  will  not  be  required;  but,  as  the  year  1918  will  be  the  year  of 
transition  from,  one  basis  to  another,  the  return  for  1918  should  show  actual  receipts  and 


INC. 


195 


TAX 


CORPORATIONS. 


disbursements  for  that  year,  and  all  accruals,  either  receivable  or  payable,  for  this  or  any 
prior  year.  (Letter  of  inquiry  from  Geo.  E.  Holmes,  New  York,  N.  Y.,  and  the  reply 
thereto  signed  by  Acting  Commissioner  Homer  S.  Pace,  and  dated  December  17,  1918.) 

1 934  jEach  Year’s  Return  Must  be  Complete  Within  Itself. — All  expenses,  including 
interest,  taxes,  and  other  necessary  charges,  incidental  and  necessary  to  the  crea- 
tion or  production  of  the  gross  income  or  properly  chargeable  against  the  same,  being 
deductible  from  the  gross  income,  whether  paid  in  cash  or  entered  on  the  books  as  a lia- 
bility, can  not,  if  unpaid,  be  carried  forward  to  be  deducted  from  the  gross  income  of  a 
subsequent  year.  (Art.  127,  11422,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 935  Each  year’s  return,  both  as  to  income  and  deductions  therefrom,  must  be  complete 
within  itself.  Charges,  of  whatever  character,  against  income  can  not  be  cumu- 
lative. They  must  be  deducted  from  the  income  of  the  year  in  which  incurred  or  not  at 
all.  The  expenses,  liabilities,  or  deficit  [read  at  1[1913]  of  one  year  can  not  be  used  to  reduce 
the  income  of  a subsequent  year. 

The  deductions  must  in  all  cases  be  such  as  are  authorized  and  within  the  limits 
1 936  fixed  by  law.  (Art.  127,  *[423-424,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1937  Adjustment  on  Account  of  Amounts  Properly  Deductible  but  not  Deducted. — 
A corporation  having  the  right  under  this  rule  to  deduct  all  authorized  allowances, 

whether  paid  in  cash  or  set  up  as  a liability,  it  follows  that  if  it  does  not  within  any  year 
pay  or  accrue  certain  of  its  expenses,  interest,  taxes,  or  other  charges,  and  makes  no 
deduction  therefor,  it  cannot  deduct  from  the  income  of  the  next  or  any  subsequent  year 
any  amounts  then  paid  in  liquidation  of  the  previous  year’s  liabilities.  (Art.  128,  ^425, 
Reg.  33,  Rev.,  Jan.  2,  1918.) 

1938  If,  however,  a corporation  discovers  or  detects  expenses  or  liabilities  which  were 
due  and  payable  during  a preceding  year,  it  will  be  permissible  for  it  to  make  an 

amended  return  for  the  year  to  which  such  expense  or  liability  applies,  include  such  expense 
in  the  deductions  of  that  year,  and  file  a claim  for  refund  for  any  taxes  overpaid  by  reason 
of  the  failure  to  deduct  such  expense  or  liability  in  the  original  return  of  that  year.  (Art. 
128,  1[426,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1939  No  Particular  Bookkeeping  or  Accounting  System  Required. — Any  system  of 
accounting  which  is  not  consistent  with  the  purpose  and  intent  of  the  rules  set 

out  in  this  title,  and  with  the  general  rules  set  out  in  these  regulations  for  the  ascertainment 
of  net  income,  will  not  be  accepted  as  a correct  basis  for  making  returns.  (Art.  128, 
1[427,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 940  No  particular  system  of  bookkeeping  or  accounting  will  be  required  by  the  depart- 
ment. However,  the  business  transacted  by  corporations  must  be  so  recorded 
that  each  and  every  item  set  forth  In  the  return  of  annual  net  income  may  be  readily 
verified  by  an  examination  of  the  books  of  account.  (Art.  182,  Reg.  33,  Jan.  5,  1914.) 

1941  Corporation  Books  Must  Confirm  Figures  Given  in  Annual  Return. — As  this 
office  requires  no  special  system  of  bookkeeping,  neither  does  it  require  any  specific 

method  by  which  the  net  income  to  be  returned  by  corporations  shall  be  determined. 
(T.  D.  2161,  Feb.  19,  1915.) 

1942  The  books  of  a corporation  are  assumed  to  reflect  the  facts  as  to  its  earnings 
income,  etc.  Hence  they  will  be  taken  as  the  best  guide  in  determining  the  net 

income  upon  which  the  tax  imposed  by  this  act  is  calculated.  Except  as  the  same  may 
be  modified  by  the  provisions  of  the  law,  wherein  certain  deductions  are  limited,  the  net 
income  disclosed  by  the  books  and  verified  by  the  annual  balance  sheet,  or  the  annual 
report  to  stockholders,  should  be  the  same  as  that  returned  for  taxation.  (Art.  183, 
Reg.  33,  Jan.  5,  1914.) 

1 943  Law  1|288.  All  ordinary  and  Necessary  Business  Expenses  are  Deductible. — 
“(1)  All  the  ordinary  and  necessary  expenses  paid  or  incurred  during  the  taxable 
year  In  carrying  on  anv  trade  or  business,”  [For  construction  of  “paid  or  incurred”  read 
at  111923.]  [Read  at  112878.] 

1944  Law  1[326.  Items  of  Expense  Not  Deductible  in  Computing  Net  Income. — “Sec. 

235.  That  in  computing  net  income  no  deduction  shall  in  any  case  be  allowed  in 
respect  of  any  of  the  items  specified  in  section  215.”*  [1[2967.] 

*Sec.  215.  That  in  computing  net  income  no  deduction  shall  in  any  case  be  allowed 
ID  respect  of  [1[1023.] 


INC. 


196 


TAX 


CORPORATIONS. 


(a)  Personal,  living,  or  family  expenses  [^1024]; 

(b)  Any  amount  paid  out  for  new  buildings  or  for  permanent  improvements  or  better- 
ments made  to  increase  the  value  of  any  property  or  estate  [^1025];  [^2967.] 

(c)  Any  amount  expended  in  restoring  property  or  in  making  good  the  exhaustion 
thereof  for  which  an  allowance  is  or  has  been  made  (^1027];  [^2967.]  or 

(d)  Premiums  paid  on  any  life  insurance  policy  covering  the  life  of  any  officer  or 
employee,  or  of  any  person  financially  interested  in  any  trade  or  business  carried  on  by 
the  taxpayer,  when  the  taxpayer  is  directly  or  indirectly  a beneficiary  under  such  policy 
[111028]. 


1945  Organization  Expenses  do  not  Constitute  an  Allowable  Deduction  from  Gross 
Income. — Numerous  inquiries  have  been  made  of  this  office  with  respect  to  the 

treatment  by  corporations  in  their  returns  of  annual  net  income  of  what  are  known  and 
commonly  designated  as  “organization  expenses” — that  is,  attorney’s  and  accountants’ 
fees,  together  with  fees  paid  to  the  State  authorities  prior  to,  or  coincident  with,  the  secur- 
ing of  a charter  and  the  incorporation  of  the  company. 

In  the  absence  of  a formal  and  definite  ruling  on  this  question,  there  appears  to 

1946  have  been  some  conflict  in  the  holdings  and  instructions  issued  by  this  office  in 
regard  to  this  matter.  Therefore,  in  order  to  make  definite  the  position  of  the 

bureau  and  to  promote  consistency,  it  is  held  that  “organization  expenses”  constitute 
a capital  investment,  such  expenses  being  offset  by  the  asset  value  of  the  corporate  fran- 
chise, an  intangible  asset  of  a somewhat  permanent  character  and  in  many  instances  of 
substantial  value.  Such  expenses  are  very  similar  in  character  to  the  discount  at  which  the 
stock  issued  by  the  company  is  being  sold,  the  only  effect  of  such  expenses  and  discounts 
being  to  reduce  the  amount  of  capital  available  for  use  and  employment  in  the  business 
of  the  corporation.  The  discount  at  which  the  stock  is  sold  is  not  a loss  sustained  within 
the  meaning  of  the  law,  and  therefore  not  deductible  [1[1949].  Likewise  “organiza- 
tion expenses” — that  is  to  say,  expenses  incident  to  and  connected  with  the  Incorporation 
and  organization  of  the  company — are  not  “ordinary  and  necessary  expenses  of  maintenance 
and  operation,”  which  are  the  only  “expenses”  authorized  by  the  incom.e-tax  law  to  be 
deducted  from  gross  Income. 

Hence  it  is  held  that  “organization  expenses”  do  not  constitute  an  allowable  deduc- 

1947  tion  from  gross  income  of  any  taxable  year,  nor  do  such  expenses  constitute  a proper 
item  to  be  added  to  the  cost  of  any  physical  property  to  be  provided  for  through 

the  authorized  annual  allowance  for  depreciation.  (T.  D.  2499,  June  11*,  1917.) 

1948  Expenses  Incurred  in  Sale  of  Capital  Stock. — Any  and  all  expenses  incidental  to 
or  connected  with  the  selling  of  the  capital  stock  (common  or  preferred)  of  a cor- 
poration for  the  purpose  of  raising  capital  to  be  by  it  invested  in  property  or  employed 
in  the  business  for  w'hich  the  corporation  is  organized  are  not  an  “expense  of  operation 
and  maintenance”  within  the  meaning  of  this  title,  and  such  expense  is  not  an  allowable 
deduction  from  the  gross  income,  for  the  reason  that  such  an  expense  is  incurred^  in  a 
capital  transaction;  that  is,  the  raising  of  capital  to  be  Invested  or  employed  in  the  business. 

Such  expense,  like  the  discount  at  which  the  shares  of  stock  may  be  sold,  has  the 
1 949  effect  only  to  reduce  the  available  capital  of  the  corporation  and  can  not  be  used  to 
reduce  the  income  from  operations;  that  is  to  say,  any  expense  incident  to  the  bring- 
ing of  capital  into  the  company,  whether  it  be  a new  or  a going  concern,  can  not  be  recouped 
out  of  or  charged  against  the  operating  income.  It  is  a capital  loss  or  expense  properly 
chargeable  against  the  proceeds  of  the  sale  of  the  stock  and  reduces  the  capital  rather  than 
the  earnings  of  the  company.  (Art.  145,  1[453-454,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

I960  Commissions  Paid  in  Connection  with  Sale  of  Securities. — Commissions  paid  in 
purchasing  and  selling  securities  are  a part  of  the  cost  or  selling  price  of  the  securities 
and  not  otherwise  deductible.  They  do  not  constitute  expense  deductions  in  a return  of 
income.  (Art.  8,  1[108,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1951  Assessments  on  Stock  Paid  by  Stockholders. — Amounts  to  be  assessed  and  paid 
under  a mutual  agreement  between  bondholders  or  stockholders  of  a corporation, 
to  be  used  in  reorganization  of  a corporation  are  held  to  be  investments  of  capital  and 
not  deductible  for  any  purpose  in  a return  of  Income.  (Art.  8,  1[100,  Reg.  33,  Rev. 
Jan.  2,  1918.) 

1962  Assessments  made  by  a corporation  on  its  capital  stock  are  regarded  as  an  invest- 
ment of  capital  and  do  not  constitute  an  allow^able  deduction  In  the  return  of  the- 
individual.  (T.  D.  2090,  Dec.  14,  1914.) 

Charges  to  capital  account  generally,  112894. 

197  TAX 


INC. 


CORPORATIONS. 


1 953  Procurement  of  Copyright  and  Plates. — Amounts  expended  for  securing  copy- 
right and  plates  which  remain  in  possession  of  and  as  property  of  the  person  making 
the  payments  are  investments  of  capital  and  can  not  be  allowed  as  deductions  in  returns 
of  income.  (Art.  8,  1[105,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 S54  Defending  or  Perfecting  Title. — Cost  of  defending  title  or  perfecting  title  to  property 
constitutes  a part  of  the  cost  of  the  property  and  is  not  a business  expense.  (Art. 
8,  11106,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 955  Architect’s  Services  in  Connection  with  Erection  of  Building. — The  amount  ex- 
pended for  architect’s  '’services  is  part  of  the  cost  of  the  building  and  not  a deductible 
business  expense,  (Art.  8,  11107,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1 956  Expenses  of  Operation  and  Maintenance. — Expenses  of  operation  and  maintenance 
shall  include  all  expenditures  for  material,  labor,  fuel,  and  other  items  entering 
into  the  cost  of  the  goods  sold  or  inventoried  at  the  end  of  the  year,  provided  such  expendi- 
tures have  not  been  considered  in  determining  the  cost  of  goods  or  materials  or  purchases 
thereof  during  the  year,  when  the  income  derived  from  operations  is  ascertained  through 
inventory,  and  all  other  disbursements  necessary  to  the  operation  of  the  business,  except 
such  as  are  required  by  the  act  to  be  segregated  and  stated  separately  in  the  return. 

Expenditures  which  are  taken  into  account  in  determining  the  cost  of  products 
1957  finished  or  unfinished,  are  not  to  be  again  deducted  as  expenses  of  operation^and 
maintenance.  (Art.  129,  1[428-429,  Reg.  33,  Rev.,  Jan.  2,  1918.)i 

1 958  Cost  of  Material. — In  ascertaining  expenses  proper  to  be  included  in  the  deductions 
to  be  m.ade  under  the  item  of  “Expenses,”  corporations  carrying  materials  and 
supplies  on  hand  should  include  in  such  expense  the  charges  for  materials  and  supplies 
only  to  the  amount  that  the  same  are  actually  consumed  and  used  in  operation  and  main- 
tenance during  the  year  for  which  the  return  is  made,  Provided  that  the  cost  of  such 
material  and  supplies  has  not  been  taken  into  account  in  determining  the  net  income  for 
any  previous  year. 

If  a corporation  carries  materials  or  supplies  on  hand  for  which  no  record  of  consump- 

1959  tion  is  kept  or  of  which  physical  inventories  at  the  beginning  and  end  of  the  year 
are  not  taken,  it  will  be  permissible  for  the  corporation  to  include  in  its  expenses  and 

deduct  from  gross  income  the  total  cost  of  such  supplies  and  materials  as  were  purchased 
during  the  year  for  which  the  return  is  made.  (Art.  130,  1[430-431  Reg.  33,  Rev.,  Jan,  2, 
1918.) 

1960  Cost  of  Manufactured  Products. — A manufacturing  corporation  may  include 
as  an  element  of  the  cost  of  manufactured  products,  the  cost  of  the  raw  material, 

the  cost  of  labor  of  the  men  who  actually  work  on  such  products,  as  well  as  the  cost  of  super- 
visory, or  what  may  be  denominated  as  “unproductive”  labor,  such  as  that  of  the  fore- 
men, inspectors,  overseers,  etc.,  provided  such  expenditures  are  not  separately  deducted 
from  the  gross  income  and  the  return  of  annual  net  income. 

The  overhead  charges  referred  to  in  Form  1031  should  Include  the'salarles  of  officers, 

1961  clerk  hire,  and  such  other  office  expenses  as  do  not  have  to  do^directlyi-with^the 
manufacture  of  the  product.  (T.  D.  2152,  Feb.  12,  1915.) 

1962  The  only'^ interest  which  constitutes  an  allowable  deduction  from  gross  income 
under  the  Federal  income  tax  law  is  the  amount  actually  paid  within  the  year 

• ♦ ♦ ♦ ^ 

Interest  payments  of  this  character,  being  allowable  deductions  from  gross  income, 

1963  will  not  be  taken  into  account  as  a part  of  the  cost  of  manufacture  for  the  reason 
that  to  consider  them  an  element  of  the  cost  of  manufacture  and  to  deduct  them  from 

gross  income  as  specific  items  would  In  effect  result  In  a double  deduction  of  the  amounts 
involved. 

A corporation  would  not  be  permitted  to  include  in  its  deductions  the  rental  value 
1 864  of  the  property  which  it  owns  and  occupies  nor  would  it  be  permitted  to  deduct 
from  gross  income  the  interest  which  the  capital  Invested  or  employed  would  earn 
were  It  otherwise  Invested. 

It  therefore  follows  that  a corporation  can  not  take  Into  account  as  a part  of  the  cost 
1965  of  manufacture  any  possible  earnings;  that  Is,  earnings  which  might  accrue  on  its 
capitalized  investment  had  such  capital  been  so  placed  as  to  earn  a given  rate 
of  interest.  [Read  at  1[2029.]  (T.  D.  2137,  Jan.  30,  1915.) 


INC. 


198  TAX 


CORPORATIONS. 


1966  Incidental  Repairs. — The  cost  of  incidental  repairs  which  neither  add  to  the  value 
of  the  property  nor  appreciably  prolong  its  life,  but  keep  it  in  an  ordinarily  efficient 

operating  condition,  may  be  deducted  as  expense,  provided  that  the  plant  or  property 
account  is  -not  increased  by  the  amount  of  such  expenditures.  'Such  repairs,  to  the  extent 
that  they  arrest  deterioration,  should  have  the  effect  to  reduce  the  depreciation  charge 
otherwise  deductible.  (Art.  131,  1[432,  Reg.  33,  Rev.,  Jan.  ,2,  1918.) 

1967  Additions  and  Betterments  Made  by  Tenant  Corporations. — In  the  case  of  cor- 
porations which  occupy  leased  premises  under  a lease  contract  which  requires 

such  corporations  to  make  all  necessary  repairs  or  improvements,  which  repairs  or  improve- 
ments, revert  to  the  owner  of  the  fee  at  the  expiration  of  the  lease,  the  tenant  corporation 
Is  entitled  to  charge  the  cost  of  all  such  repairs  and  Improvements  to  the  expense  of  doing 
business.  This  expense  of  improvements,  somewhat  permanent  in  character,  should,  how- 
ever, be  prorated  over  the  number  of  years  constituting  the  term  of  the  lease,  and  the  amount 
deductible  from  gross  income  of  each  year  would  be  the  aliquot  part  of  the  cost  of  such  re- 
pairs and  improvements.  (T.  D.  2137,  Jan.  30,  1915.) 

1968  Where,  under  the  terms  of  a rental  or  lease  contract,  a tenant  agrees  to  erect  a 

building  or  to  expend  during  the  rental  period  a certain  fixed  sum  In  making  im- 
provements upon  the  freehold  of  another,  it  is  held  for  income  tax  purposes  that  the  build- 
ing or  permanent  improvement  becomes  a part  of  the  realty  unless  otherwise  agreed  be- 
tween the  contracting  parties;  and,  as  such,  shall  be  accounted  for,  * * * as  gain 

or  profit  to  the  lessor  in  the  value  of  his  realty  at  the  termination  of  the  contract,  whether 
terminated  by  expiration  of  the  lease  or  otherwise. 

The  gain  or  profit  to  the  lessor  at  the  termination  of  the  lease,  by  expiration  or 
1 969  otherwise,  is  held  to  be  the  difference  between  the  cost  of  the  building  or  improve- 
ment and  a reasonable  allowance  for  the  exhaustion,  wear  and  tear  of  the  property 
arising  out  of  its  use  or  employment  in  the  business  or  trade  during  the  period  of  its  life 
under  the  lease;  and  no  annual  deduction  for  depreciation  shall  be  allowed  during  the  lease 
term. 

As  the  use  of  the  building  or  permanent  improvement  by  the  tenant  during  the 
1970  term  of  the  lease  is  a part  of  the  consideration  of  the  contract,  the  cost  may  be 
prorated  by  the  tenant  over  the  lease  term  and  deducted  at  an  annual  rate  as  a 
part  of  the  “necessary  expenses  actually  paid  in  carrying  on  any  business  or  trade,”  to- 
gether with  the  cost  of  incidental  repairs  and  maintenance. 

The  paragraph  of  Treasury  Decision  2135  entitled  “Rental:  Permanent  improve- 
1 97  1 ments  made  under  contract  in  addition  to  yearly,”  is  hereby  ‘repealed.  (T.  D. 
.2442,  Feb;  6,  1917.) 

1972  The  cost  of  erecting  permanent  buildings,  or  of  making  permanent  improvements 
on  ground  leased  by  a company,  is  held  to  be  an  additional  rental  and  is  there- 
fore a proper  deduction  from  gross  income,  provided  such  buildings  and  improvements, 
under  th-^  terms  of  the  lease,  revert  to  the  owner  of  the  ground  at  the  expiration  of  the 
lease.  In  such  case,  however,  the  cost  will  be  prorated  according  to  the  number  of  years 
constituting  the  term  of  the  lease  and  the  annual  deduction  will  be  an  aliquot  part  of 
such  cost.  As  to  income  to  lessor  see  paragraph  50,  Page  11,  these  regulations  [^1973 
herein].  (Art.  140,  1f445,  Reg.  33,  Rev.,  Jan.  2,  1918  ) 

1 973  Permanent  Improvements  under  Lease  or  Rental  Contracts. — When  improve  nents 
become  a part  of  real  estate,  the  difference  between  cost  of  the  improvements  and 
allowable  depreciation  during  the  lease  term  Is  gain  or  profit  to  the  lessor  at  the  end  of 
the  lease  term  and  Is  to  be  accounted  for  as  income  at  that  time.  (Art.  4,  ^50,  Reg.  33, 
Rev.,  Jan.  2 1918.) 

1974  The  cost  of  the  buildings  being  a rental  charge  and  deductible  on  the  prorated 
basis,  the  lessee  corporation  will  not  be  permitted  to  deduct  from  gross  income  any 

depreciation  with  respect  to  such  buildings,  but  the  cost  of  incidental  repairs  neces- 
sary to  keep  them  In  an  efficient  condition  for  the  purposes  of  their  use,  may  be 
deducted  as  an  expense  of  operation  and  maintenance. 

If,  however,  the  life  of  the  improvement  is  less  than  the  life  of  the  lease,  the  depre- 

1975  ciatlon  may  be  taken  by  the  lessee,  based  upon  the  cost  and  life  of  the  improvement. 
(Art.  140,  ^446-447,  Reg.  33,  Rev./Jan.  2,  1918.) 

197  6 Taxes  Paid  by  a Tenant. — Taxes  paid  by  a tenant  to  or  for  a landlord  for  business 
property  are  additional  rent  and  constitute  a deductible  item  to  the  tenant  and  tax- 
able inco.me  to  the  landlord.  iThe  amount  of  the'  tax  w.ill  be  deductible  by  the  landlord. 
(Art.  8,  11115,  Reg.  33,  |Rev.,  Jan.  2,  1918.) 


INC. 


19.9  , 


TAX  , 


CORPORATIONS. 


1977  Purchase  of  a Leasehold. — Where  a leasehold  Is  sold  for  a specified  sum,  the  pur- 
chaser may  take  as  a deduction  in  his  return  an  aliquot  part  of  such  sum,  each  year, 

based  on  the  number  of  years  the  lease  has  to  run.  (Art.  8,  ^113,  Reg.  33,  Rev.,  Jan.  2, 
1918.) 

1978  Law  ^289.  A Reasonable  Amount  For  Salaries  or  Other  Compensation  For 
Personal  Services  Actually  Rendered  May  Be  Deducted  as  a Necessary  Business 

Expense. — “including  a reasonable  allowance  for  salaries  or  other  compensation  for  per- 
sonal services  actually  rendered,”  [Read  at  ^2882. J 

[“A  reasonable  allowance  for  salaries,  etc.”  is  now  for  the  first  time  provided  for, 
specifically  as  such,  in  terms.] 

1979  Sections  5 (a)  of  the  Income  Tax  Act  of  September  8,  1916,  as  amended,  provides, 
as  to  the  Income  of  individuals- and  partnerships,  that  for  the  purpose  of  the  tax 

there  shall  be  allowed  as  deductions,  among  others,  “the  necessary  expenses  actually  paid 
in  carrying  on  any  business  or  trade,”  and  Section  12  (a)  provides  that  the  net  income  of 
a corporation  shall  be  ascertained  by  deducting  from  the  gross  amount  of  its  income  received 
within  the  year,  among  other  things,  “all  the  ordinary  and  necessary  expenses  paid  within 
the  year  in  the  maintenance  and  operation  of  its  business  and  properties.” 

Payments  for  services  by  business  enterprises  (including  individuals  in  business, 

1980  partnerships  and  corporations)  may,  of  course,  be  deducted  under  this  general  lan- 
guage, The  Government,  entitled  to  taxes  based  on  the  net  income  of  each  enter- 
prise, is  interested  and  authorized,  however,  to  see  that  each  specific  expenditure  sought  to 
be  deducted  is  in  itself  “necessary.”  The  question  is  by  what  examination  and  what 
test  this  shall  be  determined.  The  subject  Is  not  dealt  with  in  any  general  way  in  the 
Income  Tax  Regulations,  although  Article  138  [^1999]  bears  on  special  payments  to  em- 
ployees of  corporation. 

The  test  of  deductibility  in  the  case  of  compensation  payments  is  whether  they  are 
1 981  in  fact  payments  purely  for  services  or  include  some  other  element.  But  in  the  case 
of  any  compensation,  however  determined,  which  exceeds  amounts  ordinarily 
paid  for  like  services  in  like  enterprises  under  like  circumstances,  the  burden  is  upon  the 
enterprise  to  show  that  the  amount  paid  was  solely  the  purchase  price  of  services.  This 
test|and  Its  practical  application  may  be  further  stated  and  illustrated  as  follows: 

1 982  1-  Any  amount  paid  In  the  form  of  compensation,  but  not  in  fact  as  the  purchase 
price  of  services,  is  not  deductible. 

1 983  (a)  An  ostensible  salary  may  be  a distribution  of  a dividend  on  stock.  This  is 
likely  to  occur  in  the  case  of  a corporation  having  few  stockholders,  practically  all 
of  whom  draw  salaries.  If  in  such  a case  the  salaries  are  based  upon  or  bear  a close  re- 
lationship to  the  stockholdings  of  the  officers  or  employees,  it  would  seem  likely  that  the 
salaries,  if  In  excess  of  those  ordinarily  paid  for  similar  services,  are  not  paid  wholly  for 
services  rendered,  but  in  part  as  a distribution  of  earnings  upon  the  stock.  [Read  at 
1999.] 

(b)  An  ostensible  salary  paid  by  a corporation  may  be  in  part  a waste  or  appro- 
1 984  priation  of  assets  of  the  corporation.  This  may  occur  where  salaried  employees 

are  in  control  of  the  corporation  through  holding  directly  or  indirectly  a majority 
of  its  stock  or.  In  the  case  of  a large  corporation  with  many  stockholders,  owning  a substan- 
tial minority  of  Its  stock,  and  the  tendency  of  the  officers  unduly  to  inflate  their  salaries 
must  be  taken  into  account.  If  a compensation  contract  with  the  majority  stockholder 
or  stockholders  is  approved  by  all  the  stockholders,  as  well  as  by  the  directors,  it  might, 
however,  be  dealt  with  like  any  other  contract. 

(c)  An  ostensible  salary  may  be  in  part  payment  for  property.  This  may  occur, 
1 985  for  example,  where  a partnership  sells  out  to  a corporation,  the  former  partners  agree- 
ing to  continue  in  the  service  of  the  corporation.  In  such  a case  it  may  be  found 

that  the  salaries  of  the  former  partners  are  not  merely  for  services,  but  in  part  constitute 
payment  for  the  transfer  of  their  business. 

1 986  2.  The  form  or  method  of  fixing  compensation  is  not  decisiv'e  as  to  deductibility. 

While  any  form  of  contingent  compensation  invites  scrutiny  as  possible  distribution 
1987  of  earnings  of  the  enterprise,  it  does  not  follow  that  payments  on  a contingent 
basis  are  to  be  treated  fundamentally  on  any  basis  different  from  that  applying  to 
compensation  at  a flat  rate.  Generally  speaking,  if  contingent  compensation  is  paid 
pursuant  to  a free  bargain  between  the  enterprise  and  the  individual  made  before  the  services 
are  rendered,  not  influenced  by  any  consideration  on  the  part  of  the  employer  other  than 
that  of  securing  on  fair  and  advantageous  terms  the  services  of  the  individual,  it  should 
be  allowed  as  a deduction  even  though  in  the  actual  working  out  of  the  contract  it  may  prove 
to  be  greater  than  the  amount  which  would  ordinarily  be  paid. 


INC. 


200  TAX 


CORPORATIONS. 


3.  As  to  compensation  deterr  » ned  after  services  have  been  rendered,  reasonable- 
1 988  n^ss  is  ordinarily  the  control  ig  test  of  deductibility. 

In  certain  instances  apparently  of  this  sort  it  may  be  shown  that  the  compensation 

1989  is  fixed  according  to  a custom  or  practice  having  virtually  the  force  of  a contract. 
Where,  however,  such  is  not  the  case  and  it  is  for  the  management  to  fix  compen- 
sation such  as  is  deemed  fair,  it  is  just  to  assume  that  true  compensation  is  only  such  amount 
as  would  ordinarily  be  paid  in  like  circumstances  by  other  similar  enterprises, 

4.  In  connection  with  the  questions  discussed  above,  the  following  rulings  as  to 

1990  treatment  of  amounts  ostensibly  paid  as  compensation,  but  not  allowed  to  be 
deducted  as  such,  appear  to  be  warranted: 

(a)  In  the  case  of  excessive  payments  by  corporations,  if  such  payments  correspond 

1991  to  or  bear  a close  relationship  to  stockholdings,  the  amount  of  the  excess  should  be 
treated  as  dividends  and  would  thus  be  exempt  from  the  normal  tax  and  from  the 

excess-profits  tax  in  the  hands  of  the  recipients  [Read  at  ^1999];  or  if  such  payments 
represent  an  appropriation  of  assets  of  the  corporation  by  officers  who  control  it  and  fix 
their  compensation  in  violation  of  the  rights  of  the  corporation,  the  amount  of  the  excess, 
while  disallowed  as  a deduction  by  the  corporation,  should  be  treated  as  compensation 
of  the  individuals  subject  to  the  normal  and  the  excess-profits  taxes,  compensation  illegally 
secured  being  none  the  less  subject  to  tax  in  all  respects;  or  if  such  payments  constitute 
in  part  payment  for  property,  the  amount  of  the  excess  should  be  treated  by  the  corpe- 
ration  as  capital  expenditure  and  by  the  recipient  as  part  of  the  purchase  price. 

(b)  In  the  case  of  excessive  payments  by  individuals  or  partnerships,  the  amounts 

1992  disallowed  should  ordinarily  be  treated  as  partnership  shares  and  would  thus  be 
free  from  the  excess-profits  tax  to  the  recipient,  but,  of  course,  still  subject  to  the 

income  tax,  except  that  payments  for  property  should  be  treated  by  the  individual  or  part- 
nership as  a capital  expenditure  and  by  the  recipient  as  part  of  the  purchase  price. 

The  foregoing  rules  naturally  do  not  permit  a ready  determination  of  every  question 

1993  arising  as  to  compensation  payments,  but  applied  in  the  light  of  full  knowledge 
of  the  facts  in  the  particular  case  they  do,  however,  indicate  a basis  of  solution. 

They  may  be  summed  up  as  follows: 

Compensation  on  whatever  basis  fixed,  representing  only  the  price  paid  for  services 
1 994  pursuant  to  a fair  bargain  made  in  advance  between  the  individual  and  the  business 
enterprise,  is  deductible  in  determining  the  taxable  net  income  of  the  enterprise. 
Payments  nominally  as  compensation  for  services,  which  in  fact  include  amounts  paid  as 
dividends,  waste  of  corporate  assets,  payments  for  property  or  for  anything  other  than 
services,  are  deductible  only  to  an  amount  not  in  excess  of  compensation  for  like  services 
in  similar  enterprises. 

Compensation  greater  than  that  ordinarily  paid  for  like  services  in  similar  enter- 

1 995  prises  must  be  shown  to  represent  payment  for  services  only.  In  the  case  of 
compensation  fixed  after  services  are  rendered  and  not  in  accordance  with  any 

contract  or  any  custom  or  practice  amounting  virtually  to  a contract,  reasonableness  is 
ordinarily  the  controlling  test  of  deductibility.  (T.  D.  2696,  April  10,  1918.) 

1996  Special  payments,  sometimes  denominated  gifts  or  bonuses,  made  by  corporations, 
partnerships,  or  individuals  to  employees,  will  constitute  allowable  deductions 

from  gross  income  in  ascertaining  net  income  for  the  purpose  of  the  income  tax,  when  such 
payments  are  made  in  good  faith  and  an  additional  compensation  for  the  services  actually 
rendered  by  the  employees.  If  such  payments,  when  added  to  the  stipulated  salaries 
do  not  exceed  a reasonable  compensation  for  the  services  rendered  they  will  be  regarded 
as  a part  of  the  wage  or  hire  of  the  employee,  and  therefore  an  ordinary  and  necessary 
expense  of  operation  and  maintenance,  and  as  such  will  be  deductible  from  gross  income. 
(Art.  8,  111  11,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1997  Special  payments,  sometimes  denominated  as  gifts  or  bonuses  to  employees  of 
corporations,  will  constitute  allowable  deductions  from  gross  income  in  ascer- 
taining net  income  for  the  purpose  of  the  income  tax,  when  such  payments  are  made  in 
good  faith  and  as  additional  compensation  for  the  services  actually  rendered  by  the 
employees.  If  such  payments,  when  added  to  the  stipulated  salaries,  do  not  exceed  a 
reasonable  compensation  for  the  services  rendered,  they  will  be  regarded  as  a part  of  the 
wage  or  hire  of  the  employee,  and  therefore  an  ordinary  and  necessary  expense  of  opera- 
tion and  maintenance,  and  as  such  deductible  from  gross  income.  (Art.  138,  1[44I,  Reg. 
33,  Rev.,  Jan.  2,  1918.) 

1998  Payments,  Other  than  Dividends,  Paid  by  a Corporation  to  Officers  or  Employees 
Who  are  Stockholders. — Special  payments  made  to  officers  or  employees  who  are 

stockholders,  in  the  guise  of  additional  salaries  or  compensation,  the  amount  of  which 
is  based  upon  or  bears  a close  relationship  to  the  stockholdings  of  such  officers  or  employees 


INC. 


201  TAX 


CORPORATIONS. 

or  the  capital  invested  by  them  in  the  business  of  the  company,  will  be  regarded  as  a 
special  distribution  of  profits,  or  compensation  for  the  capital  invested,  and  not  payment 
for  services  rendered.  Payments  under  such  latter  conditions  being  in  the  nature  of 
dividends,  will  not  be  deductible  from  gross  income.  (Art.  138,  1[442,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

1 999  Salaries  of  officers  or  employees  who  are  stockholders  will  be  subject  to  careful 
analysis,  and  if  they  are  found  to  be  out  of  proportion  to  the  volume  of  business  trans- 
acted, or  excessive  when  compared  with  the  salaries  of  like  officers  or  employees  of  other 
corporations  doing  a similar  kind  of  volume  or  business,  the  amount  so  paid  in  excess  of 
reasonable  compensation  for  the  services  will  not  be  deductible  from  gross  Income,  but 
will  be  treated  as  a distribution  of  profits.  (Read  at  ^1991  and  ^[1983.]  (Art.  138,  11443, 
Reg.  33,  Rev.,  Jan.  2,  1918.) 

2G00  The  appended  decision  of  the  United  States  Circuit  Court  of  Appeals  for  the  Second 
Circuit  in  the  case  of  Jacobs  & Davies  (Inc.)  v.  Anderson,  collector,  for  internal 
revenue,  is  published  for  the  information  of  internal-revenue  officers  and  others  concerned. 
Jacobs  and  Davies  (Inc.)  v.  Anderson. 

(228  Fed.  505.) 

Summary. 

1.  Deductions  from  Gross  Income. 

When  a company  composed  of  two  stockholders  divided  the  profits  between  them, 
calling  it  compensation,  the  same  can  not  be  deducted  as  an  expense  of  business. 

2.  Income. 

Money  paid  out  under  these  circumstances  is  equivalent  to  dividend  and  must  be 
treated  as  income  of  the  corporation. 

3.  Judgment  of  the  United  States  District  Court  Affirmed. 

The  decision  of  the  lower  court  is  affirmed  by  the  Circuit  Court  of  Appeals. 

(T.  D.  2262,  Nov.  15,  1915.) 

2001  Bonuses  Which  May  be  Otherwise  Deductible  are  Not  So  when  Left  with  the 
Company  to  Secure  it  Against  Loss. — This  office  is  in  receipt  of  your  letter  of  the 

19th  instant,  in  reply  to  office  letter  dated  July  11,  1917,  in  which  you  make  a further 
inquiry  which  is  substantially  as  follows: 

If  a corporation  pays  its  employees  a salary  in  the  form  of  weekly  stated  amounts, 
together  with  a certain  percentage  of  the  profits,  and  if  such  percentage  of  the  profits 
is  in  no  way  based  upon  interest  in  the  business  and  makes  a total  which  is  no  more 
than  a fair  compensation,  is  such  payment  or  percentage  of  the  profits  allowably 
deducted  from  gross  income  of  the  corporation  in  the  event  that  there  is  an  agreement 
to  the  effect  that  the  so-called  bonuses  are  to  be  left  on  deposit  with  the  company 
to  secure  the  company  against  such  losses  as  may  be  by  contract  charged  to  the  em- 
ployees at  a percentage  of  the  profits  received  under  the  contract. 

2002  In  reply,  you  are  informed  that  under  the  conditions  set  out  in  the  foregoing  para- 
graph, the  bonuses  or  percentages  of  profits  “left  on  deposit  with  the  company 

to  secure  it  against  loss,”  are  not  deductible.  (Letter  to  Greenbaum,  Wolff  & Ernst, 
New  York,  N.  Y.,  signed  by  Acting  Deputy  Commissioner  S.  H.  Boyd,  and  dated  Novem- 
ber 30,  1917.) 

2003  Compensation  Paid  in  Stock. — Compensation  paid  an  employee  in  capital  stock  of  the 
corporation  may  be  deducted  as  an  expense  if  «o' charged  on  books  at  the  actual 

value  of  such  stock,  and  the  recipient  of  such  stock,  if  he  be  a taxable  person,  will  return 
such  stock  at  the  same  value  as  income.  (Art.  139,  1f444,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2004  Commissions  Paid  to  Salesmen. — Commissions  paid  to  salesmen  as  a part  of  the 
expense  of  conducting  business  are  allowable  deductions  to  the  payer  of  the  com- 
mission. (T.  D.  2090,  Dec.  14,  1914.) 

2005  Commissions  Paid  Real  Estate  Agents. — A commission  paid  to  a real  estate  agent 
for  collecting  rents  and  management  of  property  is  a legitimate  business  expense 

and  constitutes  an  allowable  deduction  in  computing  net  income.  (T.  D.  2090,  Dec.  14 
1914.) 

2006  Commissions  to  Salesmen  Paid  in  Stock.— Commissions  allowed  salesmen,  paid 
in  stock,  may  be  deducted  as  expense  if  so  charged  on  books  at  the  actual  value 

of  such  stock.  (Art.  117,  Reg.  33,  Jan.  5,  1914.)  , . 

2007  Salaries -and  Wages  Paid  to  Employees 'While' ih-thfe  Military  or  Naval  Forces 
During  the ..Pjesent  War.^Many  co'rparations,  p^lrtherships  and  also  ifidividuals 

who  are  engaged  in  business  continue  to  pay  all  or -portions  of  the  regular  compensation 
of  officers  or  employees  who  haveior-all  6r  part  of  the  period’  of  the  war  joined  the  naval 


INC. 


202  TAX 


CORPORATIONS. 

or  military  forces  of  the  United  States  or  have  undertaken  services  for  the  Government 
at  Washington  or  elsewhere  at  reduced  or  nominal  compensation.  The  business  purpose 
of  the  continuance  of  such  compensation,  under  such  circumstances,  is  to  preserve  the 
organization  and  secure  the  return  after  the  war  of  such  officers  or  employees.  You  are 
advised  that  amounts  so  expended  by  corporations,  partnerships  or  individuals  engaged 
in  business  constitute  during  the  continuance  of  the  war,  ordinary  and  necessary  expenses 
of  doing  business  and  are  allowable  as  deductions  in  computing  net  income  for  purposes 
of  the  income,  war  income  and  excess  profits  taxes.  (T.  D.  2660,  March  1,  1918.) 

2008  Pensions. — Amounts  paid  for  pensions  to  retired  employees,  or  to  their  families 
or  others  dependent  upon  them,  or  on  account  of  injuries  received  by  employees, 

or  lump-sum  amounts  paid  as  compensation  for  injuries,  are  proper  deductions  as  “ordi- 
nary and  necessary  expenses.”  Such  deduction  shall  be  limited  to  the  amount  not  com- 
pensated for  by  insurance  or  otherwise. 

No  deduction  shall  be  made  for  contributions  to  a pension  fund  the  resources 

2009  of  which  are  held  by  the  corporation,  the  amount  deductible  in  such  case  being 
the  amount  actually  paid  to  the  employee.  (Art.  136,  1[438-439,  Reg.  33,  Rev., 

Jan.  2,  1918.) 

2010  Salary  Paid  After  Death  of  Employee. — When  the  amount  of  the  salary  of  an 
officer  or  employee  is  paid  for  a limited  period  after  his  death  to  his  widow  or  heirs, 

in  recognition  of  the  services  rendered  by  the  individual,  no  services  being  rendered  by 
the  widow  or  heirs,  such  payment  is  not  “ordinary  and  necessary”  expense  of  transacting 
business  and  does  not  constitute  an  allowable  deduction.  (Art.  137,  lf440,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

201  1 Spending  Money. — So-called  “spending  or  treating  money”  actually  advanced  by 
corporations  to  their  traveling  salesmen  to  be  used  by  them  as  a part  of  the  expense 
incident  to  selling  the  product  of  such  corporations,  is  an  allowable  deduction  in  a return 
of  income  by  such  corporation.  The  deduction  of  such  expenditures  is  conditioned  upon 
a satisfactory  showing  that  all  the  allowance  claimed  as  a deduction  was  actually  expended 
for  and  was  an  ordinary  and  usual  expense  incurred  in  selling  the  product  or  merchandise 
of  the  corporation.  (Art.  133,  1[434,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

20 1 2 Donations  not  Deductible. — Donations  made  to  employees  and  others,  and  which  do 
not  have  in  them  the  element  of  compensation,  are  considered  gratuities  and  are  not 
allowable  deductions  from  gross  income  as  expenses  of  operation  or  maintenance  or  under 
any  other  item.  (Art.  135,  1[437,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

20 1 3 Donations  by  Agricultural  Corporations  to  Fairs. — A corporation  engaged  in 
agricultural  business  cannot  be  allowed  to  make  a deduction  from  gross  income 

on  account  of  donations  to  fairs,  churches,  and  associations,  such  donations  being  made 
for  the  purpose  of  obtaining  and  preserving  the  good  will  of  the  farmers  who  raise  crops 
for  it,  since  the  amounts  so  expended  are  clearly  in  the  nature  of  gratuities  and  are  not 
necessary  expenses  of  operation  and  maintenance  as  there  is  no  such  consideration  in 
this  case  as  is  contemplated  in  [^1201 2].  (Extract  from  letter  to  Carey,  Piper  and  Hall, 
Attorneys  at  Law,  Baltimore,  Maryland,  signed  by  Acting  Commissioner  G.  E.  Fletcher, 
and  dated  March  25,  1915.) 

20 1 4 donations  Deductible. — Donations  made  by  a corporation  for  purposes  connected 
with  the  operation  of  the  property,  when  limited  to  charitable  institutions,  hospi- 
tals, or  educational  institutions,  conducted  for  the  benefit  of  its  employees  or  their  depend- 
ents, shall  be  a proper  deduction  as  ordinary  and  necessary  expenses.  Such  deduction 
should,  however,  be  reduced  by  any  amount  repaid  to  the  corporation  by  the  employees. 

Donations  which  legitimately  represent  a consideration  for  a benefit  flowing 
2016  directly  to  the  corporation  as  an  incident  of  its  business  are  allowable  deductions 
from  gross  income  in  ascertaining  net  income  subject  to  the  income  tax;  for  example, 
a street  railway  corporation  donates  a sum  of  money  to  an  organization  intending  to  hold 
a convention  in  the  city  in  which  it  operates,  with  the  expectation  that  the  holding  of  such 
convention  will  augment  its  income  through  a greater  number  of  people  using  the  cars. 
In  such  case  the  donations  would  be  an  allowable  deduction,  the  reduction  to  be  reduced 
by  any  portion  of  the  donation  which  may  be  returned  to  the  corporation.  (Art.  134, 
^435-436,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2016  Law  11290.  Rentals  or  other  Paj^ents  Required  to  be  Made  as  a Condition  to 
the  Continued  Use  of  Possession  of  Certain  Property  is  Deductible. — “and  in- 
cluding rentals  or  other  payments  required  to  be  made  as  a condition  to  the  continued 
use  or  possession  of  property  to  which  the  corporation  has  not  taken  or  is  not  taking  title, 
or  in  which  it  has  no  equity;”  [Read  at  1[2891.] 


INC. 


203  TAX 


CORPORATIONS. 

2017  Business  Insurance. — Premiums  paid  In  advance,  covering  a period  of  several 
years,  are  to  be  taken  as  a deduction  on  the  basis  of  one  of  two  methods:  When 
the  books  are  kept  on  a cash  basis,  the  entire  amount  Is  deductible  in  the  year  in  which 
the  premium  is  paid.  Where  the  books  are  kept  on  an  accrual  basis  the  premium  is  to  be 
prorated  over  the  period  covered  by  the  insurance.  (Art.  8,  Hi  10,  Reg.  33,  Rev.,  Jan. 
2,  1918.) 

201  8 Reserves  for  Insurence. — Funds  set  aside  by  a corporation  for  Insuring  its  own 
property  are  not  a proper  deduction,  but  if  such  funds  are  set  aside,  or  a reserve 
therefor  is  set  up,  any  loss  actually  sustained  and  charged  to  such  funds  or  reserves  may 
be  deducted.  (Art.  144,  H452,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

20 1 9 I^spositors’  Guaranty  Fund. — Banking  corporations  which,  pursuant  to  the  laws 
of  the  States  in  which  they  are  doing  business,  are  required  to  set  apart,  keep,  and 
maintain  in  their  banks  the  amount  levied  and  assessed  against  them  by  the  State  authori- 
ties as  a “Depositors’  guaranty  fund,”  may  deduct  from  their  gross  income  in  their  returns 
of  annual  net  income  the  amount  so  set  apart  each  year  to  this  fund,  provided  that  such 
fund,  when  set  aside  and  carried  to  the  credit  of  the  State  banking  board  or  other  duly 
authorized  State  officer,  ceases  to  be  an  asset  of  the  bank,  but  may  be  withdrawn  in  whole 
or  in  part,  upon  demand  by  such  board  or  State  officer  to  meet  ihe  needs  of  these  officers, 
as  required  by  State  laws,  in  reimbursing  depositors  in  insolvent  banks,  and  provided  further 
that  no  portion  of  the  amount  thus  set  aside  and  credited  is  ’•f'tnrnable,  under  the  existing 
laws  of  the  State,  to  the  assets  of  the  banking  corporation. 

If,  however,  such  amount  is  simply  set  up  on  the  books  of  the  bank  as  a reserve 

2020  to  meet  a contingent  liability,  and  remains  an  asset  of  the  bank,  it  will  not  be 
deductible  except  as  it  is  actually  paid  out  as  required  by  law  and  upon  demand 

of  the  proper  State  officers.  (Art.  146,  H455-456,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2021  Redemption  of  Trading  Stamps. — Corporations,  mercantile  or  otherwise,  which 
issue  trading  stamps,  coupons,  etc.,  for  the  purpose  of  increasing  their  business, 

which  stamps  or  coupons  are  redeemable  In  merchandise,  may  allowably  deduct  from  gross 
income  as  a business  expense  the  amount  which  such  corporations  actually  expend  for 
such  stamps  or  coupons,  and  also  the  actual  cost  to  the  corporations  of  the  merchandise 
given  in  redeeming  the  same.  [H2881.] 

This  rule  contemplates  that  a reserve  set  up  as  a liability  equal  to  the  redemption 

2022  value  of  the  stamps  or  coupons  issued  is  not,  as  such,  an  allowable  deduction,  the 
deduction  being  limited  to  the  cost  of  the  stamps  or  coupons  and  the  merchandise 

with  which  they  are  redeemed.  (Art.  141,  H-I‘18-449,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2023  Earnings  of  Public  Utility  Paid  to  City,  etc. — In  case  of  a public  utility  constructed, 
operated,  or  maintained  by  a corporation  under  contract  with  any  city.  State, 

Territory,  or  the  District  of  Columbia,  with  an  agreement  that  a portion  of  the  net  earnings 
of  such  public  utility  corporation  shall  be  pa’d  to  the  city,  State,  Territory,  or  the  Dis- 
trict of  Columbia,  the  amount  so  paid  may  be  deducted  by  the  public  utility  company  as 
a necessary  expense  of  transacting  business.  (Art.  142,  H450,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2024  Service  Connections  and  Pipe  Extensions  by  Public  Utility. — Aloneys  so  received 
for  service  connections  and  pipe  extensions  are  not  permitted  to  be  deducted  from 

the  gross  amount  of  the  income,  for  they  do  not  come  within  any  of  the  permitted  classes 
of  deductions  mentioned  in  the  statute.  iMoneys  so  expended  are  invested  in  permanent 
improvements,  which  tend  to  enhance  the  rental  and  the  market  value  of  the  water  system. 
(Caption:  Union  Hollywood  Water  Co.  vs.  John  P.  Carter,  collector  case,  Act  of  Aug.  5, 
1909  (238  Fed.  329).  (T.  D.  2475,  April  4,  1917.) 

2025  Certain  Deductible  and  Non-Deductible  Expenses  of  Railroads. — The  appended 
decision  [summary]  of  the  United  States  District  Court  for  the  Western  District 

of  Michigan,  Southern  Division,  in  the  case  of  the  Grand  Rapids  & Indiana  Railway 
Company  v.  Doyle,  Collector.  (245  Fed.  792.) 

1.  Deductions  from  Gross  Income. 

Deductions  for  expenditures  for  addition  and  betterments  to  the  property,  such 
as  expenditures  for  sidings  or  spur  tracks,  are  not  authorized. 

2.  Operating  Expenses  Deductible. 

The  payment  for  labor  and  materials  which  go  Into  the  actual  operating  of  the 
road  and  the  property  are  deductible. 

3.  Expenses  of  Maintenance  Deductible. 

Maintenance  means  the  upkeep  or  preser  g of  the  condition  of  the  property 
to  be  operated  and  does  not  mean  additions  to  the  uipment,  additions  to  the  property, 
or  improvements  of  former  condition  of  the  road. 


INC.  204  TAX 


CORPORATIONSt 


4.  Cost  oi  Improvements.  , 

Where  old  rails  are  replaced  with  neW  and  heavier  rails, ^ wooden  bridges  and 
culverts  with  concrete  and  steel  bridges  and  culverts,  the  rule  is  that  the  cost  of  re- 
newals with  like  kind  and  quality  is  allowable,  but  excess  cost  is  not  allowable  as 
deduction. 

5.  Expenditures  Included  in  Income. 

Amounts  expended  for  improving  and  adding  to  the  property,  such  as  building 
new  stations  and  new  shops,  installing  new  machinery,  and  making  additions  to 
equipmen't,  are  included  in  income. 

is  published  for  the  information  of  internal  revenue  officers  and  others  concerned.  (T.  D. 
2210,  June  1,  1915.)  (245  Fed.  792.) 

2026  Lobbying  Expenses  and  Campaign  Contributions. — Sums  of  money  expended  for 
lobbying  purposes,  the  promotion  or  defeat  of  legislation,  the  exploitation  of  propa- 
ganda, and  contributions  for  campaign  expenses  are  held  not  to  be  an  ordinary  and  neces- 
sary expense  In  the  operation  and  maintenance  of  the  business  of  a corporation,  and  are 
therefore  not  deductible  from  gross  income  in  arriving  at  the  net  income  upon  which 
the  income  tax  is  computed.  (Art.  143,  1f451,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2027  Law  1[791.  All  Interest  Paid  or  Accrued  on  Indebtedness,  With  One  Exception, 
Is  Deductible. — “(2)  All  interest  paid  or  accrued  within  the  taxable  year  on  its 

indebtedness,”  [For  definition  of  “paid  or  accrued”  read  at  ^1923.]  [Read  at  1[2895.] 

2028  Faw'  ^,292.  Interest  Paid  in  Connection  With  Holdings  m Certain  Tax-Free 
Obligations  and  Securities  Is  Not  Deductible. — “except  on  indebtedness  incurred 

or  continued  to  purchase  or  carry  obligations  or  securities  (other  than  obligations  of  the 
United  States  issued  after  September  24,  1917)  the  interest  upon  which  is  wholly  exempt 
from  taxation  under  this  title  as  income  to  the  taxpayer,” 

2029  Interest  on  Capital  or  Surplus. — Interest  calculated  as  being  a charge  against 
income  on  account  of  capital  or  surplus  invested  in  the  business  but  which  does 

not  represent  a payment  on  an  interest-bearing  obligation,  is  not  an  allowable  deduction 
from  gross  income — that  is  to  say,  the  interest  which  the  money  would  earn  if  otherwise 
invested  is  not  a deductible  charge  against  income.  [Read  at  1[1965j  (Art.  187,  ^572, 
Reg.  33,  Rev.,  Jan.  2,  1918.)  [1[2896.] 

2030  Car-Trust  Certificates. — Equipment  or  car-trust  certificates  Issued  by  or  for  rail- 
road companies  are  a means  by  which  such  companies  secure  cars  or  other  equip- 
ment, or  the  money  with  which  such  equipment  is  purchased. 

The  equipment  becomes  at  once  an  asset  of  the  company  and  the  trust  certificates 
203  1 secured  by  such  assets  are  obligations  of  the  railroad  companies,  similar  to  corporate 
bonds,  mortgages,  and  like  obligations.  The  trustees  in  whose  names  legal  title 
to  the  equipment  stands,  are  not  an  association  within  the  meaning  of  this  title,  and  are 
therefore  not  a taxable  entity,  but  they  are,  for  the  purpose  of  this  title,  a fiscal  agent,  pay- 
ing off  the  obligations,  both  principal  and  interest,  of  the  railroad  companies  with  funds 
appropriated  by  such  companies. 

The  railroad  companies  may  include  these  trust  certificates  in  the  amount  of  their 

2032  bonded  or  other  indebtedness  reported  under  item  2 of  the  return  Form  1031,  and 

the  interest  paid  thereon,  * * * ^ deductible,  * * * ^ 

If  the  certificates  contain  a contract  or  provision  by  which  the  obligor  agrees  to 

2033  pay  any  portion  of  the  tax  imposed  by  this  title  upon  the  obligee  or  reimburse  the 
obligee  for  any  portion  of  the  tax,  or  to  pay  the  interest  without  deduction  for  any 

tax  which  the  obligor  may  be  required  to  pay,  the  trustees  in  such  cases,  in  making  interest 
payments  on  these  certificates,  will,  in  the  absence  of  claims  for  exemption  when  interest 
payments  are  made  to  individuals,  withhold  the  normal  income  tax  on  such  payments 
regardless  of  the  amount  thereof.  (Art.  188,  ^[573-576,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2034  Interest  on  Indebtedness  as  Rental. — Interest  paid  pursuant  to  contract  on  an  in 
debtedness  secured  by  mortgage  on  real  estate  occupied  and  used  by  a corporation, 

in  which  real  estate  the  corporation  has  no  equity  or  to  which  it  is  not  taking  title,  is  an 
allowable  deduction  from  gross  income  as  a rental  charge,  payment  of  which  is  required 
to  be  made  as  a condition  to  the  continued  use  and  possession  of  the  property.  If,  how- 
ever, the  corporation  has  an  equity  in  or  is  purchasing  for  its  own  use  the  real  estate  upon 
which  such  mortgage  is  a prior  lien,  the  indebtedness  will  be  held  to  be  indebtedness  of  the 
corporation  within  the  meaning  of  the  law  and  the  interest  paid  on  such  mortgage  will  be 
deauctible  [as  interest]  * • ♦ , (Art.  186,  ^571,  Reg.  33,  Rev.,  Jan.  2,  1918.) 


IKC.  205  TAX 


'CORPORATIONS. 


2035  Interest  on  Deposits. — In  the  case  of  ,banl;s  and  banking  asspeiatlons,  loan  or  trust 
companies,  interest  paid  within  the  year  on  deposits  or  on  moneys  received  for  in- 
vestment and  secured  by  interest-bearing  certificates  of  indebtedness  issued  by  such 
banks,  banking  association,  loan  or  trust  company,  may  be  allowably  deducted  from;  the 
gross  income  of  such  corporation.  (Art.  190,  1[578,  Reg.  33,  Rev.,  Jan.  2,  1918.) 


2036  I^aw  ^294.  Taxes  Paid  or  Accrued  Within  the  Year  Are  Deductible,  with  Certain 
Exceptions. — “(3)  Taxes  paid  or  accrued  within  the  taxable  year  imposed”  [For 
construe  tion  of  “paid  or  accrued’Vread  at  ^1923.]  [^[2897.1 


2037  T aw  ^295.  All  Taxes  Imposed  by  the  Federal  Government  Except  Income  and 
Excess-Profits  Taxes  Are  Deductible. — “(a)  by  the  authority  of  the  United  Status, 
except  income,  war-profits  and  excess-profits  taxes  [‘1[2327];  or”  [^2898.] 


2038  All  taxes  levied  by  the  general  taxing  authority,  levied  and  paid  on  all  taxable 
subjects,  including  tax  imposed  and  paid  under  the  act  of  October  3,  1917,  except 
war-excess  profits,  income  taxes,  and  taxes  assessed  against  local  benefits,  are  allowable 
deductions  to  the  party  paying  the  same.  Although  excess-profits  tax  paid  is  not  an  allow- 
able deduction  in  ascertaining  the  net  income,  the  net  income  shown  on  any  return  will  be 
credited  with  the  amount  of  excess-profits  tax  for  which  the  taxpayer  will  be  liable  for  the 
same  year,  in  order  to  determine  the  amount  of  income-tax  liability.  [See  ^2.^27]  (Art.  8, 
1[116,  Reg.  33,  Rev.,  Jan.  2,  1918.) 


2039  T.aw  ^296.  All  Taxes  Imposed  by  the  “Possessions”  Are  Deductible  or  Allowed 
as  a Credit. — “(b)  by  the  authoiiiy  of  any  of  its  possessions,  except  the  amoui'.t  of 
Income,  war-p.  ofits  and  excess-profits  taxes  allowed  as  a credit  under  section  238  23.12]; 


2040  Uaw  ^297.  All  State  and  Municipal  Taxes,  Excent  Certain  Assessments  A«^ainst 
Local  Benefits,  Are  Deductible.; — “(c)  by  the  authority  of  any  .State  or  Territory, 

or  any  county,  school  district,  municipality,  or  other  taxing  subdivision  of  any  State  or 
Territory,” 

2041  Law'  ^298.  Certain  Assessments  Against  Local  Benefits  are  not  Deductible.— 
“not  Including  those  assessed  against  local  benefits  of  a kind  tending  to  increase  the 

value  of  the  property  assessed;  or”  .1^2899.]  , 

[The  words  “of  a kind  tending  to  increase  the  value  of  the  property  assessed”  in  the 
above  are  new.] 

2042  So-called  “taxes,”  more  properly  assessments,  paid  for  local  benefits,  such  as  street, 
sidewalk,  and  other  like  assessments,  imposed  because  of  and  measured  by  some 

benefit  inuring  directly  to  the  property  against  W'hich  the  assessment  Is  levied,  do  not  con- 
stitute an  allowable  deduction  from  gross  income.  Taxes  deductible  are  those  lev'ied  for 
the  public  welfare  by  the  proper  taxing  authorities  at  a like  rate  against  all  property  in 
the  territory  over  which  such  authorities  have  jurisdiction. 

Special  assessments,  such  as  are  hereinbefore  contemplated  and  w'hIch  are  measured 

2043  upon  the  basis  of  the  benefit  flowing  directly  to  the  property,  are  not  deductible, 
even  though  an  incidental  benefit  may  inure  to  the  public  welfare.  (.Art.  194, 

11586-587,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2044  Taxes  paid  pursuant  to  assessments  levied  by  special  districts,  such  as  irrigation, 
reclamation,  drainage  districts,  etc.,  for  sidewalks  in  cities,  street  extension,  grading, 

paving,  etc.,  are  held  to  be  “taxes  assessed  against  local  benefits.”  Such  taxes  are  not  allow^- 
able  deductions  in  a return  of  annual  net  income.  (T.  D.  2090,  Dec.  14,  1914.) 

2045  Taxes  for  Local  Benefits. — What  forms  of  taxes  cannot  be  claimed  as  deductions'? 
(Answer.)  Taxes  assessed  against  an  individual  on  property  owned  by  him  to  pay 

for  the  paving  of  a street,  contiguous  to  his  property,  the  construction  of  a sewer,  side- 
walk, etc.,  the  sprinkling  or  oiling  of  a street  In  front  of  his  home,  the  construction  of 
levees  to  protect,  or  ditches  to  drain,  property  owned  by  him,  cannot  be  claimed  as  deduc^ 
tions.  In  short,  such  taxes  as  are  not  general  in  nature  and  are  levied  on  account  of  some 
w’ork  or  privileges  the  benefit  of  which  accrues  to  a limited  number  of  property  owners, 
of  which  the  taxpayer  is  one,  are  not  allow^able  deductions.  (Question  No.  62,  1918  Income 
Tax  Primer.) 


CORPORATIONS. 


2046  Excise,  License,  and  Franchise  Taxes  are  Deductible. — The  ruling  of  this  ofTice 
previously  made  to  the  effect  that  banking  corporations  are  not  permitted  to  deduct 

from  gross  income  the  amount  of  taxes  paid  for  stockholders  on  the  value  of  their  capital 
stock  outstanding,  applies  only  to  the  taxes  levied  upon  the  value  of  the  capital  stock  arid 
is  not  intended  to  operate  as  so  to  prevent  banking  corporations  from  deducting  from  their 
gross  income  any  State  tax  imposed  against  the  corporation  itself,  as  an  excise  or  franchise 
tax;  that  is,  a tax  which  the  corporation  is  required  to  pay  to  the  State  in  order  that  it  may 
transact  business  within  the  State.  (T.  D.  2152,  Feb.  12,  1915.) 

2047  In  the  case  of  business,  excise,  license,  or  privilege  taxes,  they  may  be  deducted 
either  as  taxes  or  items  of  expense,  but  not  under  both  heads.  (Art.  8,  ^[117,  Reg.  33, 

Rev.,  Jan.  2,  1918.) 

2048  Import,  Tariff  or  Customs  Duties. — Import  or  tariff  duties  levied  by  act  of  Congress 
and  paid  to  the  proper  customs  officers,  stamp  taxes,  and  all  other  taxes  (except 

income  and  excess  profits  taxes)  imposed  by  internal-revenue  laws  and  paid  to  collectors 
are  deductible  as  taxes  irriposed  under  authority  of  the  United  States,  provided  they  are 
not  added  to  and  made  a part  of  the  cost  of  articles  of  merchandise  with  respect  to  which 
they  are  paid,  in  which  case  they  will  be  reflected  in  the  cost  of  merchandise  and  can  not 
be  separately  deducted.  (Art.  195,  ^588,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2049  You  are  advised  that  this  office  now  holds  that  custom  duties  paid  during  the  year 
by  an  individual  are  allowable  deductions,  as  taxes  or  as  part  of  the  cost  price  if 

the  individual  is  engaged  in  the  importation  of  goods  and  merchandise.  This  ruling  super- 
sedes instructions  contained  in  office  letter  to  you  referred  to  above,  and  you  are  requested 
to  correct  your  report  in  accordance  herewith.  (Extract  from  a letter  to  a collector,  signed 
by  Deputy  Commissioner  L.  F.  Speer,  and  dated  December  22,  1914.) 

2050  Taxes  Paid  for  Shareholders. — Banks  paying  taxes  assessed  against  their  stock- 
holders on  account  of  their  ownership  of  the  shares  of  stock  issued  by  such  banks 

cannot  deduct  the  amount  of  taxes  so  paid  in  making  their  returns  for  the  purpose  of  the 
income  tax  imposed  by  this  title  unless  and  to  the  extent  that  the  lav/s  of  the  State  in  which 
they  do  business  by  specific  terms  make  the  tax  a direct  liability  of  such  banks,  that  is, 
a lien  upon  its  property.  The  shares  of  stock  are  the  property  of  the  stockholders,  and 
to  the  extent  that  the  taxes  assessed  on  the  value  of  the  shares  of  stock  are  property  taxes 
the  holders  are  primarily  liable  for  their  payment. 

The  fact  that  State  laws  make  it  the  duty  of  banks  to  pay  the  tax  does  not  neces- 

2051  sarily  make  the  tax  a liability  of  the  banks.  These  provisions  of  State  laws  are 
intended  only  to  provide  a convenient  means  whereby  the  tax  assessed  against  the 

stock  on  the  basis  of  its  value  can  be  the  more  readily  collected  by  the  tax-collecting  officers 
and  do  not  attempt  to  assert  liability  against  the  bank,  as  is  evidenced  by  the  fact  that  in 
most,  if  not  all,  cases  the  tax  is  a lien  upon  the  stock.  For  this  purpose  the  liability  of  the 
bank  is  limited  to  the  duty  to  collect  or  withhold  from  the  stockholders  the  amount  of  taxes 
due  and  to  pay  the  same  over  to  the  proper  tax-collecting  offices.  Federal  statutes  pro- 
hibit States  from  imposing  any  tax  upon  national  banks  except  upon  the  value  of  their 
real  estate.  In  cases  where  States  levy  a tax  on  the  stock  of  such  banks  and  make  it  the , 
duty  of  the  banks  to  pay  such  tax  for  the  stockholders  such  payments  are  not  deductible 
from  the  gross  income  of  such  banks. 

^I’his  rule  applies  only  to  taxes  levied  upon  the  value  of  the  capital  stock,  and  it  is 

2052  not  intended  to  so  operate  as  to  prevent  banking  corporations  from  deducting 
from  their  gross  income  any  State  tax  imposed  against  the  corporation  itself  on 

the  value  of  its  real  estate,  furniture  and  fixtures,  or  as  an  excise  or  a franchise  tax;  that  is, 
a tax  which  the  corporation  is  required  to  pay  to  the  State  on  account  of  its  own  property 
or  business  in  order  that  it  may  transact  business  within  the  State  is  deductible. 

The  rule  hereinbefore  set  out  will  apply  in  the  case  of  corporations  other  than 

2053  banks,  upon  the  value  of  whose  stock  taxes  are  assessed  to  the  stockholders.  (Art. 
192,  ^581-584,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2054  Tax  on  Bank  Stock. — Taxes  on  bank  stock  paid  under  legal  requirement  by  the  bank 
for  its  stockholders  are  deductible  by  the  stockholders  and  not  by  the  bank.  Such 

payments  are  regarded  as  in  the  nature  of  additional  dividends  and  should  be  included  by 
the  stockholder  in  his  dividends  received. 

Where  bank  stock  is  sold  and  transferred  between  date  of  assessment  and  pay- 

2055  nient  of  the  tax,  in  the  absence  of  statute  governing,  the  stockholder  liable  for  the 
tax  (if  the  tax  was  actually  paid)  will  have  the  benefit  of  the  tax  deduction  in 

returns  of  income.  'Fhis  is  a question  of  fact  and  to  be  determined  as  such.  (Art.  8, 
11118-119,  Reg.  33,  Rev.,  Jan.  2,  1918.) 


INC. 


207  TAX 


CORPORATIONS. 


2056  A bank  in  Massachusetts  held  not  authorized  to  deduct  from  is  gross  income  taxes 
paid  on  its  shares  on  behalf  of  its  stockholders  under  Rev.  Laws,  Mass.  c.  14,  Secs. 

9-18,  in  ascertaining  its  net  income  subject  to  special  excise  tax  under  Tariff  Act  Aug.  5, 
1909,  c.  6,  Sec.  38,  par.  2,  36  Stat.  112. — Eliot  Nat.  Bank  v.  Gill,  210  F.  833.  (Affirmed  by 
Circuit  Court  of  Appeals,  First  Circuit,  December  21,  1914  [218  Fed.  600].) 

The  United  States  Circuit  Court  of  Appeals,  Eighth  Circuit  (No.  4260,  December 

2057  Term,  1914),  in  error  to  the  District  Court  of  the  United  States  for  the  Eastern 
District  of  Missouri  [March  25,  1915]  in  the  case  of  the  National  Bank  of  Commerce 

in  St.  Louis,  plaintiff  in  error,  v.  E.  B.  Allen,  U.  S.  Collector  of  Internal  Revenue  for  the 
First  District  of  Missouri,  defendant  in  error,  affirms  the  decision  of  the  court  below  (21 1 
Fed.  743)  in  which  judgment  was  rendered  by  the  Court  against  the  bank. 

The  Court  of  Appeals  held  that  (223  Fed.  472];  1.  Under  the  State  law,  where 

2058  banks  pay  the  State  tax  imposed  on  shareholders,  but  have  a lien  until  reimbursed 
on  the  shares  of  stock  and  all  dividends,  the  tax  is  not  imposed  on  the  banks;  2. 

State  taxes  so  paid  can  not  be  legally  deducted  from  gross  income  on  returns  made  by  banks 
under  the  corporation  tax  act;  3.  The  commissioner  has  powder  to  make  a nev/  assessment 
within  three  years  in  case  an  incorrect  return  has  been  made;  4.  There  is  no  necessity  of 
construing  the  word  “false,”  where  it  is  used  with  reference  to  the  time  in  which  the  com- 
missioner shall  act,  to  mean  fraudulently  false.  (T.  D.  2198,  May,  5,  1915.) 

[Petition  to  the  United  States  Supreme  Court  for  a writ  of  certiorari  to  the  Court  of 
Appeals  for  the  Eighth  District  denied.  October  25,  1915.] 

2059  Taxable  Status  of  Amount  Refunded  by  Government  in  One  Year,  Represeaung 
Tax  Paid  for  Which  Credit  has  been  Taken  as  a Deduction  in  a Previous  Year.— 

Receipt,  is  acknowledged  of  your  letter  of  December  16,  1918,  in  which  you  ask  whether  an 
individual  who  has  claimed  a deduction  for  taxes  [such  as  Federal  Excise  Taxes]  paid 
during  the  year  in  his  income  tax  return  for  1917  and  in  the  following  year  it  develops 
that  these  taxes  were  improperly  assessed  and  collected,  and  a refund  is  made  to  the  tax- 
payer in  1918,  should  consider  “the  amount  of  such  refund  gross  income  for  the  year  1918, 
or  is  it  in  the  nature  of  additional  inco.me  for  1917  and  should  the  additional  tax  liability 
on  the  amount  of  the  refund  be  taken  care  of  as  1917  income  by  means  of  an  amended 
return  for  1917  and  by  an  additional  tax  payment  as  of  that  year?”  ^In  reply  you  are 
advised  that  this  taxpayer  will  not  be  required  to  include  in  his  return  for  1918  the  amount 
received  as  refund  of  taxes  erroneously  paid  in  the  preceding  year.  He  should,  however, 
file  an  amended  return  for  1917  and  claim  a deduction  therein  for  the  correct  amount  of 
taxes  due  for  that  year.  The  further  amount  of  income  tax  due  for  1917  as  a result  of  the 
reduction  in  the  item  of  taxes  paid  during  the  year  and  a letter  of  explanation  should  accom- 
pany the  amended  return  when  it  is  forwarded  the  Collector  of  Internal  Revenue.  (Letter 
to  The  Corporation  Trust  Company,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated 
January  8,  1919.) 

2060’Law  ^[299.  All  Foreign  Taxes  Are  Deductible  or  Allowed  as"a  Credit. — “(d)  in  the 
case  of  a domestic  corporation,  by  the  authority  of  any  foreign  country,  except 
the  amount  of  income,  war-profits  and  excess-profits  taxes  allowed  as  a credit  under  section 
238  [1I2332J;  or” 

2061  Law  ^301.  Taxes  Withheld  at  the  Source  on  Account  of  Tax-Free-Covenant 
Obligations  Are  Not  Deductible. — Provided,  That  in  the  case  of  obligors  specified 
in  subdivision  (b)  of  section  221  [1[604]  no  deduction  for  the  payment  of  the  tax  imposed 
by  this  title  or  any  other  tax  paid  pursuant  to  the  contract  or  provision  referred  to  in  that 
subdivision,  shall  be  allowed;” 

2062iTax-Free  Bonds. — In  the  case  of  bonds  or  other  forms  of  indebtedness  Issued  with 
a guaranty  that  the  interest  thereon  shall  be  free  from  taxation  as  against  the  holder, 
the  corporation  paying  the  tax  pursuant  to  its  guaranty,  whether  Federal,  State,  or  muni- 
cipal, will  not  be  permitted  to  deduct  the  tax  so  paid.  The  tax  assessable  upon  this  income 
is  a direct  liability  of  the  recipient,  and  the  debtor  corporation  paying  it  does  so  voluntarily 
or  at  least  in  pursuance  of  a contract  voluntarily  entered  into,  which  contract  is  in  nowise 
binding  upon  or  to  be  recognized  by  the  Government  in  determining  the  tax  liability  of 
the  corporation.  Hence  taxes  so  paid  are  not  deductible  from  the  gross  income  of  the 
debtor.  (Art.  193,  1(585,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2063  Law  1(302.  Losses  Sustained  Are  Deductible. — “(4)  Losses  sustained  during  the 
taxable  year  and  not  compensated  for  by  insurance  or  otherwise;”  [Heretofore 
the  law  read  “losses  sustained  and  charged  ofP  However,  Sec.  212  (b),  K755,  should 
be  noted  in  this  connection.]  [K2901.] 


INC.  208 


TAX 


CORPORATIONS. 


Basis  of  Determining  Gain  or  Loss. — [Read  at  ^1854.] 

Net  Losses. — [Read  at  1(1913.] 

2064  Deductible  Losses. — The  deduction  for  losses  must  represent  losses  not  compensated 
for  by  insurance  or  otherwise  and  which  were  charged  off  and  actually  sustained 

within  the  year  as  evidenced  by  closed  and  completed  transactions.  [But  read  at  “In- 
ventories,” 1(1861.]  (Art.  147,  1(457,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2065  The  loss  considered  here  has  in  it  no  element  of  “depreciation”  or  “allowance  for 
wear  and  tear,”  or  “compensation  from  insurance  or  otherwise.”  It  is  to  be  such 

loss  as  is  absolute  and  complete  and  which  has  been  actually  sustained. 

Depreciation  as  an  allowable  deduction  in  ascertaining  annual  net  Income  for  the 

2066  income  tax  is  separately  provided  for,  and  is  not  to  be  confused  with  loss.  The 
depreciation  provided  to  be  taken  as  a deduction  in  a return  of  income  Is  the  value 

assigned  to  the  deterioration  of  physical  improvements  or  assets,  such  as  are  susceptible 
of  having  their  value  lessened  through  wear  and  tear,  use  or  obsolescence.  (T.  D.  2005, 
July  8,  1914.) 

2067  Shrinkage  in  Securities  [See  “Inventories”  at  1(1861.]. — A corporation  possessing 
securities,  such  as  stocks  and  bonds,  can  not  allowably  deduct  from  gross  income 

any  amount  claimed  as  a loss  on  account  of  the  shrinkage  in  value  of  such  securities  through 
fluctuations  of  the  market  or  otherwise;  the  only  loss  to  be  allowed  in  such  cases  is  that 
actually  suffered  when  the  securities  mature  or  are  disposed  of. 

In  the  case  of  banks  or  other  corporations  which  are  subject  to  supervision  by  State 

2068  or  Federal  authorities,  and  which,  in  obedience  to  the  orders  of  such  supervisory 
officers,  charge  off  as  losses,  amounts  representing  an  alleged  shrinkage  in  the  value 

of  property,  real,  personal,  or  mixed,  the  amounts  so  charged  off  do  not  constitute  allowable 
deductions.  Deductible  losses  are  those  only  which  are  determined  upon  the  basis  of  a 
closed  or  completed  transaction.  The  foregoing  applies  only  to  owners  and  investors  and 
not  to  dealers  in  securities,  as  to  which  see  T.  D.  2609  [1(1862].  (Art.  148, 1(459-460,  Reg.  33, 
Rev.,  Jan.  2,  1918.)  [1(2904.] 

2069  Losses  may  be  sustained  by  individuals  or  corporations  on  personal  or  real  property 
* * * . Loss  to  be  deductible  must  be  an  absolute  loss,  not  a speculative 

or  fluctuating  valuation  of  continuing  investment,  but  must  be  an  actual  loss, 
actually  sustained  and  ascertained  during  the  tax  year  for  which  the  deduction  Is  sought 
to  be  made;  it  must  * * * be  determined  and  ascertained  upon  an  actual,  a com- 

pleted, a closed  transaction. 

Losses  sustained  by  * * * corporations  from  the  sale  of  or  dealings  in  personal 

2070  or  real  property  growing  out  of  ownership  or  use  of  or  interest  in  such  property, 

will  not  be  deductible  at  all  unless  they  are  * * * ascertained,  determined 

and  fixed  as  absolute  in  the  above  sense,  within  the  taxable  year  in  which  the  deduction 
is  sought  to  be  made.  When  loss  under  this  heading  is  ascertained  to  be  deductible,  the 
entire  amount  of  the  loss  will  be  deductible  except  where  the  property,  in  connection  with 
which  the  loss  occurred,  was  acquired  prior  to  March  1,  1913  * * * ^ (x.  D.  2005, 

July  8,  1914.) 

207  1 Irrigation  Bonds. — District  Irrigation  bonds  generally  are  a lien  upon  the  real  estate 
affected  by  the  irrigation  project,  and  until  a corporation  holding  such  bonds  has 
taken  the  necessary  action  to  protect  its  interest  and  enforce  the  collection  of  the  bonds 
the  corporation  will  not  be  allowed  to  deduct  from  gross  income,  as  a loss,  the  face  value 
or  any  estimated  amount  supposed  to  represent  a loss  or  shrinkage  in  the  value  of  such 
bonds.  Any  estimated  shrinkage  in  the  value  of  bonds  or  other  securities  does  not  con- 
stitute a loss  within  the  meaning  of  this  title.  So  long  as  the  value  of  a security  is  un- 
certain or  unknown  a loss  can  not  be  definitely  ascertained  and  is  therefore  not  deductible. 
(Art.  153,  K471,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2072  Discount  on  Bonds  Issued  Prior  to  1909. — Discount  on  bonds  Issued  and  sold  prior 
to  the  year  1909,  if  such  discount  was  then  charged  against  surplus  or  against  the 
income  of  the  year  in  which  the  bonds  were  sold,  is  held  not  to  be  deductible  from  the  in- 
come of  subsequent  years,  for  the  reason  that  the  charging  off  prior  to  January  1,  1909, 
of  the  entire  amount  of  the  discount  constitutes  a closed  transaction,  and  such  transaction 
can  not  be  reopened  for  the  purpose  of  reducing  the  taxable  income  of  a corporation  for 
subsequent  years  by  deducting  therefrom  an  aliquot  part  of  the  discount.  (Art.  149, 
K461,  Reg.  33,  Rev.,  Jan.  2,  1918.)  (C.  & A.  R.  R.  v.  U.  S.,  Court  of  Claims  [1(2073]). 


INC. 


209  TAX 


CORPORATIONS. 

2073  The  appended  opinion  [caption  only,  ^2074]  pf^the  Court  of  Claims  of’the  United 
States  in  the  case  of  Chicago  & Alton  Railroad- Co’ United  States  [decided  Dec. 

3,  1917]  is  published  for  the  information  of  internal-revenue  officers  and  other  concerned, 

2074  Caption  referred  to  in  ^[2073. — Where  a railroad  company  sold  bonds  and  equipment 
notes  at  a discount  in  1906  and  the  books  show  that  the  loss  was  entirely  charged 

off  under  the  profit  and  loss  account  for  1906,  and  th-e  company'in  making  returns  under  the 
act  of  August  5,  1909,  for  purpose  of  assessment  of  excise  tax  for  years  1911  and  1912, 
failed  to  deduct  the  proportionate  amount  of  discount  sustained,  it  has  no  right  to  claim 
refund  of  such  amount.  The  petition  of  claimant  for  refund'of  tax  dismissed.  (T.  D. 
2631,  Jan.  19,  1918.)  (249  Fed.  280.) 

2075  Discount  on  Bonds  Issued  Subsequent  to  January  1,  1909. — If,  however,  the  bonds 
were  sold  subsequent  to  January  1,  1909,  at  a discount,  and  the  amount  of  the  dis- 
count was  then  charged  off  on  the  books,  either  against  earnings  or  surplus,  but  not  deducted 
ill  the  corporation’s  return  of  net  income,  such  discount  as  was  not  then  deducted,  may  be 
spread  over  the  life  of  the  bonds,  and  an  aliquot  part  of  the  discount  may  be  deducted  from 
the  gross  income  of  each  year  until  the  bonds  mature  or  are  redeemed. 

In  cases  wherein  a corporation  sells  its  bonds  at  a discount  plus  a commission 
207  6 for  selling,  the  amount  of  such  discount  and  commission,  together  with  other  ex- 
penses incidental  to  issuing  the  bonds,  constitutes  a loss,  the  aggregate  amount  of 
which  loss  will  for  the  purpose  of  an  income  tax  return,  be  prorated  over  the  life  of  the 
bonds  sold,  and  the  amount  thus  apportioned  to 'each  year  will  be  deductible  from  the 
gross  income  of  each  such  year  until  the  bonds  shall  have  been  redeemed. 

If  a corporation  having  sold  its  bonds  at  a discount,  the  discount  having  been 
207  7 deducted  from  gross  income  later  repurchases  or  redeems  the  bonds  at  a price 
, : less  than  par,  the  difference  between  the  price  at  which  they  are  redeemed  and  their 
par  value  will  be  returned  as  income.  If  bonds  are  sold  at  a premium  the  premium  must- 
be  returned  as  Income.  (Art.  150,  lf462-464,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2078  The  appended  decision  of  the  United  States  Circuit  Court  of  Appeals  for  the  Tlilrd 
Circuit,  is  the  case  of  the  Baldwin  Locomotive  Works  v.  McCoach,  collector, 

[221  Fed.  59,  holding  that  if  the  less  sustained  by  selling  its  own  bonds  at  a discount  is  an 
expense  of  the  business  of  a corporation,  the  expense  will  not  be  paid  until  the  maturity 
of  the  bonds,  and  should  therefore  be  prorated  over  the  life  of  the  bonds]  is  published  for 
the  information  of  Internal  revenue  officers  and  others  concerned.  (T.  D.  2185,  April  1, 
1915.)  [Decision  reported  at  221  Fed.  59.] 

2079  Loss  Due  to  Retirement  of  Bonds. — In  a case  wherein  a corporation,  under  the 
terms  of  its  indenture,  securing  an  issue  of  bonds  is  required  annually  or  at  certain 

specified  periods  to  purchase  and  retire  a certain  number  of  its  bonds  and  in  doing  so  pays 
more  than  par  for  the  bonds,  the  loss  sustained  is  an  allowable  deduction  from  gross 
income  for  the  year  in  which  such  purchase  is  made,  under  the  following  conditions: 

2080  First.  If  the  bonds  w^ere  sold  at  par,  then  the  loss  is  the  difference  between  par 
and  the  price  at  which  they  w'ere  repurchased  for  retirement. 

2081  Second.  If  the  bonds  were  sold  at  a premium  and  such  premium  was  accounted  for 

as  income  for  the  year  in  which  issued,  then  the  difference  between  par  and  the  repur- 
chase price  may  be  deducted  as  loss,  but  if  the  premiums  at  which  the  bonds  were  issued 
had  not  been  carried  into  the  income  account  then  the  loss  to  be  claimed  should  be  the 
difference  between  the  price  at  w hich  the  bonds  were  sold  and  the  price  at  which  they 
were  repurchased.  , , ‘ 

Third.  If  the  bonds  were  sold  at  a discount  and  the  discount  was  charged  against 

2082  tlie  earnings  of  the  year  in  which  issued,  the  difference  between  par  and  the  repur- 

chase price  may  be  deducted  as  a loss,  but  if  the.  dicount  on  the  bonds  was  pro- 
rated over  the  life  of  the  bonds  and  the  annual  proportion  charged  against  the  yearly 
income,  the  amount  to  be  charged  off  as  a loss  for  the  year  in  which  the  bonds  are  repur- 
chased for  retirement  should  be  the  difference  between  the  price  at  which  the  bonds  were 
sold  and  the  repurchase  price  minus  an  allowance  for  the  sum  that  had  been  charged  off 
annually  on  account  of  the  prorated  discount  on  such  bonds.  (Art.  152,  11467-470,  Reg. 
33,  Rev.,  Jan.  2,  1918.)  (• 

2083  Redemption  of  Stock  on  a Stipulated  Premium  Basis  Considered  a Capital  Trans- 
action.— I’his  office  is  in  receipt  of  your  letter  of  the  6th  instant,  in  which  you  ask 

for  information  on  the  following  question:  “A  corporation  in  1912  issued  preferred  stock 
for  par.  It  was  provided  on  the  certificates  that  said  stock  was  redeemable  at  110.  The 
company  exercised  its  option  and  redeemed  the  stock  at  1 10  by  calling  it  in.  The  difference 
appeared  on  the  books  as  a reduction  of  undivided  profits.  Is  this  difference  a lawful 


INC. 


210 


TAX 


CORPORATIONS. 

deduction?”  1[In  reply  you  are  informed  that  this  office  will  hold  that  the  redeeminjt 
of  the  stock  at  a price  in  excess  of  par  represents  a capital  transaction  in  which  there  can 
be  no  gain  or  loss  to  the  corporation,  and  therefore  the  difference  between  the  selling  price 
of  the  stock  and  the  price  at  which  it  was  redeemed  will  not  be  deductible  in  a return  of 
annual  net  income,  (Letter  to  a subscriber,  signed  by  Deputy  Commissioner  G.  E. 
Fletcher  and  dated  April  11,  1917.) 

2084  Voluntary  Removal  of  Buildings. — Loss  due  to  the  voluntary  removal  or  demolition 
of  old  buildings,  the  scrapping  of  old  machinery,  equipment,  etc.,  incident'to 

renewals  and  replacements  will  be  deductible  from  gross  income,  in  an  amount  repre- 
senting the  difference  between  the  cost  of  such  property  demolished  or  scrapped  and 
an  amount  treasuring  a reasonable  allowance  for  the  depreciation  which  the  property 
had  undergone  prior  to  its  demolition  or  scrapping;  that  is  to  say,  the  deductible  loss  is 
only  so  much  of  the  original  cost,  less  salvage,  as  would  have  remained  unextinguished 
had  a reasonable  allowance  been  charged  off  for  depreciation  during  each  year  prior 
to  its  destruction.  (Art.  155,  ^473,  Reg.  33,  Rev.,  Jan.  2,  1918.)  [^2902.] 

2085  Razing  Old  Buildings  to  Give  Place  to  New  Ones. — When  a corporation  buys 
real  estate,  upon  which  is  located  a building  or  buildings,  which  it  proceeds  to  raze, 

with  a view  to  erecting  thereon  another  building  or  buildings,  it  will  be  held  that  the  cor- 
poration has  sustained  no  deductible  loss  by  reason  of  the  demolition  of  the  old  building 
or  buildings.  In  such  case  it  will  be  considered  that  the  value  of  the  real  estate,  exclusive 
of  old  improvements,  is  equal  to  the  purchase  price  of  the  land  and  buildings.  (Art.  156,' 
^474,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2086  Sale  of  Patents. — A corporation  disposing  of  patents  by  sale  should  determine 
the  profit  or  loss  arising  therefrom  by  computing  the  difference  between  the  selling 

price  and  the  value  as  of  March  1,  1913,  if  acquired  prior  to  that  date,  or  between  the 
selling  price  and  the  cost,  if  acquired  subsequent  to  that  date.  The  profit  or  loss  thus 
ascertained  should  be  increased  or  decreased,  as  the  case  may  be,  by  the  amounts  deducted^ 
on  account  of  depreciation  of  such  patents  since  March  1,  1913,  or  since  the  date  of  pur- 
chase if  acquired  subsequent  to  that  date. (Art.  157,  1[475,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2087  Losses  on  Judgment. — Any  amount  paid  pursuant  to  judgment  or  otherwise  on 
account  of  damages  is  deductible  from  gross  income  to  the  extent  of,  and  when 

the  amount  is  actually  paid,  less  any  amount  of  such  damages  as  may  have  been  compen- 
sated for  by  insurance.  (Art.  158,  ^[476,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2088  Cost  of  Successful  Drawing,  Models,  etc..  Capital. — When  a corporation  has 
made  expenditures  for  designs,  drawings,  patterns  or  models  representing  work" 

of  an  expcrlm.ental  nature,  and  such  designs,  drawings,  patterns,  or  models  prove  to  be 
satisfactory  and  result  in  the  production  of  salable  goods,  they  will  be  treated  as  a capital 
asset,  and  the  entire  cost  thereof,  including  experimental  and  development  expense's, 
will  be  capitalized,  in  which  case  no  part  of  such  expenditures  shall  be  included  in  expenses 
of  rujining  the  business  and  shall  not  be  treated  as  a deduction  from  gross  income. — (Art. 
175,  ^553,  Reg.  33,  Rev.,  Jan.  2,  4918.) 

2089  Cost  of  Unsatisfactory  Models,  Drawings,  Etc.,  a Loss. — If,  however,  the  designs, 
drawings,  patterns,  or  m.odels  prove  by  actual  experience  to  be  unsatisfactory  and 

do  not  result  in  the  production  of  salable  goods  and  have  no  asset  value,  such  expenditures 
charged  off  may  be  included  as  a ,lo,£S  incident  to  running  the  business  and  as  such 
deducted  from  gross  incomg,.  provided  that  the  corporation  in  taking  credit  for  such 
expenditures  in  its  income  tax  return  shall  :nake  a full  and  complete  explanation  with 
respect  to  the  sam.e  and  to  the  satisfaction  of  the  Commissioner  of  Internal  Revenue. 
(Art.  176,  1|554,  Reg.  33,  Rev.,  Jan.  2,  1,918.) 

2090  Law  ^303.  Worthless  Debts  are  Deductible, — “(5)  Debts  ascertained  to  be  worth- 
less and  charged  off  withm  tlie  taxable  .year;”  [^2906.] 

2091  Where  all  of  the  surrounding  and  attendant  circumstances  indicate  that  a debt 
is  worthless  and  uneollectible  and  that  legal  action  to  enforce  payment  would 

in  all  probability  not,.re,tfultl in  thejjja-u.sfact.ioij.-rof  execution  on  a judgment,  a showing; 
of  these  facts  will  be -^ujffcient  showing,  of.gfig.. >vor.thle.ssness  of  the  debt  for  purposes  of 
deduction.  , 

A bad  debt  or  worthless  debt,  as  contemplated  by  the  income-tax  law  and  which 
2.092  may  be  deducted^uva  return 'of  :jnvpme|  is.a-dcbt  which  .has  been  actually  i^Ccr-* 
tained  to  be  W9rt.hlu.ss-aiid  .•qha.rgod  off-wiLlriir  the  taxable  year. • 


INC. 


211 


TAX 


CORPORATIONS. 


Debts  arising  from  unpaid  wages,  salaries,  rents,  and  items  of  similar  taxable 

2093  income  will  not  be  allowed  as  a deduction  unless  the  income  they  represent  has 
been  included  in  the  return  of  gross  income  for  the  year  in  which  the  deduction  as 

a bad  debt  is  sought  to  be  made  or  in  a previous  year  and  the  debts  themselves  have  been 
actually  ascertained  to  be  worthless  and  charged  off.  (Art.  8,  ^[94-96,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

2094  Losses  which  may  be  properly  deducted  from  gross  income  on  account  of  bad  debts 
or  doubtful  accounts  are  those  losses  which  have  been  definitely  ascertained  to  have 

occurred  and  which  were  charged  off  during  the  year  for  which  the  return  is  made.  It 
is  not  essential  that  the  bad  debt  or  account  shall  be  proved  worthless  by  legal  proceedings 
before  the  deduction  may  be  allowed  but  the  corporation  must  not  only  be  satisfied  that 
the  debt  or  account  is  worthless,  but  must  be  able  to  satisfy  the  Commissioner  or  Collector 
of  Internal  Revenue  that  the  accounts  charged  off  were  definitely  determined  at  the  time 
to  be  worthless  and  that  they  had  not  been  recognized  as  worthless  or  without  value  prior 
to  the  beginning  of  the  year  for  which  the  return  is  made.  (Art.  151,  ^[465,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

2095  Loss  Must  be  Definite. — In  the  absence  of  legal  proceedings  to  determine  the  col- 
lectibility of  a debt  or  account,  the  question  of  whether  or  not  It  is  an  asset  without 

value  will  depend  largely  upon  the  judgment  of  the  creditor.  The  mere  writing  down  of 
the  value  of  an  account  does  not  constitute  such  a loss  as  may  be  allowably  deducted.  The 
deduction  will  be  permissible  only  when  the  debt  or  account  is  written  out  of  the  assets 
of  the  corporation.  (Art.  151,  1[466,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2096  Bankruptcy. — Bankruptcy  may  or  may  not  be  an  indication  of  worthlessness  of  a 
debt.  Actual  determination  of  worthlessness  in  such  cases  is  possible  only  when 

settlement  in  bankruptcy  shall  have  been  had.  Only  the  difference  between  the  amount 
received  in  distribution  of  assets  of  the  bankrupt  and  the  amount  of  proved  claim  may  be 
considered  for  the  purpose  of  deduction  as  a bad  debt.  (Art.  8,  1[97,  Reg.  33,  Rev.,  Jan.  2, 
1918.) 

2097  Foreclosure  Sale  on  a Mortgage. — Where,  under  foreclosure,  a mortgagee  buys 
in  the  mortgaged  property  and  credits  the  indebtedness  with  the  purchase  price 

the  difference  between  purchase  price  and  the  indebtedness  will  not  be  allowable  as  a 
deduction  for  bad  debt — the  property  which  was  security  for  the  debt  being  In  possession 
and  ownership  of  the  mortgagee  is,  for  the  purposes  of  income  tax,  held  to  be  sufficient  to 
justify  a disallowance  of  a claim  for  bad  debt. 

Only  where  purchaser  for  less  than  debt  is  another  than  mortgagee  may  the  dif- 

2098  ference  between  debt  and  net  from  sale  credited  be  deducted  as  bad  debt.  (Art.  8, 
198-99,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2099  Compromise. — Where  an  indebtedness  is  claimed  and  contested  and  a settlement 
is  had  by  way  of  compromise  whereby  an  amount,  less  than  the  debt  claimed,  is 

accepted  in  full  payment  and  satisfaction  of  the  debt,  the  difference  between  the  amount 
paid  and  that  claimed  is  not  allowable  as  a deduction  for  bad  debts.  Where  the  settle- 
ment in  compromise  consists  of  a promise  to  pay  an  amount  less  than  the  debt  claimed, 
the  amount  promised  to  be  paid  forms  the  basis  of  a new  transaction,  and  upon  failure 
to  make  good  this  promise  the  question  will  arise  as  to  the  deductibility  of  the  new  amount 
only.  (Art.  8,  193,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2100  Debts  Due  and  Payable  Prior  to  March  1,  1913. — All  debts  representing  amounts 
that  became  due  and  payable  prior  to  March  1,  1913,  and  not  ascertained  to  be 

worthless  prior  to  that  date,  whether  representing  income  or  a return  of  capital,  are  held 
to  be  allowable  deductions,  under  paragraph  B of  the  law,  in  a return  of  income  for  the  year 
in  which  they  are  actually  ascertained  to  be  worthless  and  are  charged  off.  (T.  D.  2224, 
July  13,  1915.) 

2101  Reserves  for  Losses  not  Deductible. — Reserves  to  take  care  of  anticipated  or 
probable  losses  are  not  a proper  deduction  from  gross  income.  (Art.  126,  Reg.  33, 

Jan.  5,  1914.) 

2102  Law  11304.  Amounts  Received  as  Dividends  are  Deductible. — “(6)  Amounts 
received  as  dividends  from  a corporation  which  is  taxable  under  this  title  upon  its 

net  income,  and” 

2 1 03  Law  11305.  “amounts  received  as  dividends  from  a personal  service  corporation 
out  of  earnings  or  profits  upon  which  income  tax  has  been  imposed  by  Act  of  Congress 
(read  at  11772.];” 


JNC,  212  TA^ 


CORPORATIONS. 


2104  Earnings  of  Subsidiary  Company. — In  a case  wherein  a holding  company  actually 
takes  up  each  month  on  its  books  and  credits  surplus  or  profit  and  loss  with  its 
proportionate  share  of  the  earnings  of  the  underlying  companies,  such  holding  company 
will  be  required  to  include  in  its  gross  income  the  amounts  thus  taken  up,  regardless  of 
the  fact  that  the  same  may  not  have  been  actually  paid  to  or  received  by  it  in  cash.  The 
fact  that  the  underlying  companies  credit  the  holding  company  with  the  amount  of  earn- 
ings to  w'hich  it  is  entitled  on  the  basis  of  the  stock  it  holds,  together  with  the  fact  that  the 
holding  company  takes  up  on  its  books  the  amount  thus  credited,  renders  it  incumbent 
upon  the  holding  company  to  return  these  amounts  as  income.  [But  see  “Consolidated 
returns,”  ^[1405.]  (Art.  115,  ^386,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2 1 05  Law  1[306.  A Reasonable  Allowance  for  Depreciation  is  Deductible. — “(7)  A 
reasonable  allowance  for  the  exhaustion,  wear  and  tear  of  property  used  in  the  trade 
or  business  including  a reasonable  allowance  for  obsolescence;”  [Read  at  ^2910.] 

[Heretofore  the  law  provided  a reasonable  allowance  for  the  “exhaustion,  wear  and 
tear  of  property  arising  out  of  its  use  or  employment  in  the  business  or  trade,”  no  mention 
of  “obsolescence”  being  made  in  the  law,  specifically.  Such  “loss”  had  to  be  “charged 
off.”  As  to  “charged  off”  Sec.  212  (b),  at  ^755  should  be  noted.] 

2106  Basis  of  Allowances  for  Depreciation. — Section  12(a)  of  the  act  of  September  8, 
1916,  as  amended,  to  which  section  5(a)  is  similar,  provides  that  net  income  shall 

be  ascertained  by  deducting  from  gross  income,  among  other  things: 

Second.  All  losses  actually  sustained  and  charged  off  within  the  year  and  not  compen- 
sated by  insurance  or  otherwise,  including  a reasonable  allowance  for  the  exhaustion, 
wear  and  tear  of  property  arising  out  of  its  use  or  employment  in  the  business  or  trade. 
A reasonable  allowance  for  the  wear  and  tear  of  property  arising  out  of  its  use 

2107  or  employment  in  the  business  or  trade  is  to  be  based  on  the  cost  of  such  property 
or  on  its  fair  market  price  or  value  as  of  March  1,  1913,  if  acquired  prior  thereto. 

In  the  absence  of  proof  to  the  contrary,  it  will  be  assumed  that  such  value  as  of  March  1, 
1913,  is  the  cost  of  the  property,  less  depreciation  up  to  that  date. 

This  decision  is  supplemental  to  articles  159  to  169,  inclusive,  of  regulations  No.  33 

2108  (revised),  which  to  any  necessary  extent  are  modified  accordingly.  (T.  D.  2754, 
Aug.  23,  1918.) 

2109  The  value  to  be  cared  for  by  depreciation  is  the  actual  amount  invested  in  the 
property  and  not  the  value  which  may  be  arbitrarily  or  otherwise  fixed.  (Art.  8, 

1[84,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2110  Section  12,  item  “second,”  authorizes  corporations  to  deduct  from  the  gross  amount 
of  their  income  received  within  the  year  all  losses  actually  sustained  and  charged 

off  within  the  year,  including  a reasonable  allowance  for  the  exhaustion,  wear  and  tear 
of  property  arising  out  of  its  use  or  employment  in  the  business  or  trade. 

Depreciation  as  here  used  must  be  differentiated  from  depletion,  obsolescence, 

2111  and  other  losses  elsewhere  provided  for  in  these  regulations. 

The  deduction  for  depreciation  should  be  the  amount  of  the  loss  occurring  during 

2112  the  year  to  which  the  return  relates,  estimated  on  the  cost  of  the  physical  property 
with  respect  to  which  such  deduction  is  claimed,  which  loss  results  from  wear  and 

tear  due  to  the  use  to  which  the  property  is  put  and  which  loss  has  not  been  made  good 
through  expenditures  for  renewals,  replacements,  and  repairs,  deducted  under  the  heading 
of  expenses  for  maintenance  and  operation.  (Art.  159,  ^477-479,  Reg.  33,  Rev.,  Jan.  2, 
1918.) 

Depreciation  in  an  amount  representing  exhaustion  from  wear  and  tear  of  property 

2113  arising  out  of  its  use  or  employment  in  business  or  trade,  but  no  deduction  shall 
be  allowed  for  any  amount  paid  out  for  new  buildings,  permanent  improvements 

or  betterments  to  increase  the  value  of  any  property  or  estate,  and  no  deduction  shall  be 
made  for  any  amount  of  expense  of  restoring  property  or  making  good  the  exhaustion 
thereof  for  which  an  allowance  is  or  has  been  made.  (Art.  8,  ^[83,  Reg.  33,  Rev.,  Jan. 
2,  1918.) 

2114  Must  Be  Charged  Off. — Within  the  purview  of  this  item  depreciation,  to  an  amount 
measuring  the  decline  in  value  due  to  exhaustion,  wear  and  tear  of  property  arising 

out  of  its  use,  is  a loss.  This  loss,  in  order  to  constitute  an  allowable  deduction  from  gross 
income,  must  be  charged  off.  The  particular  manner  in  which  the  amount  shall  be  charged 
off  is  not  material,  except  that  the  amount  measuring  a reasonable  allowance  for  depre- 
ciation must  be  either  deducted  directly  from  the  book  value  of  thejassets |or  credited] to 
a depreciation  reserve  account,  and  as  such  shall  be  reflected  in  the  annual  balance  sheet, 
(Art.  159,  1[480,  Reg.  33,  Rev.,  Jan.  2,  1918.) 


INC. 


213  TAX 


CORPORATIONS. 


2115  Your  attention  is  called  to  the  “second”  deduction  under  section  12  of  the  act  of 
September  8,  1916,  which  provides: 

2116  All  losses  actually  sustained  and  charged  off  within  the  year  and  not  compensated 
by  insurance  or  otherwise,  including  a reasonable  allowance  for  the  exhaustion, 

wear  and  tear  of  property  arising  out  of  its  use  or  employment  in  the  business  or  trade; 
(a)  in  the  case  of  oil  and  gas  wells  a reasonable  allowance  for  actual  reduction  in  flow 
and  production  to  be  ascertained  not  by  the  flush  flow  but  by  the  settled  production  or 
regular  flow;  (b)  in  the  case  of  mines  a reasonable  allowance  for  depletion  thereof  not  to 
exceed  the  market  value  in  the  mine  of  the  product  thereof  which  has  been  mined  and 
sold  during  the  year  for  which  the  return  and  computation  are  made,  such  reasonable 
allowance  to  be  m,ade  In  the  case  of  both  (a)  and  (b)  under  rules  and  regulations  to  be 
prescribed  by  the  Secretary  of  the  Treasury.  [Bear  in  mind  that  all  of  this  paragraph  is  a 
quotation  from  the  old  law.] 

In  view  of  the  fact  that  it  has  been  the  practice  of  examining  officers  to  disallow 

2117  a deduction  for  depreciation  or  depletion  if  not  charged  off  on  the  books  of  the 
corporation  at  the  tlm.e  of  the  investigation,  it  is  deemed  necessary  to  clarify  the 

interpretation  of  this  provision  of  the  law. 

A corporation  is  not  entitled  to  a deduction  from  the  amount  of  its  gross  Income 
21  1 8 of  any  amount  for  depreciation,  depletion,  or  other  loss  sustained  wdthin  the  taxable 
year  unless  the  amount  of  such  depreciation,  depletion,  or  other  loss  is  charged  off  on 
the  books  of  the  corporation  before  such  deduction  is  allowed.  The  purpose  of  this  require- 
ment that  depreciation,  depletion,  and  other  losses  be  charged  off  on  the  books  of  the 
corporation  before  allow'ance  is  to  insure  that  the  returns  of  such  corporation  are  in  accord 
with  its  books  of  account,  and  that  thereby  error  and  fraud  with  respect  to  the  facts  are 
prevented.  The  statute  is  not,  however,  to  be  construed  as  requiring  that  depreciation, 
depletion,  and  other  losses  be  charged  off  within  the  taxable  year.  It  is  sufficient  that 
they  are  charged  off  before  they  are  allowed  as  deductions.  Consequently  at  the  time  of 
an  examination  of  a corporation  It  should  be  given  an  opportunity  to  reopen  its  books  and 
charge  off  depreciation,  depletion  and  other  losses  which  it  actually  sustained  during 
the  taxable  year. 

The  depreciation,  depletion,  and  other  losses  must  be  charged  off  in  the  manner 

2119  prescribed’  by  the  regulations.  If  the  books  of  the  corporation  are  reopened  for 
the  purpose  of  charging  off  depreciation,^  depletion,  or  other  losses,  corresponding 

corrections  m.ust  be  made  In  the  other  book  entries;  and  if  for  any  reason  the  facts  do  not 
warrant  such  other  changes,  depreciation,  depletion,  and  other  losses  can  not  be  charged 
off,  and,  therefore,  can  not  be  allowed  as  deductions.  Thus,  for  example,  if  by  reason 
of  a distribution  of  earnings  there  is  nothing  from  which  to  credit  a reser>re  for  depreciation 
no  allowance  for  depreciation  can  be  credited  to  a depreciation  reserve  account.  [See 
112159.] 

Whenever,  therefore,  a corporation  has  clearly  suffered  allowable  depreciation, 

2120  depletion,  or  other  loss  which  has  not  been  charged  off  on  its  books,  and  on  re- 
opening its  books  at  the  time  of  an  examination  charges  off  such  depreciation, 

depletion,  or  other  loss  by  proper  entries,  it  is  entitled  to  the  benefit  of  the  deduction  of 
such  depreciation,  depletion  or  other  loss  subject  to  the  general  provisions  of  law. 

2121  The  Instructions  contained  herein  revoke  the  last  paragraph  of  C.  T.  R.  A.  Mim. 
48,  dated  March  27,  1917. 

2 1 22  You  will  please  acknowledge  the  receipt  of  this  letter.  (Letter  to  Internal  Revenue 
Agents,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  June  25,  1918.) 

In  connection  with  the  above  read  at  1[2919.] 

2 1 23  Assets  Not  Subject  to  Wear  and  Tear,  Such  as  Real  Estate  and  Securities. — Assets 
of  any  character  whatever  which  are  not  affected  by  use,  wear,  and  tear  (except 
patents,  copyrights,  etc.)  are  not  subject  to  the  depreciation  allowance  authorized  by  this 
act.  Real  estate  as  such,  and  as  distinct  from  the  improvements  thereon,  is  not  reduced 
in  value  by  reason  of  w^ear  and  tear,  and  it  therefore  follows  that  the  “allowance”  con- 
templated as  an  offset  to  depreciation  in  the  case  of  real  estate  corporations  does  not 
apply  to  the  ground,  but  is  intended  to  measure  the  decline,  by  reason  of  wear  and  tear, 
In  the  value  of  the  improvements.  (Art.  162,  1[487,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2 1 24  Value  of  Purchased  Buildings  May  Have  To  Be  Estimated. — In  determining 
the  cost  of  the  real  estate  upon  which  depreciable  property  is  located  It 
frepucnfly  occurs  that  no  segregation  is  made  of  the  cost  of  buildings  as  separate  and 
drsti.net  from  the  cost  of  the  ground  upon  which  such  buildings  stand.  In  such  cases  where 
thb  .actual' cost  of  the  buildings  or  improvements  at  the  time  they  were  taken  over  by  the 
corporatigh  egn  not  be  definitely  determined.  It  w’ill  be  sufficient  for  the  purpose  of  •de- 
termining, the  rate  of  depreciation  to  be  used  in  computing ; the  amount  which  will  be 
de.du'ctible.from  gross  [inco.'ne  to  estimate  the  actual  value  at  the  time  acquired,  of  buildings  . 


INC. 


214  TAX 


CORPORATIONS. 


or  Improvements  if  acquired  after  March  1,  1913,  or  the  fair  market  price  or  value  as  of  that 
date  If  the  property  was  acquired  prior  to  March  1,  1913,  the  value  in  either  case  to  be 
reduced  by  the  amount  of  depreciation  previously  sustained.  (Art.  163,  ^488,  Reg.  33, 
Rev.,  Jan.  2,  1918.) 

2125  Depreciation  in  the  Value  of  Stocks,  Bonds,  etc.  (Read  ^2067-^2068.] — The  depreci- 
ation referred  to  in  the  income  tax  law  does  not  relate  to  evidence  of  a right  or  interest 
in  property  and  hence,  any  shrinkage  in  the  value  of  bonds,  stocks,  and  like  securities,  due 
to  fluctuations  in  their  market  value,  is  not  deductible  in  a return  of  income  as  depre- 
ciation or  loss.  (T.  D.  2005,  July  8,  1914.) 

21  26  ♦ * ♦ depreciation,  applies  only  to  such  tangible  property  as  is  subject  to  wear 

and  tear,  exhaustion  and  obsolescence,  and  is  not  to  be  construed  as  recognizing 
any  gain  or  loss  due  to  fluctuations  in  the  market  value  or  arbitrary  changes  in  the  book 
value  of  securities  and  like  assets,  the  gain  or  loss  with  respect  to  which  will  be  determined 
only  when  such  assets  mature,  or  are  sold  or  disposed  of — that  is,  when  there  is  a completed, 
a closed  transaction.  (T.  D.  2077,  Nov.  21,  1914.) 

2127  Bonds  and  securities  are  not  subject  to  wear  and  tear  within  the  meaning  of  the 
Federal  income  tax  law,  and  therefore  depreciation  does  not  apply  to  any  shrinkage 

in  their  value.  Shrinkage  in  the  value  of  securities,  as  such,  does  not  constitute  a loss 
actually  sustained  within  the  year,  the  amount  of  which  is  definitely  ascertained.  There- 
fore, under  the  rules  of  this  office  and  consistent  with  the  provisions  of  the  law,  a shrinkage 
in  the  value  of  bonds  or  like  securities  does  not  constitute  an  allowable  deduction  from 
gross  income  either  as  loss  or  depreciation. 

The  fact  that  bonds  and  similar  securities  were  written  off  at  the  direction  of  the 

2128  Comptroller  of  the  Currency  or  the  State  banking  department  is  not  material. 
A mere  book  entry  does  not  constitute  either  a loss  or  gain  for  the  purpose  of  the 

income  tax.  The  fact  that  bonds  were  written  off  does  not  necessarily  imply  that  they  are 
a total  loss,  nor  is  this  act  a conclusive  proof  that  any  loss  occurred  during  the  year  for 
which  the  return  is  made. 

2129  Losses  of  this  character  are  only  ascertainable  when  the  securities  mature,  are  dis- 
posed of,  or  cancelled.  (T.  D.  2152,  Feb.  12,  1915.) 

21 30  Depreciation  in  Connection  With  Good-Will,  Trade  Marks,  and  Trade  Brands. 
— “Good-will”  represents  the  value  attached  to  a business  over  and  above 

the  value  of  the  physical  property,  and  is  such  an  intangible  asset  that  it  is  not  subject  to 
wear  and  tear,  and  no  claim  for  depreciation  in  connection  therewith  can  be  allowed. 
Any  loss  resulting  from  or  on  account  of  an  investment  in  “good-will”  can  be  determined 
only  when  the  property  or  business  to  which  the  good-will  attaches  is  sold  or  disposed  of, 
in  which  case  the  profit  or  loss  will  be  determined  upon  the  basis  of  the  value  of  the  assets 
including  good-will  if  acquired  prior  to  March  1,  1913,  or  their  cost  if  acquired  subsequent 
to  that  date.  (Art.  167,  ^494,  Reg.  33,  Rev.,  Jan.  2,  1918.)  [^2912.] 

2131  Comment:  We  have  been  told  that  the  last  two  lines  above  should  read,  “Including 
good-will  on  March  1,  1913,  if  acquired  prior  to  that  date,  or  their  cost  if  acquired 

subsequent  to  that  date.”  (C.  T.  Co.) 

2132  No  deduction  will  be  allowed  for  the  depreciation  of  good-will,  trade-marks,  and 
trade  brands.  If  such  assets  shall  have  been  purchased  at  a determined  price  and 

shall  be  later  sold  at  a price  less  than  such  cost,  or  less  than  their  determined  fair  market 
value  as  of  March  1,  1913,  if  acquired  prior  to  that  date,  the  amount  by  which  the  selling 
price  is  less  than  the  cost  or  value,  as  the  case  may  be,  will  be  a loss  deductible  from  the 
gross  income  of  the  year  in  which  such  assets  were  sold.  (Art.  168,  ^495,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

2133  Loss  on  Inventory  of  Merchandise  or  Material,  by  Obsolescence  or  Damage. — 

No  deductions  from  the  inventory  value  of  merchandise  or  material  will  be  allowed 
except  in  cases  in  which  the  inventory  includes  goods  or  materials  which  by  reason  of 
obsolescence  or  damage  are  unsalable.  When  such  deduction  is  claimed  the  facts  con- 
nected therewith,  including  a statement  of  the  cost  of  the  goods,  the  value  at  which  they 
were  inventoried,  and  their  present  condition,  must  be  filed  with  the  return.  (Art.  160, 
11481,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

21 34  Merchandise. — Depreciation  computed  on  total  invoice  cost  of  merchandise 
in  stock  is  not  an  allowable  deduction,  except  that  if  any  portion  of  the 

merchandise  in  stock  is  unsalable  by  reason  of  obsolescence  or  damage,  a depreciation 
deduction  not  in  excess  of  the  decline  in  value  during  the  taxable  year  will  be  allowed, 
(Art.  169,  11496,  Reg.  33,  Rev.,  Jan,  2,  1918.) 

215,  TAX 


INC. 


cotit>oiiAtioi^s. 


21 35  Patents,  Deduction  for  Return  of  Capital  Invested  Therein. — An  allowable 

deduction  for  any  given  year  for  return  of  capital  invested  in  patents 
at  the  time  of  issue  will  be  an  amount  equal  to  one-seventeenth  of  the  actual  cost,  in  cash 
or  its  equivalent,  of  such  patents.  Where  the  patent  has  been  secured  from  the  Govern- 
ment, its  cost  v/ill  be  represented  by  the  various  Gbvernment  fees,  cost  of  drawings, 
experimental  models,  attorneys’  fees,  etc.,  actually  paid.  Where  the  patent  has  been 
purchased  for  a cash  consideration,  the  amount  paid  therefor  would  represent  the  capital 
invested  therein.  If  the  corporatioh  purchased  a patent  and  made  payment  therefor 
in  stocks  or  other  securities,  the  actual  cash  value  of  such  stocks  or  other  securities  at  the 
time  of  the  purchase  will  represent  the  cost  or  capital  invested  in  the  patent.  If  the 
patent  was  purchased  after  a part  of  its  life  had  expired,  the  cost  for  the  purpose  of  a 
deduction  for  return  of  capital  will  be  ratably  spread  over  the  remaining  years  of  its  life. 
If  the  patent  becomes  obsolete  prior  to  its  expiration,  it  will  be  permissible  for  the  cor- 
poration to  deduct  from  gross  income  such  proportion  of  its  original  cost  (less  any  amount 
previously  charged  off)  as  the  number  of  years  of  its  remaining  life  bears  to  the  whole 
number  of  years  Intervening  between  the  date  it  v^as  acquired  dnd  the  date  it  legally 
expires.  In  determining  the  amount  deductible  on  account  of  the  expiring  life  of  patents 
only  the  actual  cost  thereof  and  not  an  estimated  vklue  as  of  March  1,  1913,  or  any  other 
date,  will  be  considered.  (Art.  174,  11552,  Reg.  33,  Rev.,  Jan.  2,  1918.)  [1[2917.] 

2 1 36  Obsolescence  of  Models,  Drawings,  Etc.,  Deductible  as  a Loss. — If  designs, 
drawings,  patterns,  or  models  result  in  the  production  of  goods  which  prove  to  be 
salable  for  a certain  length  of  time  and  then  become  obsolete  and  can  not  be  sold,  the 
amount  expended  for  such  designs,  drawings,  patterns,  or  models,  less  any  amounts  previ- 
ously claimed  as  depreciation  with  respect  to,  the  same  or  as  a return  of  capital,  may, 
when  charged  off,  be  included  in,  and  deducted  as  a loss  incident  to  running  the  business, 
provided  full  and  complete  information  is  reported  in  a manner  satisfactory  to  the  Corn- 
m.issioner  of  Internal  Revenue.  (Art.  177,  1f555,  Reg.  33,  Rev.,  Jan.  2,  1918.)  [i[2918.] 

2137  Obsolescence  Deductible,  Cost  Less  Depreciation  and  Salvage. — Amounts  repre- 
senting losses  on  account  of  obsolescence  of  physical  property  m.ay  be  included 
as  a deduction  from  gross  income  as  a loss,  provided  such  amounts  have  been  recorded 
in  the  books  following  the  condemnation  and  vithdrav.’al  from  use  of  the  obsolete  property. 
The  amount  of  obsolescence  that  may  be  claimed  as  a deduction  shall  be  ascertained  by 
deducting  from  the  cost  of  the  property  the  total  amount  that  has  been  previously  claimed 
and  deducted  on  account  of  the  depreciation  of  the  property,  plus  residual  value  at  time  of 
obsolescence,  or  plus  the  amount  received  from  the  sale  of  the  property.  The  obsolescence 
deduction  must  not  include  the  accumulated  depreciation  applicable  to  prior  years.  (Art. 

178,  1|556,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2133  Obsolescence  V^Tien  no  Depreciation  is  Deducted. — If  no  depreciation  has  been 
charged  off  against  such  property  and  deducted  from  gross  income  of  prior  years, 
the  amount  allowable  as  a deduction  for  the  year  in  which  the  property  becomes  obsolete 
shall  be  ascertained  by  deducting  from  the  cost  of  the  property  its  residual  value,  plus 
an  amount  equal  to  the  depreciation  actually  sustained  during  the  prior  period  and  which 
might  have  been  deducted  when  computed  at  the  rate  applicable  to,  the  same  or  sim.ilar 
property.  The  amount  of  depreciation  thus  arrived  at  as  applicable  to  former  years 
may  be  made  the  basis  of  amended  returns  and  a claim  for  the  refund  of  taxes  overpaid 
bv  reason  of  the  fact  that  no  depreciation  deduction  was  claimed  in  those  years.  (Art, 

179,  1^^557,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2130  Rate  for  Computing. — No  definite  rate  has  been  fixed  by  which  an  allowable 
deduction  on  account  of  depreciation  in  the  value  of  any  class  of  property  subiect 
to  wear  and  tear  is  to  be  computed,  but  it  is  contemplated  that  this  allowance  shall  be 
computed  upon  the  basis  of  the  cost  of  the  property  and  the  probable  number  of  years 
constituting  its  life.  The  deduction  to  be  allowed  relates  solely  to  loss  due  to  use,  wear 
and  tear,  and  the  matter  of  ob^dlescence  is  not  relevant,  inasmuch  as  when  the  property 
becomes  obsolete  a deduction  for  the  loss  sustained  thereby,  representing  the  difference 
between  the  cost  and  the  amount  of  depreciatioh  previously  charged  off  or  which  should 
have  been  charged  off  in  prior  Vears,  will  be  allowed.  (See  Arts.  178  [1(2137]  and  179 
[112138]).  (Art.  162,  1(485,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2140  Rate  Based  Upon  Life. — In  the  case  of  buildings  the  deduction  on  account  of 
depreciation  shall  not  include  any  allowance  for  an  estimated  loss  due  to  lessening 
of.’rental  Rvalue,  nor  fshall  the  computation  of  the  deduction  be  influenced  by  the  changed 
environment  after  a period  of  years,  nor  by  its  lack  of  adaptability  to  the  use  originally 
intended  nor  to  any  other  outside  influence  affecting  its  value  but  an  allowable  deprecia- 
tion shall  be  determined  solely  upon  the  estimated  life  of  such  buildings  after  making 
due  allowance  for  ordinary  repairs,  the  cost  of  which  may  be  deducted  as  expenses  for 
maintenance  and  operation.  (Art.  162,  1(486,  Reg.  33,  Rev.,  Jan.  2,  1918.) 


INC. 


216  TAX 


COUPORATIONS. 


2141  The  appended  charge  of  the  court  tP  the  jury  in  the  District  Court  of  the  United 
States  for  the  S'butheril  District  Pf  New  York,  in  the  case  of  Hyman  Cohen  v. 

John  Z.  Lowe,  collector,  is  published  for  the  information  of  internal-revenue  officers  and 
others  concerned.  (T.  D.  2343-,  June  14,  1916.) 

2142  Suriimary  of  charge. 

1.  Depreciation  Depends  on  Life  of  Building. 

The  physical  loss  or  deterioration  a building  suffers  during  the  tax  year  depends  on  the 
life  of  the  building;  how  many  years  it  would  remain  so  as  to  be  habitable  for  general 
purposes  for  which  it  was  constructed. 

2.  Yearly  Deductions. 

The  average  amount  of  deduction  each  year  covers  the  annual  percentage. 

3.  Deductions  for  Improvements. 

When  allowance  Is  made  for  depreciation  of  a building  no  deduction  shall  be  allowed 
for  expense  of  restoring  the  building  or  making  good  the  exhaustion  thereof. 

4.  Exhaustion,  Wear  and  Tear. 

The  word  “exhaustion,  wear  artd  tear”  of  a building  contemplate  only  depreciation 
of  the  physical  property  itself,  irrespective  of  its  adaptability  to  the  use  originally  Intended 
or  the  changing  environments. 

5.  Decrease  in  Rental  Value. 

No  allowance  can  .be  made  for  depreciation  by  reason  of  decrease  in  rental  value  nor 
in  value  arising  from  lack  of  modern  improvements. 

Opinion  of  the  Court  In  the  Above  Case. 

[234  Fed.  474.] 

The  plaintiff  was  allowed  3 per  cent  for  depreciation  onan'apartmenChouse  owned 

2143  by  him.  The  burden  is  on  him  to  show  that  the  depreciation  so  allowed  was 
too  small.  This  allowance  is  for  the  wear  and  tear  suffered  by  the  building  during 

the  tax  year,  which  means  the  physical  deterioration  that  the  building  suffered  during 
that  period.  It  does  not  take  into  account  depreciation  in  value  due  to  a loss  in  rental 
value  because  of  the  construction  of  more  modern  buildings  with  improved  facilities 
or  due  to  a change  in  the  neighborhood.  It  is  to  be  based  upon  the  life  of  the  building 
in  the  sense  of  the  number  of  years  the  building  would  remain  in  a condition  to  be  habitable 
for  the  use  for  which  it  was  constructed  and  used;  and  which  v/as  In  the  instant  case  for  an 
apartment  house,  and  not  merely  the  number  of  years  it  would  stand  without  being  con- 
demned and  torn  down.  The  annual  depreciation  would  be  an  amount  represented  by 
a fraction  having  one  (tax  year)  for  the  numerator  and  the  number  of  years,  representing 
thfe  ascertained  life  of  the  building;  as  the  denominator.  This  assumes  that  there  would 
be  an  average  deterioration  Suffered  each  year  during  the  life  of  the  building,  and  that  the 
plaintiff  would  keep  the  building  in  good  repair  during  the  life  of  it.  This  the  law  exacts 
of  him.  Upon  these  assumptions,  and  giving  this  meaning  to  the  words  of  the  statute, 
“a  reasonable  allowance  for  the  exhaustion,  wear  and  tear  of  the  property,  arising  out  of 
its  use  or  employment  in  the  business,”  the  amount  of  the  deduction  allowed"  by  the 
Government  to  the  plaintiff  on  this  account  is  deemed  to  be  reasonable.  (234  Fed.  474.) 

21  44  At  what  rates  mhy  depreciation  be  claimed  and  under  what  conditions.^  (Answer.) 

As  the  rate  at  which  depreciation  may  be  claimed  Is  dependent,  in  a greater  or 
less  extent,  upon  local  conditions,  the  use  to  which  the  property  is  put,  and  its 
probable  lifetime  under  normal  business  conditions,  no  specific  rates  at  which  it  may  be 
claimed  have  ever  been  established.  The  Law  states  that  a “reasonable  allowance”  may 
be  claimed  and  it  is  for  the  taxpayer  to  determine  what  constitutes  a “reasonable  allow- 
ance.” To  compute  the  amount  which  may  be  claimed,  a taxpayer  should  determine 
the  probable  lifetime  of  the  property,  then  divide  its  cost  to  him  by  the  number  of  years 
it  will  be  usable  in  a business  In  which  employed,  and  the  result  thus  obtained  will  repre- 
sent the  amount  which  may  be  claimed  each  year  as  a deduction,  e.  g.,  a frame  building, 
the  probable  lifetime  of  which,  without  repair  of  replacement,  is  25  years,  cost  $5,000. 
Divide  $5,000  by  25,  and  claim  $200  bach  year  as  depreciation. 

While  each  taxpayer  must  determine  the  probable  lifetime  of  his  property  wuthout 

2145  regard  to  the  following  figures.  It  has  been  estimated  that  the  average  usable  life- 
time of  a frame  building  is  25  years,  a brick  building  35  years;  a stone  building 

or  steel  and  concrete  building,  50  to  lOO  years.  The  estimated  lifetime  of  ordinary 
machinery  is  ten  years,  that  of  automobiles  used  for  business  or  farm  purposes  and  farm 
tractors,  four  to  five  years. 

If  a taxpayer  wishes  to  claim  the  full  amount  of  depreciation  estimated  to  have 

2146  occurred  in  the  value  of  a building,  or  other  property,  used  for  business  or  trade 
purposes,  he  may  do  so,  but  this  precludes  his  claiming  a deduction  to  cover  any 

amount  expended  during  the  same  year  in  making  repairs.  If  he  wishes  to  claim  a deduc- 
tion on  account  of  repairs,  their  cost  must  be  deducted  from  the  full  amount  of  deprccl^- 


fKc.  2i7 


TAX 


CORPORATIONS. 


tion,  and  the  balance  may  then  be  claimed  as  a deduction  under  the  heading  of  Depre- 
ciation, that  is,  if  the  taxpayer  expends  $100  in  making  repairs  to  a building  which  will 
depreciate  in  value  $200  during  the  calendar  year,  he  may  claim  $100  as  business  expense 
and  $100  as  depreciation,  or  he  may  claim  $200  as  depreciation  and  nothing  for  repairs. 
In  short,  the  aggregate  deductions  claimed  on  account  of  repairs  and  depreciation  must 
not  exceed  the  full  amount  of  depreciation  estimated  to  have  occurred. 

In  claiming  depreciation  the  following  fundamental  principles  must  be  taken  into 

2147  consideration^ 

(a)  Only  such  depreciation  as  results  from  exhaustion,  wear  and  tear  of  prop- 
erty, arising  out  of  its  use  or  employment  in  business  or  trade,  can  be  claimed.  Depre- 
ciation in  the  value  of  a home  or  any  article  of  property,  such  as  automobiles  used 
for  personal  pleasure  or  convenience,  cannot  be  claimed;  the  property  must  be  used 
for  the  purpose  of  producing  income. 

(b)  Depreciation  other  than  that  arising  from  wear  and  tear,  such  as  a lessening 
of  values  due  to  changes  in  the  social  or  business  conditions  in  the  neighborhood 
in  which  a property  is  located,  changes  of  street  grade,  or  fluctuations  in  market 
values,  etc.,  cannot  be  claimed. 

(c)  Depreciation  in  the  value  of  land,  whether  improved  or  unimproved,  due  to 
erosion,  exhaustion,  or  any  other  cause  cannot  be  claimed. 

(d)  Where  the  value  of  a piece  of  machinery  or  any  other  asset  is  lessened  by 
reason  of  the  production  of  an  improved  machine  or  article,  that  depreciation  can- 
not be  claimed,  as  it  does  not  result  from  exhaustion,  wear  and  tear. 

(e)  Where,  in  the  course  of  years,  the  owner  of  property  has  claimed  its  full  cost 
as  depreciation  in  his  income  tax  returns,  no  further  claim  will  be  allowed.  (Ques- 
tion 80,  1918  Income  Tax  Primer.) 

2148  Depreciation  Allowance  when  Plant  is  Regularly  Operated  in  Two  Shifts  or  Con- 
tinuously.— Reference  is  made  to  your  letter  of  the  first  instant  in  which  you  state 

that  shipbuilding  corporations  and  other  industrial  concerns  have  been  engaged  in  a 
discussion  as  to  whether  or  not  this  Department  will,  in  connection  with  the  income  and 
excess-profits  taxes,  allow  as  a deduction  depreciation  at  higher  than  normal  rates  in  cases 
where  two  shifts  are  being  worked,  and  the  plant,  machinery  and  equipment  are  operated 
sixteen  or  twenty-four  hours  a day  in  place  of  the  usual  eight  or  nine  hours.  l[In  reply 
you  are  informed  that  it  is  obvious  that  in  a case  where  machinery  and  equipment  are 
operated  more  than  the  usual  number  of  working  hours,  a greater  rate  of  depreciation 
would  be  applicable  in  determining  the  actual  loss  sustained  by  a corporation  due  to 
depreciation  than  would  be  the  case  in  the  event  that  the  machinery  was  only  operated 
eight  or  nine  hours  as  the  normal  time.  1[Therefore  you  are  informed  that  a greater  rate 
of  depreciation  will  be  allowed  in  the  case  you  mentioned  but  no  definite  rulings  relative 
thereto  can  be  given  except  in  record  cases  which  are  presented  to  this  office  for  con- 
sideration in  connection  with  a full  statement  of  facts  and  figures  relative  thereto. 
(Letter  to  E.  G.  Shorrock  & Co.,  Seattle,  Wash.,  signed  by  Deputy  Commissioner  L.  F. 
Speer,  and  dated  July  12,  1918.) 

2149  Unearned  Increment. — Unearned  increment  will  not  be  considered  in  fixing  the 
value  on  which  depreciation  shall  be  based.  (Art.  146,  Reg.  33,  Jan.  5,  1914.)^ 

2150  Adjusting  Excess  Depreciation  Charged  Off  in  Previous  Years. — This  office  is  in 
receipt  of  your  letter  of  the  8th  instant,  in  which  you  state  that  a corporation  in 

its  returns  for  the  years  1911,  1912  and  1913  claimed  depreciation  of  1234%  on  the  value 
of  its  machinery;  that  in  1917  an  income  tax  inspector  examined  the  books  and  recommended 
that  depreciation  at  the  rate  of  5%  be  allowed  and  as  a result  additional  taxes  were  assessed 
against  the  corporation  for  the  years  1911,  1912  and  1913,  based  upon  the  increase  in  net 
income  resulting  from  the  reduction  of  depreciation  from  1234  to  5%;  and  that  another 
corporation  engaged  in  the  same  line  of  business  and  using  the  same  kind  of  machinery 
charged  off  12%  for  depreciation  on  the  same,  but  the  books  of  this  corporation  were 
never  exam.ined  and  you  ask  what  penalty,  if  any,  the  latter  company  will  be  required 
to  pay  for  the  years  1911,  1912  and  1913  if  it  now  makes  a claim  that  its  calculations  for 
such  years  were  based  on  an  excessive  rate  of  depreciation.  ^In  reply,  you  are  informed 
that  no  penalty  will  attach  to  the  corporation  if  it  files  amended  returns  reducing  its  de- 
preciation deduction  from  1234  to  5%  on  its  machinery..  The  amended  returns  should  be 
prepared  and  filed  with  the  Collector  of  Internal  Revenue  for  its  district  with  a letter  of 
transmittal,  stating  the  reason  the  amended  returns  were  filed.  The  Collector  will  then 
notify  this  office  and  an  additional  tax  * * * will  be  assessed  against  the  corporation 

due  to  the  increase  in  its  net  income  on  account  of  thq  reduction  of  its  depreciation  de- 
duction from  1234  5%.  [Read  ^2lSl  following,  which  bears  a later  date  than  the  above.] 

(Part  of  letter  to  the  First  National  Bank,  Cleveland,  Ohio,  signed  by  Deputy  Commis- 
sioner L.  F.  Speer,  andjdatedJNov.  16,  1917.) 


INC,  218  TAX 


s 


CORPORATIONS. 


2161  Depreciation  in  Excess  of  Cost. — If  it  develops  that  by  reason  of  underestimating 
the  life  of  the  property  or  by  overestimating  the  rate  of  deterioration  an  amount 

in  excess  of  the  yearly  depreciation  has  been  taken,  the  rate  applicable  to  future  years 
should  at  once  be  reduced  and  the  balance  of  the  cost  of  the  property  not  provided  for 
througli  a depreciation  reserve  should  be  spread  over  the  estimated  remaining  life  of  the 
property.  (Art.  165,  1[491,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2 162  Use  of  Depreciation  Reserve. — Depreciation  set  up  on  the  books  and  deducted 
from  gross  income  can  not  be  used  for  any  purposes  other  than  in  making  good  the 

loss  sustained  by  reason  of  the  wear  and  tear  of  the  property  with  respect  to  which  it  is 
claimed. 

If,  however,  an  investment  is  made  in  extensions,  additions,  or  betterments  of  the 

2163  company’s  own  property,  representing  a part  or  the  whole  of  the  credit  balance 
of  the  depreciation  reserve  account,  such  investment  will  not  be  considered  a mis- 
use or  diversion  of  the  depreciation  deduction  otherwise  allowable.  (Art.  164,  ^489-490, 
Reg.  33,  Rev.,  Jan.  2,  1918.) 

2 1 64  Investment  of  Depreciation  Reserve  Funds. — The  “second”  paragraph  under 
Sec.  12  of  Title  I of  the  Act  of  September  8,  1916,  authorizes  corporations,  joint- 

stock  companies,  etc.,  in  making  their  returns  of  annual  net  income,  to  deduct  from  gross 
income — 

“all  losses  actually  sustained  and  charged  off  within  the  year  * * * including  a 

reasonable  allowance  for  the  exhaustion,  wear  and  tear  of  property,  arising  out  of  its 
use  or  employment  in  the  business  or  trade” 

and  in  the  case  of  oil  and  gas  wells  and  mines,  a reasonable  allowance  for  depletion  of 
natural  deposits. 

The  essential  requirements  of  this  provision  are  that  the  amount  deductible  on 
2166  account  of  depreciation  and  depletion  shall  be  charged  off  and  shall  be  reasonable 
allowances — that  is,  an  amount  sufficient  to  make  good  the  loss  due  to  these 
causes.  The  phrase  “charged  off”  contemplates  that  the  “reasonable  allowance”  deducted 
from  gross  income  on  account  of  depreciation  or  depletion,  shall  be  credited  to  appropriate 
reserve  accounts  and  carried  as  a liability  against  the  assets,  to  the  end  that  when  the  total 
of  these  credits  equals  the  capital  investment  account,  no  further  deductions  on  these 
accounts  will  be  allowed. 

2166  While  the  presumption  is  that  amounts  credited  to  these  accounts  will  be  used 
to  make  good  the  loss  sustained,  either  through  a renewal  or  replacement  of  the 
property  or  a return  of  capital,  there  is  no  requirement  of  law  that  the  funds  represented 
by  these  reserve  liabilities  shall  be  held  intact  or  remain  idle  against  the  day  when  they 
may  be  used  in  making  good  the  depreciation  of  the  property  with  respect  to  which  the  de- 
duction is  claimed,  or  in  restoring  the  capital  invested  in  the  depleted  assets. 

The  conversion  of  the  depreciation  reserve  into  tangible  assets  will  not  constitute 
2157  such  a diversion  as  would  deny  the  corporation  the  right  of  deduction,  provided 
in  all  cases,  that  the  deduction  claimed  in  the  return  is  a reasonable  allowance, 
that  is,  a fair  measure  of  the  loss  due  to  “exhaustion,  wear  and  tear  of  property,  growing 
out  of  its  use”  and  is  charged  off  or  so  entered  upon  the  books  as  to  constitute  a liability 
against  the  assets  with  respect  to  which  the  depreciation  deduction  is  claimed. 

To  the  extent  that  Articles  130,  132,  and  133  of  [original]  Regulations  No.  33  are  in 
2168  conflict  with  the  foregoing,  they  are  hereby  rescinded,  and  this  decision  is  made  appli- 
cable to  the  adjustment  of  returns  of  annual  net  income  made  pursuant  to  the  require- 
ments of  Section  38,  Act  of  August  5,  1909,  Section  2 of  the  Act  of  October  3,  1913,  and  the 
present  income  tax  law,  except  that  as  to  returns  made  under  the  first  two  Acts,  the  writing 
off  of  depreciation,  if  reasonable  in  amount,  will  not  be  insisted  upon.  (T.  D.  2481,  April 
10,  1917.) 

2159  Diversion  of  Fund. — If  a corporation  at  the  end  of  the  year  finds  it  has  a certain 
net  income,  and,  without  making  any  provision  for  depreciation,  distributes  such 

net  income  among  its  stockholders  as  dividends,  it  will  be  estopped  from  claiming  in  its 
returns  of  annual  net  income  for  such  year  any  deduction  on  account  of  depreciation 
unless  it  is  shown  conclusively  that  the  property  account  has  been  reduced  by  the  amount 
of  depreciation  claimed,  or  unless  such  amount  has  been  credited  to  a depreciation  reserve 
account,  and  such  amount  was  in  fact  a reasonable  allowance. 

The  depreciation  allowance  authorized  by  section  12  is  intended  to  provide  a fund 

2160  out  of  which  the  loss  due  to  use,  wear,  and  tear  may  be  made  good,  and  the  fund 
thus  created  can  not  be  diverted  to  the  payment  of  dividends;  that  is  to  say,  a de- 
duction made  under  the  guise  of  depreciation  can  not  measure  a loss  and  at  the  same  time 
be  used  in  the  payment  of  dividends.  [Read  at  ^2119.] 

216lThe  fact  that  no  reserve  was  made  for  depreciation  indicates  that  there  is  no  loss 
on  this  account  to  be  provided  for.  (Art.  161,  ^482-484,  Reg.  33,  Rev.,  Jan. 
2,  1918.) 


INC. 


219  TAX 


eoiiBaRATj^s. 


2162  Sinking-Fund  Reserve. — When  a corporation  sets  aside  a part  of  its  earnings  for 
the  purpose  of  creating  a sinking  fund  with  which  to  retire  its  bonded  Ojr  ptlf\er 
indebtedness,  the  annual  additions  to  such  funds  are  not  allowahie  deductions  from  gross 
income  as  or  in  lieu  of  depreciation  or  on  any  other  account.  The  earnings  thus  set  aside 
are  an  asset  of  the  corporation  and  any  accretion  thereto  must  be  accounted  for  as  IncQrnc. 

This  ruling  will  not,  however,  forbid  the  deduction  from  gross  income  of  a reason- 
21  63  able  allowance  for  depletion  of  natural  deposits  even  though  ^he  amount  so  deducted 
be  used  in  W'hole  or  in  part  in  the  payment  of  its  bonded  or  other  indebtedness. 
(Art.  166,  11492-493,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

21 64  Law  1f307.  A Reasonable  Allowance  for  the  Amortization  of  Certain  Assets 
Assets  (Special — Due  to  the  War)  is  Deductible. — “(8)  In  the  case  of  buddings, 
machinery,  equipment,  or  other  facilities,  constructed,  erected,  iqstalled,  o,r  acquired, 
on  or  after  April  6,  1917,  for  the  production  of  articles  contributing  to  the  prosecution  of 
the  present  war,  and  in  the  case  of  vessels  constructed  or  acquired  on  o.r  after  such  date 
for  the  transportation  of  articles  or  men  contributing  to,  the  prosecution  o.f  the.  present 
war,  there  shall  be  allowed  a reasonable  deduction  for  the  amortizatiqn  of  suph  part  of 
the  cost  of  such  facilities  or  vessels  as  has  been  borne  by  the  taxpayer,  but  not  again  in- 
cluding any  amount  otherwise  allo.w'ed  under  this  title  or  previous  Acts  of  Co.ngress  as  a 
deduction  in  computing  net  income.” 

2 1 65  Law  1[308.  A Redetermination  of  the  Amortization  Deduction  May  be  Effected. 

— “At  any  time  within  three  years  after  the  termination  of  the  present  war  the 
Commission^’-  may,  and  at  the  request  of  the  taxpayer  shall,  reexamine  the  return,,  and 
if  he  then  finds  s a result  of  an  appraisal  or  from  other  evidence  that  the  deduction  orig- 
inally allowed  was  incorrect,  the  taxes  imposed  by  this  title  and  by  Title  III  [vvar  excess- 
profits  taXj  for  the  year  or  years  affected  shall  be  redetermined  and” 

2166  Law  1f309.  Adjustment  of  Under-Payment  or  Over-Payment  of  Taxes  Di^e.  to 
Redetermination  of  Amortization  Deduction. — “the  amount  of  tax  due  upon  such 

redeterminaiion,  if  any,  shall  be  paid  upon  notice  and  demand  by  the  collector,  o.r  the 
amount  of  tax  _verpaid,  if  any,  shall  be  credited  or  refunded  to  the  taxpayer  in  accordance 
with  the  pioviffons  of  section  252  [1l248t8};” 

[In  connection  with  the  above  read  at  ^2^22.} 

2167  Law  1[310.  A Reasonable  Allowance  for  Depletion  of  IV^ines,  Oil  and  Gas  Wells, 
Other  Natural  Deposits,  and  Timber,  and  for  Depreciation  of  Improvements, 

is  Deductible. — *‘(9)  In  the  case  of  mines,  oil  and  gas  welljs,  other  na,tural  deposits,  and 
timber,  a reasonable  allowance  for  depletion  and  for  depreciation  of  improvements,  accord- 
ing to  the  pe:u!iar  conditions  in  each  case,  based  upon  cost  including  cost  of  developm.ent 
not  otherwise  deducted:” 

2168  Law  11311.  Basis  in  the  Case  of  Properties  Aequired  Prior  to  March  1,  1913; — 

'^Provided,  That  in  the  case  of  such  properties  acquired  prior  to  March  1,  1913, 
the  fair  market  value  of  the  property  (or  the  taxpayer’s  interest  therein)  o.u  that  date  shall 
be  taken  in  lieu  of  cost  up  to  that  date:” 

2169  Law  11312.  Basis  in  the  Case  of  Mines  and  Wells  Discovered  by  the  Taxpajer 
on  or  after  March  1,  1913. — Provided  further,  That  in  the  case  of  mines,  oil  J-idgas 

wells,  discovered  by  the  taxpayer,  on  or  after  hjarch  1,  1913,  and  pot  acquired  as  the  result 
of  purchase  of  a proven  tract  or  lease,  where  the  fair  market  value  of  the  property  is  ma- 
terially disproportionate  to  the  cost,  the  depletion  allo\yance  shgll  be  based  upon  the 
fair  market  value  of  the  property  at  the  date  of  the  discovery,  or  within  thirtv  days  there- 
after;” 

2170  Law  11313.  Depletion  and  Depreciation  of  Improvements  Allowance  to  be  Made 
in  Accortlance  with  Regulations. — “such  reaso.nabfe  allowance  in  all  the  above 

cases  to  be  made  under  rules  and  regulations  to  be  prescribed  by  the  Commissioner  with 
the  approval  of  the  Secretary.” 

217  1 Law  11314.  Depletion  and  Dep;-eciation  of  Improvements  Allowance  to  be  Appor- 
tioned between  the  Lessor  and  the  Lessee*. — “In  the  case  of  leases  the  deductions 
allowed  by  this  paragraph  shall  be  equitably  apportioned  betAyeen  the  lessor  and  lessee;” 

[In  connection  with  th,e  aboye  reacj  at  112929.] 


INC. 


220  TAX 


CQ^qMTXQ^s. 


Comment. — [The  following  paragraphs,  112172  to  ^2214  being  the  Department’s 
compilation  ^of  frulings  on  j depletion,  under  ^ the  provisions  of  the  Revenue  Act  of 
1916  as  amended  by  the^Rev^enue  Act  of  1917,  as  originally  issued  in  Regulations  No.  33, 
Revised,  January  2,  1918,  are  reprinted  here  merely  that  they  may  be  before  the  reader 
pending  the  issuance  by  the  Government  of  the  Department’s  “rules  and  regulations” 
based  on  the  new  law  provisions.]  [Read  at  1[2929.] 

2172  Depletion  of  Oil  and  Gas  Properties. — Sections  5 and  12  of  the  act  of  September  8, 
1916,  as  amended  by  the  act  of  October  3,  1917,  authorize  individuals  and  corpora- 
tions owning  and  operating  gas  or  oil  properties,  to  deduct  from  gross  income — ■ 

“A  reasonable  allowance  * * * for  actual  reduction  in  flow  and  production, 

2173  * * * provided  that  when  the  allowance  authorized  * * * shall  equal  the 

capital  originally  invested,  or  in  case  of  purchase  made  prior  to  March  1,  1913,  the 

fair  market  value  as  of  that  date,  no  further  allowance  shall  be  made.” 

The  essence  of  this  provision  of  law  is  that  the  owner  or  operator  of  this  character 
a 1 74  of  properties  shall  secure  through  an  aggregate  of  annual  depletion  deductions, 
the  return  of  the  amount  of  capital  actually  invested,  or  an  amount  not  in  excess 
of  the  fair  market  value  as  of  March  1,  1913,  of  the  properties  owned  prior  to  that  date. 
For  the  purpose  of  determining  the  amount  of  capital  to  be  returned  through  annual 

2 1 75  deductions,  operators  may  be  divided  into  two  classes,  (a)  operators  who  own 
the  fee,  and  (b)  operators  who  own  a lease  or  leases. 

In  the  case  of  the  operating  fee  owner,  the  amount  returnable  through  depletion 

2176  deductions  is  the  fair  market  value  of  the  property  (exclusive  of  the  cost  of  physical 
property)  as  of  March  1,  1913,  if  acquired  prior  to  that  date,  or  the  actual  cost  of 

the  property  if  acquired  subsequent  to  that  date,  plus.  In  either  case,  the  cost  of  develop- 
ment (other  than  the  cost  of  physical  property  incident  to  such  development)  up  to  the 
point  at  which  the  income  from  the  developed  territory  equals  or  exceeds  the  deductible 
expenses. 

In  the  case  of  a lessee,  the  capital  thus  to  be  returned  is  the  amount  paid  in  cash 

2177  or  its  equivalent  as  a bonus  or  otherwise  by  the  lessee  for  the  lease,  plus  also  all 
expenses  incurred  in  developing  the  property  (exclusive  of  physical  property) 

prior  to  the  receipt  of  income  therefrom  sufficient  to  meet  all  deductible  expenses,  after 
which  time  as  to  both  owner  and  lessee,  such  incidental  expenses  as  are  paid  for  wages, 
fuel,  repairs,  hauling,  etc.,  in  connection  with  the  drilling  of  wells  and  further  development 
of  the  property,  may,  at  the  option  of  the  operator,  be  deducted  as  an  operating  expense 
or  charged  to  capital  account. 

If,  in  exercising  this  option,  the  individual  or  corporation  charges  the  expense 
2176  of  drilling  wells  or  further  development  to  capital  account,  the  same,  in  so  far  as 
such  expense  is  represented  by  physical  property,  may  be  taken  into  account  in 
determining,  a reasonable  allowance  for  depreciation  during  each  year  until  the  property 
account  thus  augmented  has  been  extinguished  through  annual  depreciation  deductions, 
after  which  no  further  deduction  on  this  account  will  be  allowed.  In  the  case  of  a going 
or  producing  business,  the  cost  of  drilling  nonproductive  wells  may  be  deducted  from  gross 
income  as  an  operating  expense.  (Art.  170,  1[497-503,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

21  79  Estimate  of  Probable  Resources. — In  the  case  of  either  an  owner  or  lessee  it  will 
be  required  that  an  estimate,  subject  to  the  approval  of  the  Commissioner  of 
Internal  Revenue,  shall  be  made  of  the  probable  quantity  of  oil  or  gas  contained 
in  or  to  be  recovered  from  the  territory  with  respect  to  which  the  investment  is  made. 
The  invested  capital  (value  as  of  March  1,  1913,  or  cost,  if  acquired  subsequent  to  that 
date,  plus  the  cost  of  development,  other  than  cost  of  physical  property,  up  to  the  point 
of  expense-paying  production,  in  the  case  of  an  owner,  and  the  amount  actually  paid 
for  the  lease  plus  cost  of  development,  other  than  cost  of  physical  property,  up  to  the 
same  point,  in  the  case  of  a lessee)  will  be  divided  by  the  number  of  units  of  oil  or  gas  so 
estimated  to  be  contained  in  or  to  be  recovered  from  the  territory,  and  the  quotient  vdll 
be  the  per  unit  cost  or  amount  of  capital  invested  in  each  unit  recoverable.  This  quotient, 
or  per  unit  cost,  when  multiplied  by  the  number  of  units  removed  from  the  territory  dur- 
ing any  one  year,  will  determine  the  amount  which  may  be  allowably  deducted  from  the 
gross  income  of  that  year  on  account  of  depiction  of  assets  or  as  a return  of  invested  capi- 
tal until  the  total  of  such  deductions  shall  equal  the  capital  invested. 

Every  individual  or  corporation  entitled  to  a deduction  on  account  of  the  dcple- 
2180  tion  of  the  property  under  operation  or  for  a return  of  the  capital  invested  with 
respect  to  the  same  shall  keep  an  accurate  ledger  account,  in  which,  in  the  case 
of  fee  owner,  shall  be  charged  the  fair  market  value  as  of  March  1,  1913,  or  the  cost,  if 
acquired  subsequent  to  that  date,  of  the  oil  or  gas  property,  plus  cost  of  development  as 
herejnbefoje  defined,  or,  in  the  case  of  a lessee,  the  amount  actually  originally  invested 
in  the  lease  and  its  development.  This  account  shall  be  credited  with  the  amount  claimed 
and  allowed  each  year  as  a deduction  on  account  of  depletion  or  as  a return  of  capital, 


CORPORATIONS. 

to  the  end  that  when  the  credits  to  the  account  equal  the  debits  no  further  deduction  on 
either  account,  with  respect  to  this  property  and  the  capital  invested  therein,  will  be 
allowed.  Or,  in  lieu  of  a direct  credit  to  property  account,  the  amount  so  claimed  and 
allowed  as  a deduction  may  be  credited  to  a depletion  reserve  account.  (Art.  170,  ^504- 
505,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2181  Where  Resources  are  Uncertain.— If  for  any  reason  the  quantity  of  oil  or  gas 
in  the  property  can  not  be  determined  with  any  degree  of  certainty,  the  depletion 

deduction  will  be  computed  in  accordance  with  the  rule  set  out  in  Treasury  Decision  2447, 
except  that  lessees  may  compute  their  deduction  for  return  of  capital  (cost  of  lease  and 
development)  in  the  same  manner  as  owners  in  fee;  that  is,  they  may  extinguish  such 
capital  on  the  basis  of  the  reduction  in  flow  and  production  as  compared  with  the  pre- 
ceding year,  or,  in  the  case  of  leasehold  properties  brought  in  or  developed  during  the 
year,  the  depletion  reduction  may  be  computed  on  the  basis  of  the  decline  in  settled  flow 
and  production,  as  ev^idenced  by  tests  and  gauges  made  at  the  end  of  the  year  as  com- 
pared with  similar  tests  and  gauges  made  at  the  time  the  settled  flow  was  determined. 

For  the  purpose  of  computing  the  depletion  the  territory  comprehended  in  a given 

2182  lease  will  be  considered  the  unit  with  respect  to  which  the  depletion  deduction 
may  be  claimed  and  allowed. 

If  the  operator  is  the  owner  of  the  fee  the  value  determined  and  set  up  as  of  March 
21  83  1,  1913,  or  the  cost  of  the  property  if  acquired  subsequent  to  that  date,  or,  if  the 
operator  is  a lessee,  the  amount  actually  paid  for  the  lease,  plus,  in  the  case  of 
both  owner  and  lessee,  the  cost  of  subsequent  development,  exclusive  of  physical  property, 
if  such  cost  is  capitalized,  will  be  the  basis  for  determining  the  depletion  deduction  or 
the  deduction  for  return  of  capital  for  all  subsequent  years  during  the  continuance  of 
the  ownership  under  which  the  value  was  fixed  or  by  which  the  investment  was  made, 
and  during  such  ownership  there  can  be  no  revaluation  for  the  purpose  of  this  deduction 
if  it  should  be  found  that  the  quantity  of  oil  or  gas  in  the  property  was  underestimated 
at  the  time  the  value  was  fixed  or  the  property  was  acquired,  or  at  the  time  the  lease  con- 
tract was  entered  into  or  purchased. 

This  rule  will  not,  however,  be  so  construed  as  to  forbid  an  operator  from  redistribut- 
2 1 84  Ing  tbe  invested  capital  over  the  estimated  number  of  units  remaining  in  the  territory 
under  operation  if  a subsequent  increase  of  invested  capital  should  render  this  neces- 
sary in  order  to  determine  the  amount  of  such  capital  applicable  to  each  unit  provided  that 
when  such  redistribution  is  made  the  total  capital  invested  will  be  reduced  by  the  amount 
previously  charged  off  and  deducted  on  account  of  depletion  or  as  a return  of  capital. 
(Art.  170,  11506-509,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2185  Additional  Depreciation  for  Machinery,  Etc. — Both  owners  and  lessees  operating 
oil  or  gas  properties  will,  in  addition  to  and  separate  from  the  deduction  allowable 

for  the  depletion  or  return  of  capital  as  hereinbefore  provided  for,  be  permitted  to  deduct 
a reasonable  allowance  for  depreciation  of  physical  property,  such  as  machinery,  tools, 
equipment,  pipes,  etc.,  the  amount  deductible  upon  this  account  to  be  such  an  amount, 
based  upon  its  capitalized  value  (cost)  equitably  distributed  over  its  useful  life,  as  will 
bring  it  to  its  true  salvage  value  when  no  longer  useful  for  the  purpose  for  which  such 
property  was  acquired. 

As  to  both  fee  owner  and  lessee,  the  capital  invested  in  physical  property,  upon 

2186  which  the  depreciation  deduction  is  computed,  should  be  segregated  in  the  books 
of  account  from  that  invested  in  the  oil  or  gas  territory  or  in  the  lease  or  leases, 

with  respect  to  which  the  deduction  for  depletion  or  return  of  capital  is  claimed,  and 
credits  for  depreciation  may  be  made  in  the  same  manner  as  hereinbefore  provided  for 
depletion.  (Art.  170,  11510-511,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2187  Statement  Required. — To  each  return  made  by  an  individual  or  corporation 
owning  and  operating  oil  or  gas  properties  there  should  be  attached  a statement 

showing — 

(1)  (a)  The  fair  market  value  of  the  property  (exclusive  of  machinery,  equipment, 
etc.)  as  of  March  1,  1913,  if  acquired  prior  to  that  date,  or  (b)  the  actual  cost  of  the  property 
if  acquired  subsequent  to  that  date; 

(2)  How  the  fair  market  value  as  of  March  1,  1913,  was  ascertained; 

(3)  The  estimated  quantity  of  oil  or  gas  in  the  sand  at  the  time  the  value  or  cost  was 
determined; 

(4)  Amount  of  capital  applicable  to  each  unit; 

(5)  The  quantity  of  oil  or  gas  produced  during  the  year  for  which  the  return^is  made; 

(6)  Any  other  data  which  would  be  helpful  in  determining  the  reasonableness  of  the 
depletion  deduction. 

If  the  operator  is  a lessee  that  fact  should  be  stated,  and  to  the  return  made  by  such 
lessee  there  should  be  attached  a statement  showing — 


INC. 


222  TAX 


CORPORATIONS. 


(1)  The  amount  of  cash  or  its  equivalent  actually  paid  for  the  lease; 

(2)  The  amount  expended  for  development  prior  to  the  receipt  of  income  from  the 
output,  sufficient  to  ^ay  operating  expenses; 

(3)  The  total  capital  thus  invested; 

(4)  The  estimated  quantity  of  oil  or  gas  in  the  territory  comprised  in  the  lease; 

(5)  The  arfiount  of  capital  applicable  to  each  unit; 

(6)  The  number  of  units  removed  during  the  year  for  which  the  return  is  made,  and 
other  data  that  would  be  helpful  in  determining  whether  or  not  the  deduction  made  for  the 
return  of  capital  is  a reasonable  allowance.  (Art.  170,  ^[5 12-525,  Reg.  33,  Rev.,  Jan.  2, 
1918.) 

2 1 88  Depletion. — Mines. — Paragraphs  “seventh”  and  eighth”  of  section  5 (a)  and 
paragraph  “second”  of  section  12  (a)  of  Title  I of  the  act  of  Septem.bcr  8,  1916, 
authorize  Individuals  and  corporations  to  deduct  from  gross  income  “a  reasonable  allow- 
ance for  exhaustion,  wear  and  tear  of  property,  and  * * * (b)  in  the  case  of  mines, 

a reasonable  allowance  for  depletion  thereof  not  to  exceed  the  market  value  in  the  mine 
of  the  product  thereof  which  has  been  mined  and  sold  during  the  year  for  which  the  return 
and  computation  are  made”;  provided,  that  when  the  sum  of  the  annual  allowances 
for  depletion  equals  the  capital  originally  invested,  or  in  case  of  purchase  prior  to  March  1, 
1913,  the  fair  market  value  as  of  that  date  of  the  mineral  “in  place,”  no  further  allowance 
on  this  account  shall  be  made. 

Ownership  of  the  mine  content  at  the  time  for  which  computation  is  made  is  an 
21  89  essential  prerequisite  to  an  allowable  deduction  for  depletion. 

The  deduction  in  the  case  of  a lessee  will  be  limited  to  an  amount  equal  to  the 
21  90  capital  actually  invested  in  the  lease,  without  regard  to  value  as  of  March  1,  1913, 
or  any  other  date. 

The  paragraphs  of  the  title  above  referred  to  authorize  in  the  case  of  mdne  owners 

2191  two  classes  of  deductions  to  take  care  of  the  wasting  of  assets,  namely,  (a)  depre- 
ciation, (b)  depletion.  (Art.  171,  ^526-529,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2192  Deductions  and  Valuation. — If  the  property  was  acquired  by  purchase  or  other- 
wise (other  than  by  lease)  prior  to  March  1,  1913,  the  amount  of  invested  capital 

which  may  be  extinguished  through  annual  depletion  deductions  from  gross  income  v/111 
be  the  fair  market  value  of  the  mine  property  so  acquired,  as  of  March  1,  1913.  The  value 
contem.plated  herein  as  the  basis  for  depletion  deductions  authorized  by  this  title  must 
not  be  based  upon  the  assum.ed  salable  value  of  the  output  under  current  operative  condi- 
tions, less  cost  of  production,  for  the  reason  that  the  value  so  determined  would  com.pre- 
hend  the  profits  to  be  realized  from  operation  of  the  property. 

Neither  must  the  value  determined  as  of  March  1,  1913,  be  speculative,  but  must 

2193  be  determined  upon  the  basis  of  the  salable  value  en  bloc  as  of  that  date  of  the  entire 
deposit  of  minerals  contained  in  the  property  owned,  exclusive  of  the  improve- 
ments and  development  work;  that  is,  the  price  at  which  the  natural  deposits  or  mineral 
property  as  an  entirety  In  its  then  condition  could  have  been  disposed  of  for  cash  or  its 
equivalent. 

The  en  bloc  value  having  been  thus  ascertained,  an  estim.ate  of  the  number  of  units 

2194  (tons,  pounds,  etc.)  should  be  m.ade.  The  en  bloc  value  divided  by  the  estim.ated 
number  of  units  in  the  property  will  determ.ine  the  per  unit  value,  or  amount  of 

capital  applicable  to  each  unit,  which,  multiplied  by  the  number  of  units  mined  and  sold 
during  any  one  year,  will  determine  the  sum  which  will  constitute  an  allowable  deduction 
from  the  gross  income  of  that  year  on  account  of  depiction. 

Deduction  computed  on  a like  basis  may  be  made  from  year  to  year  during  the 

2 1 95  ownership  under  which  the  value  was  determined,  until  the  aggregate  ol  bloc 
value  as  of  March  1,  1913,  of  the  mine  or  mineral  deposits  shall  have  been  extin- 
guished, after  which  no  further  deduction  on  account  of  depletion  with  respect  to  this 
property  will  be  allowed  to  the  individual  or  corporation  under  whose  ownersiilp  the  en 
bloc  value  was  determined.  (Art.  172,  ^530-533,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2196  Fak  Market  Value,  March  1,  1913. — The  precise  detailed  manner  In  which  the 
estimated  fair  market  value  of  mineral  deposits  as  of  March  1,  1913,  shall  be  made 

must  naturally  be  determined  by  each  individual  or  corporation  interested,  and  who  is  the 
owner  thereof,  upon  such  basis  as  must  not  comprehend  any  operating  profits,  the  estimate 
in  all  cases  to  be  subject  to  the  approval  of  the  Commissioner  of  Internal  Revenue. 

In  any  case  in  which  a corporation  uses  for  purposes  of  its  income  return  an  estimate 

2197  of  the  value  of  niines  or  of  mineral  lands  or  properties  as  of  March  1,  1913,  as  the 
basis  of  computing  amounts  to  be  deducted  for  depletion  or  return  of  capital, 

this  department  in  passing  upon  the  accuracy  and  fairness  of  such  estimate  will  attach 
due  weight  to  the  market  value  of  the  stock  of  the  corporation  on  March  1,  1913,  and  also 


INC.  223 


TAX 


CORPOIUTIONS. 


to  sworn  statements  as  to  the  value  of  capital  stock  of  the  corporation  filed  at  any  time 
thereafter  for  purposes  of  the  special  excise  tax  on  corporations  based  on  value  of  their 
capital  stocks  imposed  by  Title  iV  of  the  Act  of  September  8,  1916. 

In  any  case  in  which  any  depletion  deduction  is  computed  on  the  basis  of  the  cost 

2198  or  price  at  which  any  mine,  mineral  lands,  or  properties  were  acquired  the  corporation 
will  be  required  upon  request  of  the  Commissioner  of  Internal  Revenue  to  show 

that  the  cost  or  price  at  which  the  property  was  bought  was  fixed  for  purposes  of  a bona 
fide  purchase  or  sale  by  which  the  property  passed  to  an  owner  in  fact  as  well  as  in  form, 
different  from  the  vendor.  No  fictitious  or  inflated  cost  or  price  will  be  permitted  to  form 
the  basis  of  any  calculation  of  a depletion  deduction,  and  in  determining  whether  or  not 
the  prices  or  cost  at  which  any  purchase  or  sale  was  made  represented  the  actual  market 
value  of  the  property  sold  due  weight  v»'ill  be  given  to  the  relationship  or  connection  existing 
between  the  party  or  parties  selling  the  property  and  the  buyer  thereof.  (Art.  172,  1|534- 
536,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2199  Records  to  be  kept. — Every  individual  or  corporation  claiming  and  making  a deduc- 
tion for  depletion  of  natural  deposits  shall  keep  an  accurate  ledger  account,  in 

which  shall  be  charged  the  fair  market  value  as  of  March  1,  1913,  or  the  cost,  if  the  property 
was  acquired  subsequent  to  that  date,  of  the  m.ineral  deposits  involved.  This  account  shall 
be  credited  with  the  amount  of  the  depletion  deduction  claimed  and  allowed  each  year, 
or  the  amount  of  the  depletion  shall  be  credited  to  a depletion  reserve  account,  to  the  end 
that  when  the  sum  of  the  credits  for  depletion  equals  the  value  or  cost  of  the  property  no 
further  deduction  for  depletion  with  respect  to  this  property  will  be  allowed.  The  v^^lue 
determined  and  set  up  as  of  March  1,  1913,  or  the  cost  of  the  property  if  acquired  subsequent 
to  that  date  will  be  the  basis  for  determining  the  depletion  deduction  for  all  subsequent 
years  during  the  ownership  under  which  the  value  was  fixed,  and  during  such  ownership 
there  can  be  no  revaluation  for  the  purpose  of  this  deduction  if  it  should  be  found  that  the 
estimated  quantity  of  the  mineral  deposit  was  understated  at  the  time  the  value  was  fixed 
or  at  the  time  the  property  was  acquired. 

In  cases  wherein  the  quantity  of  the  mineral  deposit  in  the  mine  prior  to  March  1, 
1913,  can  not  be  estimated  with  any  degree  of  accuracy,  it  will  be  necessary,  if 
depletion  deductions  are  to  be  taken,  for  the  individual  or  corporation  owning 
the  deposits,  with  the  best  information  available,  to  arrive  at  the  fair  market  value  of  the 
property  as  of  March  1,  1913;  that  is,  its  fair  cash  value  en  bloc,  if  such  value  is  believed 
to  be 'other  than  its  original  cost,  which  value,  during  the  period  of  t|ie  ownership  under 
which  it  was  determined,  shall  be  final  and  shall  be  charged  to  the  property  account  as 
hereinbefore  indicated,  and  then,  on  the  basis  of  the  most  probable  number  of  units  in 
the  property,  the  per  unit  value  shall  be  determined  as  the  basis  for  computing  annual  deple- 
tion allowances,  this  method  and  allowances  to  be  continued  until,  but  not  beyond,  the  time 
when  the  value  as  of  March  1,  1913,  shall  have  been  extinguished.  (Art.  172,  ^537-538 
Reg.  33,  Rev.,  Jan.  2,  1918.) 

2201  When  to  Use  Original  Cost  Basis. — The  original  cost  of  the  mineral  deposit  may 
be  taken  as  the  basis  for  computing  annual  depletion  deductions  if  the  fair  market 

value  as  of  March  1,  1913,  as  hereinbefore  required,  can  not  be  ascertained  otherwise, 
allowance  being  made  for  minerals  which  may  have  been  removed  prior  to  that  date. 

In  cases  wherein  a mineral  property  was  acquired  subsequent  to  March  1,  1913, 

2202  the  same  rule  for  computing  the  annual  depletion  deduction  will  apply,  except 
that  in  such  case  the  basis  of  the  computation  will  be  the  actual  cost  rather  than  the 

value  as  of  March  1,  1913. 

A lessee  corporation  is  not  entitled  to  any  depletion  deduction  as  such,  but  if  such 

2203  lessee,  in  addition  to  royalties,  pays  a stipulated  sum  for  the  right  to  explore, 
develop,  and  operate  a mine,  such  sum  may  be  spread  ratably  over  the  estimated 

number  of  units  in  the  mine,  and  thus  ascertain  the  amount  of  invested  capital  or  bonus 
payment  applicable  to  each  unit.  The  per  unit  cost  thus  ascertained  will  be  multiplied 
by  the  number  of  units  removed  from  the  mine  during  any  one  year  and  the  result  will  be 
the  amount  that  may  be  deducted  from  the  gross  income  of  that  year  as  a return  of  .the 
capital  invested.  In  the  case  of  both  mine  owner  and  lessee  no  deduction  for  depletion 
or  return  of  capital  will  be  allowed  when  the  invested  capital  has  through  the  aggregate 
of  all  such  deductions  been  extinguished.  (Art.  172,  ^[539-541,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

22Q4  Lessee’s  Computation  of  Invested  Capital. — For  the  purpose  of  computing  this 
deduction  in  the^case  of  a lessee  company,  the  actual  amount  of  the  bonus  payment 
and  not  a value  as  of  March  1,  1913,  will  be  considered  the  invested  capital  to  be  returned 
through  the  aggregate  of  the  annual  deductions. 


INC. 


224  TAX 


QCX^OM^ioiKS. 


To  the  return  made  pursuant  to  the  above  rule  there  should  be  attached  a statement 

2205  setting  out  (1)  whether  the  operator  is  a fee  owner  or  lessee;  (2)  in  the  case  of  a fee 
owner,  i^a)  the  fair  market  value  of  the  mineral  deposits  as  of  March  1,  1913,  if  the 

property  was  acquired  prior  to  that  date,  (b)  the  cost  of  the  mineral  property  if  ac- 
quired subsequent  to  that  date;  (3)  the  method  by  which  the  value  as  of  March  1,  1913, 
was  determined,  in  case  the  property  was  acquired  prior  to  that  date;  (4)  the  estimated 
quantity  in  units  in  the  mine  as  of  March  1,  1913,  or  at  the  date  of  purchase  if  acquired 
subsequent  to  that  date;  (5)  amount  of  capital  applicable  to  each  unit;  (6)  thp  number 
of  units  removed  and  sold  during  the  year  for  which  the  return  was  made;  and  (7)  any 
other  data  which  would  be  helpTul  in  determining  the  reasonableness  of  the  depletion 
deduction  claimed  in  the  return. 

In  the  case  of  a lessee,  the  statenient  should  show  (a)  the  amount  of  the  bonus 

2206  or  other  payment  made  for  the  right  to  operate  the  mine;  (b)  the  period  covered 
by  the  lease,  and  the  estimated  quantity  of  units  in  the  mine  when  the  lease  con- 
tract was  entered  into. 

In  addition  to  the  deduction  hereinbefore  provided  for,  the  operator  will  be  per- 

2207  mitted  to  deduct  from  the  gross  income  of  each  year  a reasonable  allowance  for 
depreciation  of  all  physical  property  used  in  connection  with  the  operation  of  the 

mine,  and  owned  by  the  operator.  For  this  purpose  the  actual  cost  (not  value)  will  be  equit- 
ably distributed  over  the  useful  life  of  such  property  until  the  true  salvage  value  has  been 
reached. 

Both  owner  and  lessee  will  keep  accurate  ledger  accounts  to  which  will  be  charged 

2208  the  capital  invested  in  the  mine  or  leasp  and  in  machinery,  equipment,  etc.,  crediting 
such  accounts  or  a depletion  and  depreciation  reserve  account,  with  thp  amount 

claimed  and  allowed  as  a Reduction  each  year  until  as  a result  of  such  credits  the  capital 
charge  shall  be  extinguished,  after  which  no  further  deduction  on  these  accounts  will  be 
allowed.  (Art.  172,  ^542-546,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2209  Depletion — Timber. — In  the  case  of  tirnberlands,  the  fair  market  price  or  value 
of  timber  standing  March  1,  1913,  or  the  cost  of  the  timber  wh,ere  the  purchase 

was  made  subsequent  to  March  1,  1913,  will  be  the  basis  for  calculation  of  depletion,  and 
this  value  as  of  March  1,  1913,  or  cost  wheq  subsequently  purchased,  is  not  to  be  exceeded 
for  purposes  of  deduction  in  returns  of  income.  The  whole  of  such  value  is  to  be  dis- 
tributed over  the  entire  amount  of  standing  timber  on  these  respective  dates.  See  Art. 
173  [^2210]  of  these  regulations  fot  rule  of  calculation.  (Art.  8,  1^125,  Reg.  33,  Rev.,  Jan. 
2,  1918.)  Read  at  ^2955.] 

2210  Corporations  owning  timber  knd  and  logging  off  the  timber  and  manufacturing 
it  into  lumber,  will,  if  the  timber  was  acquired  prior  to  March  1,  1913,  be  permitted 

to  exclude  from  gross  income  either  through  a deduction  from  gross  receipts  or  through  a 
charge  into  the  cost  of  manufacturing  the  timber  into  lumber,  an  amount  equivalent  to 
the  fair  market  price  or  value  of  the  standing  timber  as  of  March  1,  1913. 

In  order  to  secure  the  benefit  of  this  deduction  such  corporations  must  set  up  on 
22  1 1 their  books  as  of  March  1,  1913,  the  fair  market  price  en  bloc,  of  all  the  timber  then 
owned  by  them,  and  then,  by  dividing  this  en  bloc  value  by  the  estimated  number 
of  feet  (board  measure),  in  the  entire  tirnber  holdings,  the  per  unit  value  or  price  as  of  March 
1,  1913,  will  be  ascertained,  which  per  unit  price  or  value  will  be  the  basis  for  measuring 
the  amount  which  may  be  added  to  the  cost  of  manufacture,  or  deducted  from  gross  income, 
until  the  en  bloc  value  of  the  entire  holding  as  of  March  1,  1913,  shall  have  been  extinguished, 
after  which  no  further  deduction  on  this  account  shall  be  allowed. 

The  same  rule  will  apply  in  the  case  of  timber  or  timber  lands  purchased  subse- 
221  2 quent  to  March  1,  1913,  the  only  difference  being  that  actual  cost — that  is,  the  gross 
purchase  price — shall,  in  making  the  computation,  be  substituted  for  en  bloc  price 
or  value  as  of  that  date.  If  the  entire  mai;ket  price  or  value  of  both  timber  and  lands  as 
of  March  1,  1913,  or  the  entire  cost,  if  acquired  subsequent  to  that  date,  is  extinguished 
through  a deduction  from  gross  income  for  timber  used,  or  through  a per  unit  charge  to 
cost  of  manufacturing  lumber,  then  the  entire  amount  realized  from  the  logged-off  lands 
or  for  other  salvage  will  be  returned  as  income  of  the  year  in  which  such  lands  are  sold  or 
disposed  of. 

If  the  timber  or  timber  lands  are  sold  en  bloc,  the  gain  or  loss  will  be  ascertained  on 

2213  the  basis  of  the  difference  between  the  fair-market  price,  or  cost,  and  the  selling 
price,  according  as  the  property  was  acquired  prior  or  subsequent  to  March  I,  1913. 
The  fair  market  price  or  value  of  timber  or  timber  lands  as  of  Mqrch  1,  1913,  is 

2214  the  price  at  which  the  property  in  its  then  condition,  and  with  the  circumstance 
then  surrounding  it  could  have  been  sold,  for  cash  or  its  equivalent.  This  value 

must  not  be  speculative,  but  must  be  determined  without  taking  into  account  any  pros- 
pective profits  that  may  result  from  the  manufacture  of  the  timber  into  lumber.  It  must 
be,  as  the  law  contemplates,  a fair  market  value  and,  once  determined,  must  be  set  up 


CORPORATIONS. 

on  the  books  and,  as  the  measure  of  a stumpage  deduction  for  income-tax  purposes,  must 
remain  constant  and  can  not  be  increased  except  as  new  purchases  are  made  at  a higner 
average  cost.  The  value  so  set  up  as  of  March  1,1913,  will  be  subject  to  the  approval 
of  the  Commissioner  of  Internal  Revenue.  (Art.  173,  ^547-551,  Reg.  33,  Rev.,  Jan.  2, 
1918.) 

2215  Law  1[319.  Adjustment  for  Substantial  Losses  Sustained  in  the  Taxable  Year 
1919  Because  of  Material  Reduction  of  Inventory  Values  for  1918,  or  Because  of 
Certain  Rebate  Payments. — “(14)  (a)  At  the  time  of  filing  return  for  the  taxable  year  1918 
a taxpayer  may  file  a claim  in  abatement  based  on  the  fact  that  he  has  sustained  a substan- 
tial loss  (whether  or  not  actually  realized  by  sale  or  other  disposition)  resulting  from  any 
material  reduction  (not  due  to  temporary  fluctuation)  of  the  value  of  the  inventory  for 
such  taxable  year,” 

2216jLaw  ^320. — “or  from  the  actual  payment  after  the  close  of  such  taxable  year  of 
rebates  in  pursuance  of  contracts  entered  into  during  such  year  upon  sales  made 
during  such  year.” 

2217  Law  ^321. — “In  such  case  payment  of  the  amount  of  the  tax  covered  by  such 
claim  shall  not  be  required  until  the  claim  is  decided,  but  the  taxpayer  shall  accom- 
pany his  claim  with  a bond  in  double  the  amount  of  the  tax  covered  by  the  claim,  with 
sureties  satisfactory  to  the  Commissioner,  conditioned  for  the  payment  of  any  part  of 
such  tax  found  to  be  due,  with  interest.  If  any  part  of  such  claim  is  disallow^ed  then  the 
remainder  of  the  tax  due  shall  on  notice  and  demand  by  the  collector  be  paid  by  the  tax- 
payer with  interest  at  the  rate  of  1 per  centum  per  month  from  the  time  the  tax  would 
have  been  due  had  no  such  claim  been  filed.” 

221  8 Law  ^^322. — “If  it  is  shown  to  the  satisfaction  of  the  Commissioner  that  such  sub- 
stantial loss  has  been  sustained,  then  in  computing  the  taxes  imposed  by  this  title 
and  Title  III  the  amount  of  such  loss  shall  be  deducted  from  the  net  income.” 

221  9 Law  ^323. — “(b)  If  no  such  claim  is  filed,  but  it  is  shown  to  the  satisfaction  of  the 
Commissioner  that  during  the  taxable  year  1919  the  taxpayer  has  sustained  a 
substantial  loss  of  the  character  above  described  then  the  amount  of  such  loss  shall  be  de- 
ducted from  the  net  income  for  the  taxable  year  1918  and  the  taxes  imposed  by  this  title 
and  by  Title  III  for  such  year  shall  be  redetermined  accordingly.  Any  amount  found  to 
be  due  to  the  tax-payer  upon  the  basis  of  such  redetermination  shall  be  credited  or  refunded 
to  the  taxpayer  in  accordance  with  the  provisions  of  section  252  [^2488].” 

[In  connection  with  the  above  read  at  ^1963.] 

2220  Law  ^456.  Liberty  and  Other  United  States  Bonds  as  Security  in  Connection 
with  “Penal  Bonds.” — “Sec.  1320.  That  wherever  by  the  laws  of  the  United  States 

or  regulations  made  pursuant  thereto,  any  person  is  required  to  furnish  any  recognizance, 
stipulation,  bond,  guaranty,  or  undertaking,  hereinafter  called  “penal  bond,”  wdth  surety 
or  sureties,  such  person  may,  in  lieu  of  such  surety  or  sureties,  deposit  as  security  with  the 
official  having  authority  to  approve  such  penal  bond.  United  States  Liberty  bonds  or  other 
bonds  of  the  United  States  in  a sum  equal  at  their  par  value  to  the  amount  of  such  penal 
bond  required  to  be  furnished,  together  with  an  agreement  authorizing  such  official  to 
collect  or  sell  such  bonds  so  deposited  in  case  of  any  default  in  the  performance  of  any  of 
the  conditions  or  stipulations  of  such  penal  bond.  The  acceptance  of  such  United  States 
bonds  in  lieu  of  surety  or  sureties  required  by  law  shall  have  the  same  force  and  effect  as 
indiv^idual  or  corporate  sureties,  or  certified  checks,  bank  drafts,  post-office  money  orders, 
or  cash,  for  the  penalty  or  amount  of  such  penal  bond.  The  bonds  deposited  hereunder, 
and  such  other  United  States  bonds  as  may  be  substituted  therefor  from  time  to  time  as 
such  security,  may  be  deposited  with  the  Treasurer,  or  an  Assistant  Treasurer  of  the 
United  States,  a Government  depository.  Federal  Reserv^e  bank,  or  member  bank,  which 
shall  issue  receipt  therefor,  describing  such  bonds  so  deposited.  As  soon  as  security  for 
the  performance  of  such  penal  bond  is  no  longer  necessary,  such  bonds  so  deposited,  shall 
be  returned  to  the  depositor:  Provided,  * * *.” 

2221  Law  ^457. — '^Provided  further,  That  nothing  herein  contained  shall  affect  or  impair 
the  priority  of  the  claim  of  the  United  States  against  the  bonds  deposited  or  any 

right  or  remedy  granted  by  said  Acts  or  by  this  section  to  the  United  States  for  default 
upon  any  obligation  of  said  penal  bond:” 

2222  Law  ^458.  '"Provided  further.  That  all  laws  inconsistent  with  this  section  are  hereby 
so  modified  as  to  conform  to  the  provisions  hereof:” 


226  TAX 


INC. 


INSURANCE  COMPANIES. 


2223  Law  ^459.  Aiid  frovided  further,  That  nothing  contained  herein  shall  affect  the 
authority  of  courts  over  the  security,  where  such  bonds  are  taken  as  security  in 

judicial  proceedings,  or  the  authority  of  any  administrative  officer  of  the  United  States 
to  receive  United  States  bonds  for  security  in  cases  authorized  by  existing  laws.” 

2224  Law  ^460.  “The  Secretary  may  prescribe  rules  and  regulations  necessary  and  proper 
for  carrying  this  section  into  effect.” 


2225  Tax  on  Insurance  Companies. — [Comment:  Same  provisions  in  general  as  for  other 
corporations.  For  the  exceptions,  see  below.] 

2226  In  ascertaining  the  net  Income  of  an  insurance  company,  for  the  purpose  of  the  tax 
imposed  by  this  title,  the  general  provisions  contained  in  the  law  and  elsewhere 

in  these  regulations  will  be  observed,  except  as  modified  by  specific  legislation  or  regulations 
concerning  insurance  companies.  (Art.  239,  ^[684,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2227  Exempted  Organizations. — There  are  exempted  under  the  provisions  of  the  act 
fraternal  beneficiary  societies,  orders,  or  associations  operating  under  the  lodge 

system  or  for  the  exclusive  benefit  of  the  members  of  a fraternity  itself  operating  under  the 
lodge  system  and  providing  for  the  payment  of  life,  sick,  accident,  or  other  benefits  to  the 
members  of  such  societies,  orders,  or  associations  or  their  dependents;  and  farmers’  and 
other  mutual  hail,  cyclone,  or  fire  insurance  companies,  or  like  organizations  of  a purely 
local  character,  the  income  of  which  consists  solely  of  assessments,  dues,  and  fees  collected 
from  members  for  the  sole  purpose  of  meeting  expenses. 

A society  or  association  “operating  under  the  lodge  system”  Is  considered  to  be  one 

2228  organized  under  a charter,  with  properly  appointed  or  elected  officers,  with  an 
adopted  ritual  or  ceremonial,  holding  meetings  at  stated  intervals,  and  supported 

by  fees,  dues,  or  assessments. 

It  is  not  sufficient  that  companies  of  the  foregoing  classes  merely  claim  exemption, 

2229  but  it  must  be  shown  by  affidavit  or  otherwise  to  the  satisfaction  of  the  Commissioner 
of  Internal  Revenue  that  the  conditions  set  forth  in  the  exempting  provisions  have 

been  fully  met.  [See  ^1754.]  (Art.  239,  ^681-683,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2230  Gross  Income  of  Insurance  Companies. — [Sec.  230  (a),  ^1662,  provides  that  in  the 
case  of  corporations,  which  includes  insurance  companies,  “gross  income”  means 

the  gross  income  as  defined  in  section  213,  1[763,  except  as  shown  below  at  ^2256  for  life 
insurance  companies  and  at  ^2264  for  mutual  marine  insurance  companies.] 

2231  Gross  income  of  insurance  companies  consists  of  the  total  revenue  derived  from  the 
operation  of  the  business,  including  income,  gains,  or  profits  from  all  other  sources, 

within  the  calendar  year  for  which  the  return  is  made,  except  as  modified  by  the 
special  provisions  of  law  which  apply  to  insurance  companies. 

Gross  income,  as  defined  above,  will  include  net  premiums,  investment  income, 

2232  income  from  the  sale  of  capital  assets,  all  gains,  profits,  and  income  as  reported 
to  the  State  insurance  departments,  except  the  items  specifically  exempted  in  the 

act,  as  construed  by  these  regulations.  (Art.  239,  *[[673-674,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2233  Amounts  representing  reinsurance  treaties  will  be  eliminated  from  income  and 
disbursements. 

2234  Deposit  premiums  on  perpetual  risks  received  and  returned  should  be  treated  in 
the  same  manner,  as  no  reserve  will  be  considered  covering  liability  for  such  de- 
posits, but  the  earnings  on  such  deposits  will  be  included  in  the  premium  income. 

For  the  purpose  of  ascertaining  the  gain  or  loss  from  sale  or  other  disposition  of 

2235  ledger  assets  acquired  prior  to  March  1,  1913,  to  fair  market  price  or  value  of  such 
assets  as  of  March  1,  1913,  shall  be  the  basis  for  determining  the  amount  of  such 

gain  or  loss  to  be  accounted  for  in  the  return  of  the  year  in  which  the  assets  are  sold.  If 
acquired  subsequent  to  March  1,  1913,  then  the  profit  or  loss  to  be  returned  or  claimed  will 
be  the  difference  between  the  cost  and  the  selling  price. 

2236  Reinsurance  and  return  premiums  should  not  be  included  in  gross  income  nor  in 
deductions.  (Art.  239,  1[677-680,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2237  Exempted  Income. — There  is  specifically  exempted  from  taxation  interest  received 
on  obligations  of  the  United  States  or  its  possessions,  or  on  the  obligations  of  a State 

or  any  political  subdivision  thereof.  Therefore,  in  ascertaining  gross  income  for  the  p.ujy 
poses  of  the  tax,  all  interest  receivci  from  such  sources  should  be  eliminated.  (Report 
to  State,  schedule  D,  parts  1 and  4.)  As  accrued  interest  on  bonds  purchased  is  not  iri- 
cluded  in  the  interest  income  reported  to  the  State  insurance  department,  it  must  not  be 


LNC.  ^27  TAX 


INSURANCE  C0MM5!riES. 


included  in  the  amount  eliminated  from  gross  income  in  the  return.  (Report  to  State, 
schedule  D,  part  3.)  In  the  case  of  obligations  of  the  United  States  issued  after  September 
1,  1917,  income  from  such  obligations  is  exempt  from  tax  only  to  the  extent  provided  in 
the  act  authorizing  their  issue.  Income  from  such  obligations  received  by  insurance  com- 
panies is  exempt  from  the  [12]  per  cent  and  [10]  per  cent  income  tax.  (Art.  239,  ^675, 
Reg.  33,  Rev.,  Jan.  2,  1918.) 

2238  General  Deductions  Allowed  to  Insurance  Companies. — The  following  deductions 
from  gross  income  will  be  allowed  in  returns  made  by  insurance  companies  other 
than  mutuals  but  Including  mutual  life  and  mutual  marine. 

2239  All  ordinary  and  necessary  expenses  paid  vdthin  the  year  in  the  maintenance  and 
operations  of  the  company  and  its  properties. 

2240  Interest. — Interest  paid  on  indebtedness  wholly  secured  by  property  collateral 
the  subject  of  sale  or  hypothecation  in  the  ordinary  business  of  the  company  as  a 

dealer  only  in  the  property  constituting  such  collateral  or  in  the  loaning  of  funds  thereby 
produced  Is  an  allowable  deduction  as  a business  expense  to  an  amount  of  the  interest 
paid  on  such  Indebtedness  not  in  excess  of  the  actual  value  of  the  collateral  securing  It. 
[All  interest  paid  or  accrued  on  indebtedness  is  now  deductil  ic  as  interest,  with  one  excep- 
tion, 1[:027.] 

2241  Incidental  Repairs. — Expenditures  for  incidental  repairs  which  do  not  add  to  the 
value  nor  appreciably  prolong  the  life  of  property  are  deductible  as  expenses,  but 

expenditures  for  new  buildings,  permanent  improvements,  or  betterments  which  increase 
the  value  of  property,  or  for  restoring  or  replacing  property,  are  not  deductible  under  this 
or  any  other  item  of  the  return.  Such  expenditures  are  properly  chargeable  to  capital 
account,  to  be  extinguished  through  annual  depreciation  allowances. 

2242  Cost  of  Furniture. — Insurance  companies  will  be  permitted  to  add  to  expenses. 
In  lieu  of  depreciation  of  furniture  and  fixtures,  the  actual  cost  of  repairs,  replace- 
ments, and  renewals  of  such  furniture  as  Is  reported  to  the  State  insurance  department. 
Provided  that  in  case  of  an  original  investment  the  cost  thereof  shall  be  charged  to  capital 
account, 

2243  Premiums  Paid. — Premiums  paid  on  life  insurance  policies  covering  the  lives 
of  officers,  employees,  or  those  financially  Interested  in  any  trade  or  business  con- 
ducted by  an  individual,  partnership,  corporation,  joint-stock  company  or  association,  or 
insurance  company,  shall  not  be  deducted  in  computing  the  net  income  of  insurance 
companies. 

2244  Losses  Actually  Sustained. — Losses  deductible  (other  than  policy  payments) 
must  be  distinguished  from  depreciation  or  allowances  for  exhaustion,  wear  and 

tear.  The  losses  must  be  absolute,  complete,  actually  sustained  during  the  year,  and 
charged  off  on  the  books  of  the  company,  and  if  the  losses  result  from  the  sale  of  assets 
acquired  prior  to  March  1,  1913,  such  losses  shall  be  ascertained  by  taking  the  difference 
between  the  fair  market  price  or  value  as  of  March  1,  1913,  and  the  selling  price.  If  the 
assets  were  acquired  subsequent  to  March  1,  1913,  the  loss  will  be  the  amount  by  which 
the  selling  price  Is  less  than  the  cost. 

2245  Losses  compensated  by  insurance  or  otherwise  are  not  deductible. 

Agency  Balances. — There  may  also  be  deducted  losses  from  agency  balances  or 

2246  other  amounts  charged  off  as  worthless,  and  losses  by  defalcation,  premium  notes 
voided  by  lapse,  provided  such  notes  Have  at  some  time  been  included  in  gross 

income  for  income  tax  purposes;  otherwise,  they  will  not  be  deductible.  (Art.  240, 
^685-693,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2247  Taxes  Paid  For  Stockholders. — Taxes  paid  by  companies  on  the  value  of  their  cap- 
ital stock  outstanding  and  in  the  hands  of  stockholders  are  not  deductible.  Such 

taxes  are  a primary  liability  of  the  stockholders  and  therefore  chargeable  against  their 
(the  stockholders’)  income.  ^ ... 

2243  Dividends  From  Foreign  Corporations. — Insurance  companies  claiming  as  a de- 
duction from  gross  income,  for  the  purpose  of  the  * ♦ * income  tax,  dividends 

received  from  foreign  organizations  must  accompany  their  returns  by  a list  giving  the  names 
of  such  organizations  and  the  amount  received  from  each.  (Aft.  240,  ^696-697,  Reg.  33, 
Rev.,  Jan.  2,  1918.) 

2249  Law  ^315.  Special  Deductions  Allowed  to  Insurance  Companies  in  General. — 
“(10)  In  the  case  of  insurance  companies,  in  addition  to  the  above  [i.  e.,  the  general 
deductions  allowed  to  all  corporations]:  (a)  The  net  addition  required  by  law  to  be  made 
within  the  taxable  year  to  reserve  funds  (including  in  the  case  of  assessment  insurance 
companies  the  actual  deposit  of  suras  with  State  of  Terfitoflail  officers  pursuant  to  law  as 
additions  to  guarantee  or  reserve  funds);  and  (b)  the  sums  other  than  dividends  paid  within 
the  taxable  year  on  policy  and  annuity  contracts;” 


IKC. 


TAX 


INSURANCE  COMPANIES. 


2250  Policy  Losses. — -As  payments  on  policies  there  should  be  reported  all  death,  disa- 
bility, or  other  policy  claims  (other  than  dividends)  paid  within  the  year,  including 

fire,  accident,  and  liability  losses,  matured  endowments,  annuities,  payments  on  install- 
ment policies,  surrender  values,  and  all  claims  actually  paid  under  the  terms  of  policy 
contracts. 

2251  Net  Addition  to  Reserve  Funds. — All  policy  premiums,  on  which  net  addition  to 
f'eserve  is  computed,  must  be  included  in  gross  income.  The  net  addition  may  be 

based  upon  the  highest  authorized  reserve  by  the  statutes  of  any  States  in  which  the  com- 
pany does  business.  When  the  reserve  at  the  end  of  the  year  is  less  than  at  the  beginning 
of  the  year  there  is  a “released  reserve,”  and  the  amount  so  released  must  be  included  in 
gross  income.  In  the  case  of  assessment  insurance  companies,  whether  domestic  or  foreign, 
the  actual  deposit  of  sun  s with  State  or  Territorial  officers,  pursuant  to  law,  as  additions 
to  guaranty  or  reserve  funds  shall  be  treated  as  being  payments  required  by  law  to  reserve 
funds.  In  the  case  of  life  insurance  com.panles,  the  net  addition  to  the  “reinsurance  re- 
serve” and  the  “reserve  for  supplementary  contracts,”  and  In  the  case  of  fire,  marine, 
accident,  liability,  and  other  insurance  companies,  the  net  addition  to  the  “uneariied- 
prerrtlun.  reserves,”  and  only  such  other  reserves  as  are  specifically  required  by  the  statutes 
of  the  States  within  which  the  companv  Is  doing  business  will  be  allowed  as  deductiohs. 
(Art.  240,  ^694-695,  Reg.  33,  Rev.,  Jan'.  2,  1918.) 

2252  Decision  of  U.  S.  Supreme  Court. — The  appended  decision  [captions  only]  of  the 
Supreme  Court  is  published  for  the  information  of  Internal-revenue  officers  and 

others  concerned.  (T.  D.  2501,  June  18,  1917.) 

(Act  of  Aug.  5,  1909.) 

1.  Reserve  Against  Unpaid  Losses. 

Fire  insurance  companies  not  “required  by  law”  of  Pennsylvania  to  hold  a reserve 
against  unpaid  losses  within  the  meaning  of  the  act  of  Congress. 

2.  Reserve  Funds  Required  by  Law. 

The  words  “reserve  funds  ” as  used  In  the  act  of  Congress,  have  reference  to  the 
funds  ordinarily  held  as  against  the  contingent  liability  on  outstanding  policies. 
(McCoach  vs.  Insurance  Company  of  America.  ^244  U.  S.  585.)  T.  D.  2501,  June 
18,  1917.) 

2253  Decision  of  U.  S.  Court  of  Claims. — The  appended  decision  [captions  only] 
of  the  United  States  Court  of  Claims  in  the  case  of  the  Maryland  Casualty  Co.  v. 

United  States  is  published  for  the  information  of  internal-revenue  officers  and  others 
concerned.  (T.  D.  2451,  Feb.  20,  1917.) 

Maryland  Casualty  Co.  v.  United  States. 

(Acts  of  Aug.  5,  1909  and  Oct.  3,  1913.) 

Court  of  Claims  of  the  United  States.  No.  33,191.  [Decided  February  12,  1917.] 

1.  Income  Means  Receipts  in  Cash. 

Income  means  what  has  come  in  or  receipts. 

2.  Receipt  by  Agent  is  Receipt  by  Principal. 

Company  obligated  to  report  in  full  the  total  sums  received  in  cash,  both  airiouhts 
received  at  the  home  office  and  those  paid  to  its  lawful  agencies  during  the  calendar 
year. 

3.  Net  Addition  to  Reserve  Funds. 

Only  the  net  addition  to  reserve  funds  required  by  State  statutes  is  deductible 
from  gross  income.  No  State  law  has  been  pointed  out  which  requires  the  main- 
tenance of  reserve  fund  to  secure  payments  of  taxes,  salaries,  and  brokerage  and 
agents’  commissions. 

4.  Decreases  in  Reserve  Funds. 

Reserve  funds  when  released  arc  In  their  very  essence  income. 

2254  Law  T,316.  Life,  Health,  ard  Accident  Insuiance  Combined  in  One  Policy. — “(11)  In 
the  case  of  corporations  issuing  policies  covering  life,  health,  and  accident  insur- 
ance combined  in  one  policy  issued  on  the  v/eekly  premium,  payment  plan  continuing 
for  life  and  not  subject  to  cancellation,  in  addition  to  the  above  [i.  e.,  the  general  deductions 
allowed  to  all  corporations  and  the  special  deduction  allowed  to  all  insurance  companies, 
^2249]  such  portion  of  the  net  addition  (not  required  by  law)  made  within  the  taxable 
year  to  reserve  funds  as  the  Commissioner  finds  to  be  required  for  the  protection  of  the 
holders  of  such  policies  only;” 

2265  Assessment  Life  and  Accident  Insurance  Companies;  Stock  Fire  Insurance 
Companies;  Stock  Casualty,  Fidelity,  and  Surety  Insurance  Companies;  Mis- 
cellaneous Stock  Companies. — Com.panies  of  the  foregoing  classes  will  make 
their  returns  in  accordance  with  articles  applicable  to  insurance  companies  in  general. 
(Art.  245,  1[713,  Reg.  33,  Rev.,  Jan.  2,  1918.) 


INC. 


219  TAX 


INSURANCE  COMPANIES. 


2256  T-aw  11282.  Life  Insurance  Companies. — Premium  Income  Paid  Back.— “(1)  In 

th'-  case  of  life  insurance  companies  there  shall  not  be  included  in  ^ross  incorne 
such  portion  of  any  actual  premium  received  from  any  individual  policyholder  as  is  paid 
back  or  credited  to  or  treated  as  an  abatement  of  premium  of  such  policyholder  within 
the  taxable  year.” 

Life  insurance  companies  are  authorized  to  omit  from  gross  income  such  portion 

2257  of  any  actual  premium  received  from  any  individual  policyholder  as  shall  have 
been  paid  back  or  credited  to  the  policyholder  or  treated  as  an  abatement  of  his 

premium. 

The  amount  authorized  by  this  provision  to  be  excluded  from  gross  premium 

2258  income  on  account  of  any  premium  refunded  to  any  individual  policyholder  is 
explicitly  limited  to  an  amount  not  in  excess  of  the  actual  premium  paid  by  the 

individual  policvholder  within  the  tax  year.  (Art.  24-1,  1[700-701,  Reg.  33,  Rev.  Jan. 
2,  1918.) 

2259  Cash  Dividends. — Life  insurance  companies  are  entitled  under  the  foregoing 
holding  to  exclude  from  gross  income  any  part  of  the  premium  received  which  is 

paid  back  to  the  individual  policyholder  within  the  same  return  year.  Where  the  divi- 
dend is  In  excess  of  the  premdum  received,  there  can  be  excluded  from  gross  income  only 
the  amount  of  the  premium  received  from  such  individual  policyholder  within  the  same 
return  year. 

2260  Dividends  Provisionally  Ascertained. — Dividends  provisionally  ascertained,  appor- 
tioned, or  credited  on  deferred  dividend  policies  can  not  be  excluded  or  deducted 

from  gross  Income  for  the  reason  that  the  assured  has  no  vested  or  enforceable  right  in 
them  and  can  not,  at  the  time  of  the  ascertainment,  apportionm.ent,  or  credit,  nor  until 
the  maturity  of  the  policy,  avail  himself  of  such  dividends;  and  in  the  event  of  the  death 
of  the  assured  prior  to  the  expiration  of  the  deferred  dividend  period,  the  amount  so 
ascertained,  apportioned,  or  credited  lapses.  (Art.  241,  1[702-703,  Reg.  33,  Rev.,  Jan. 
2,  1918.) 

2261  Decision  of  District  Court. — Brief  Summary:  In  rendering  judgment  for  the 
plaintiff  Judge  Dickinson  held  that  no  matter  during  what  year  premiums  had 

been  received  by  mutual  life  insurance  companies,  those  portions  of  such  premiums,  with 
any  accretions  thereto,  which  are  returned  to  policyholders  may  be  excluded  from  the 
gross  income  of  the  insurance  company  for  the  year  in  which  returned,  the  fact  being 
that  in  the  case  of  such  mutual  life  insurance  companies  the  actual  cost  only  of  insurance 
is  paid  by  the  policyholders  and  returns  of  parts  of  premiums  with  interest  are  merely 
periodic  refunds  of  excess  amounts  paid  in.  (Penn  IVlutual  Life  Insurance  Company  vs. 
Lederer,  Act  of  Oct.  3,  1913.  U.  S.  District  Court,  E.  D.  Pennsylvania  (247  Fed.  559), 
February  4,  1918.) 

2262  Surrender  Values. — Gross  income  of  life  Insurance  companies  should  include, 
in  addition  to  Income  heretofore  defined,  surrender  values  applied  in  any  manner, 

consideration  for  supplementary  contracts  involving  and  not  involving  life  contingencies, 
and  all  other  Income,  gains  or  profits. 

Applied  surrender  values  and  consideration  for  supplementary  contracts,  not 

2263  involving  life  contingencies  included  in  income  will,  of  course,  be  deducted  as 
payments  under  policy  contracts;  but  for  convenience  in  verifying  the  returns 

these  items  should  appear  In  the  return  in  both  gross  income  and  deductions.  (Art.  241, 
11698-699,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2264  Law  1[283.  Mutual  Marine  Insurance  Companies. — Gross  Income. — “(2)  Mutual 
m.arine  insurance  companies  shall  include  in  gross  income  the  gross  premiums 

collected  and  received  by  them  less  amounts  paid  for  reinsurance.” 

2265  Law  1[317.  Mutual  Marine  Insurance  Companies. — Special  Deduction  Authorired. 

— “(12)  In  the  case  of  mutual  marine  Insurance  companies,  there  shall  be  allowed, 
in  addition  to  the  deductions  allowed  in  paragraphs  (1)*  to  (10)*,  inclusive,  amounts 
repaid  to  policyholders  on  account  of  prem.iums  previously  paid  by  them,  and  interest 
paid  upon  such  amounts  between  the  ascertainment  and  the  payment  thereof;” 

, *(l)  to  (9) — General  deductions  allowed  to  all  corporations,  beginning  at  1[1943. 
(10) — Special  deductions  allowed  to  all  insurance  companies,  1[2249. 

2266  A.*.utual  marine  insurance  com.panies  may  include  in  their  deductions  from  gross 
income  amounts  repaid  to  policyholders  on  account  of  premiums  previously  paid  by 

them  and  interest  paid  upon  such  amounts  between  the  date  of  ascertainment  thereof  and 
the  date  of  payment  thereof,  such  amounts  and  interest  having  been  included  in  gross 


INC. 


230  TAX 


INSURANCE  COMPANIES. 


income,  which  amounts  deducted  fro  n gross  income  should  be  fully  set  forth  in  the  supple- 
mentary statement  of  the  return  form.  (Art.  243,  11710,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2267  Law  1[318.  Mutual  Insurance  Companies  Other  than  Mutual  Life  and  Mutual 
Marine. — “(13)  In  the  case  of  mutual  insurance  companies  (other  than  mutual 

life  or  mutual  m.arine  insurance  companies)  requiring  their  members  to  make  premium 
deposits  to  provide  for  lasses  and  expenses,  there  shall  be  allowed,  in  addition  to  the 
deductions  allowed  in  paragraphs  (l)*to  (10)*,  inclusive,  (unless  otherwise  allowed  under 
such  paragraphs)the  amount  of  premium  deposits  returned  to  their  policyholders  and  the 
amount  of  premium  deposits  retained  for  the  payment  of  losses,  expenses,  and  reinsurance 
reserves;” 

*(1)  to  (9) — General  deductions  allowed  to  all  corporations,  beginning  at  If  1943.  (10 — 
Special  deductions  allowed  to  all  insurance  companies,  1f2249. 

The  foregoing  provision  [The  Act  of  September  8,  1916,  provided:  “That  mutual 

2268  fire  and  mutual  employers’  liability  and  mutual  workmen’s  compensation  and 
mutual  casualty  insurance  companies  requiring  their  members  to  make  premium 

deposits  to  provide  for  losses  and  expenses  shall  not  return,  etc.”]  is  construed  to  embrace 
all  mutual  insurance  companies  (other  than  mutual  life  and  mutual  marine  and  com- 
panies exempt);  interinsurance  and  reciprocal  exchanges  and  returns  of  annual  net  income 
should  be  made  on  the  special  form  (No.  1030a)  provided  for  that  purpose. 

Gross  Income. — Gross  income  of  such  companies  will  consist  of  the  total  revenue 

2269  derived  from  the  operation  of  the  business  but  excluding  all  income  received  from 
premiums,  assessments,  fees,  and  other  amounts  paid  by  the  policyholders  necessary 

to  secure  or  continue  the  policy  in  force.  If,  however,  any  portion  of  the  funds  thus  received 
is  retained  or  finally  used  for  any  purpose  other  than  the  payment  of  losses,  expenses,  or 
reinsurance  reserves,  such  portion  is,  by  the  terms  of  the  law,  taxable  and  must  be  returned 
as  income. 

Rent  Income. — All  payments  received  in  cash  or  its  equivalent,  as  rent  on  build- 

2270  ings  or  other  property  owned  or  controlled  by  the  company  making  the  return,  must 
be  returned  as  taxable  income,  after  deducting  the  amount  paid  for  repairs  and 

expenses,  including  taxes  (levied  for  purposes  other  than  local  benefits)  as  has  been  expended 
on  the  property  from  which  the  rental  income  returned  was  derived. 

Sale  of  Capital  Assets. — The  profit  or  income  to  be  returned  in  the  event  of  the 
227  1 sale  or  maturity  of  capital  assets  acquired  prior  to  March  1,  1913,  should  be  deter- 
mined upon  the  ba§is  of  the  difference  between  the  fair  market  value  of  such  assets  as 
of  that  date  and  the  selling  price  thereof.  If  the  assets  were  acquired  subsequent  to 
March  1,  1913,  the  loss  will  be  the  amount  by  which  the  selling  price  is  less  than  the  coji. 
This  profit  or  income  may,  for  the  purpose  of  the  tax,  be  reduced  by  the  amount  of  any 
loss  resulting  from  the  same  source  and  ascertained  in  the  same  manner.  In  no  event 
can  a loss  resulting  from  the  sale  or  maturity  of  capital  assets  exceed  the  gain  within 
the  year  from  like  transactions. 

Other  Income. — All  other  income  or  earnings  not  hereinbefore  referred  to  will 
22  72  form  a part  of  and  must  be  reported  as  taxable  income.  (Art.  242,  1[705-709, 
Reg.  33,  Rev.,  Jan.  2,  1918.) 

2273  Foreign  Insurance  Companies. — Insurance  companies  organized,  authorized,  or 
existing  under  the  laws  of  any  foreign  government  shall  report  as  gross  income  the 

gross  amount  received  within  the  year  from  all  sources  within  the  United  States  or  its 
possessions.  Incom.e  from  business  transacted  by  a United  States  branch  or  agency  of  a 
foreign  insurance  company  which  relates  to  a foreign  country  must  be  returned  as  gross 
incom.e.  Otherwise  articles  applicable  to  insurance  companies  in  general  will  be  followed 
as  to  incom.e  and  deductions. 

Income  from  Investment. — Insurance  companies  organized,  authorized,  or  existing 

2274  under  the  laws  of  any  foreign  government^  not  transacting  an  insurance  business 
in  the  United  States  or  its  possessions  but  receiving  income  from  Investments 

therein  must  make  returns  of  such  income,  deducting  therefrom  the  amount  of  such  Income 
[the  tax  on  which  has  been]  withheld  at  the  source.  [Dividends  are  now  deductible,  1[2102.] 
(Art.  244,  1[71 1-712,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2275  Returns  by  Insurance  Companies. — Except  as  otherwise  specially  provided  in  the 
law  or  in  these  regulations,  the  general  regulations  hereinbefore  provided  for  the 

use  of  corporations,  joint-stock  companies,  or  associations  will  be  observed  by  insurance 
companies  in  making  their  returns.  (Art.  246,  1[714,  Reg.  33,  Rev.,  Jan.  2,  1918.) 


INC. 


231  TAX 


FOREIGN  CORPORATIONS. 


2276  Returns  to  Conform  to  State  Reports. — Returns  of  insurance  companies  must 
be  rendered  in  conformity  with  reports  made  for  the  same  period  to  the  State 

insurance  departments.  As  all  insurance  com.panies  are  required  by  law  to  render  their 
reports  to  the  various  State  insurance  departments  for  the  calendar  year,  their  returns  of 
annual  net  income  for  the  purpose  of  the  incomie  tax  should  be  made  for  the  same  period, 
unless  their  books  are  actually  kept  on  a fiscal-year  basis. 

Treasury  Decision  2433,  [^1928],  providing  that  returns  may  be  made  on  a basis 

2277  other  than  as  above  set  forth,  is  not  applicable  to  insurance  companies.  (Art.  239, 
11671-672,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

227  8 Copy  of  Report  to  State. — As  an  assistance  in  auditing  the  returns,  Vvdierever  possible, 
a copy  of  the  report  to  the  State  insurance  department  should  be  submitted  with  the 
returns;  otherwise  schedule  D,  parts  1,  3,  and  4,  of  the  report  should  be  attached  thereto 
showing  Federal,  State,  and  m.unicipal  olDligations  from  which  the  interest  omitted  from 
gross  income  was  derived.  (Art.  239,  1[676,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

General  Lav7  Provisions  and  Applicable  Regulations  Relating  to  Returns. — [Read 
at  111434.] 

Ge  neral  Law  Provisions  and  Applicable  Regulations  Relating  to  the  Payment  of 
of  the  Tax. — [Read  at  1[2339.] 


2279  Tax  on  Foreign  Corporations. — [The  rate  is  the  same  as  for  domestic  corporations, 
for  which  see  1(1682.] 

2280  Law  K5.  What  Constitutes  a Foreign  Corporation. — “The  term  ‘foreign’  when 
applied  to  a corporation  or  partnership  means  created  or  organized  outside  the 

United  States;” 

2231  Law  K6.  “The  term  ‘United  States’  when  used  in  a geographical  sense  includes 
only  the  States,  the  Territories  of  Alaska  and  Hawaii,  and  the  District  of 
Colum.bia;” 

Foreign  Corporations  not  Engaged  in  Trade  or  Business  within  the  United  States 
and  not  Having  any  Office  or  Place  of  Business  therein. — [Against  such,  the  tax 
is,  in  large  measure,  withheld  at  the  source,  1(572.] 

2282  “Exempt  Coiporations”  Includes  Foreign  as  Well  as  Domestic  Corporations. — 

This  office  is  in  receipt  of  your  letter  of  the  30th  ultimo  in  which  you  ask  whether 
or  not  foreign  corporations  of  the  nature  specified  in  Section  11,  under  the  heading  “Condi- 
tional and  Other  Exem^ptions”  [1(1739]  will  also  come  within  that  heading,  you  are  informed 
that  the  section  referred  to  provides  that  the  income  of  the  corporations  enumerated  therein 
shall  not  be  taxed  and  therefore  it  follows  that  if  the  corporations  are  not  subject  to  tax 
they  will  not  be  required  to  file  corporate  returns,  and  it  is  held  by  this  office  that  the  exemp- 
tion applies  to  foreign  as  well  as  to  domestic  corporations. 

Corporations  similar  to  those  enumerated  in  the  several  subsections  of  Section  11 

2283  are  not  necessarily  exem.pt  from  m.aking  returns  of  annual  net  income  and  can 
not  be  classed  as  exem.pt  corporations  until  they  have  set  out,  in  the  form  of  an 

affidavit,  either  to  the  Collector  of  Internal  Revenue  for  their  districts  or  to  this  office 
the  purpose  and  nature  of  the  organization,  the  source  of  its  income,  the  disposition  of 
the  same,  and  whether  or  not  any  of  its  net  income  will  ever  inure  to  the  benefit  of  any 
private  stockholder  or  individual.  Upon  receipt  of  such  affidavit  the  corporation,  either 
domestic  or  foreign,  will  be  definitely  advised  as  to  its  status,  under  the  requirements  of 
the  law.  (Letter  to  The  Central  Trust  Company  of  New  York,  New  York,  signed  by 
Com.m.issioner  W.  H.  Osborn,  and  dated  November  1,  1916.) 

2284  Receipt  is  acknowledged  of  your  letter  of  November  17,  1916,  and  in  reply  you 
are  advised  that  the  Federal  Incom.e  Tax  Law  of  September  8,  1916,  provides 

that  cA'cry  organization  enum.erated  in  Section  II  of  that  statute  is  exempt  from  Federal 
Income  Tax  on  its  net  earnings,  profits  or  incom.e,  and  the  office  holds  that  the  provisions 
apply  V,  hether  the  or~anization  be  domestic  or  foreign.  In  a case  where  a foreign  organiza- 
tion desires  to  be  held  exempt  from  Federal  income  tax,  and  a doubt  exists  as  to  whether 
or  not  it  comes  within  the  class  of  ow’anlzations  enumerated  in  Section  II,  it  will  be  required 
to  file  a copy  of  its  charter  and  by-laws,  and  an  affidavit  executed  by  its  principal  officer 


INC. 


232 


TAX 


FOREIGN  CORPORATIONS. 


showing  the  disposition  made  of  such  income  as  it  receives,  and  stating  specifically,  whether 
or  not  any  of  the  income  so  received  inures  to  the  benefit  of  any  individual  stockholder. 
The  question  of  whether  or  not  the  office  will  hold  the  organization  to  be  “exempt”  will 
be  determ.ined  by  the  facts  shown  in  its  charter,  by-laws  and  affidavit.  (Letter  to  'I  he  Cor- 
poration Trust  Company,  signed  by  Com.m.issioner  W.  H.  Osborn,  and  dated  December  6, 
1916.) 

22S5  Law  ^280.  Net  Income  of  a Foreign  Corporation  Defined. — “Sec.  232.  That  in 
the  case  of  a corporation  subject  to  the  tax  imposed  by  section  230*  [^1662]  the  term 
‘net  incomm’  means  the  gross  income  as  defined  in  section  233  [‘1[1788]  less  the  deductions 
allowed  bv  section  234  [*[1922]  and  the  net  income  shall  b?  computed  on  the  same  basis  as 
is  provided  in  subdivision  (b)  of  section  212  [*lf755]  or  in  section  226  [‘Returns  when  account- 
ing period  is  changed,’  ^1479].” 

*[The  tax  imposed  by  section  230  Is  “upon  the  net  income  of  every  corporatiaa”  si  nply.] 

2286  Law  ^281.  Gross  Income  of  a Foreign  Corporation  Defined. — “Sec.  233.  fa) 
That  in  the  case  of  a corporation  subject  to  the  tax  imposed  by  section  230  [^1662] 

the  term  ‘gross  incom.e’  means  the  gross  income  as  defined  in  section  213  [^763],” 

2287  Law  ^284.  Gross  Income  of  a Foreign  Corporation  is  that  from  Sources  within 
the  United  States  only. — “(b)  In  the  case  of  a foreign  corporation  gross  income 

includes  only  the  gross  income  from  sources  wdthin  the  United  States,” 

2288  Meaning  of  “Source  v/ithin  United  States.” — It  is  not  necessary  that  the  foreIg.r.£j^* 
corporation  shall  be  engaged  In  business  in  this  country  or  that  it  have  an  offioe, 

branch,  or  agency  in  the  United  States.  Liability  to  the  tax  attaches  with  respect  to  the^^ 
income,  the  source  of  which  is  in  the  United  States. 

“Source”  as  here  used  means  the  place  of  the  origin  of  the  income.  (Art.  66,  ^309- 

2289  310,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2290  Foreign  Corporations  Doing  Business  by  Agents. — [Note  that  the  wording  of  the 
present  Act  is  “income  from  sources  wdthin  the  United  States.”]  The  Federal 

income  tax  law’  prov^ides  that  the  normal  tax  imposed  by  it  shall  be  levied,  assessed,  and 
collected  upon  the  entire  net  incom.e  arising  and  accruing  to  foreign  corporations  from 
business  transacted  or  capital  invested  in  this  country.  Such  a corporation  may  transact 
business  or  have  capital  invested  in  this  country  through  and  by  an  agen^:  as  completely  as, 
if  it  w’ere  transacting  the  business  or  Investing  the  capital  direct  from  its  home  office  or 
through  a duly  established  branch  office  In  the  United  States.  An  agent  w’ho  is  doing- 
business  in  this  country,  buying  and  selling  certain  products  of  the  foreign  corpora tIon->. 
is  to  all  intents  and  purposes  a branch  of  the  foreign  corporation,  as  through  and  by  him  the 
foreign  corporation  is  transacting  business  in  this  country. 

The  buying  and  selling  of  a product  in  this  country  through  a local  agency  or  branch 

2291  for  and'  on  behalf  of  a foreign  corporation  is  clearly  transacting  business  in  this, 
country  within  the  meaning  of  the  Federal  income  tax  law,  and  any  net  income 

arising  and  accruing  because  of  the  business  to  transacted  will  be  held  to  be  subject  to  the 
tax  imposed  by  the  Federal  income  tax  law,  and  every  foreign  corporation  carrying  on 
business  in  the  manner  indicated  will  be  required  to  make  a return  of  annual  net  income 
covering  the  business  so  transacted.  (T.  D.  2137,  Jan.  30,  1915.) 

2292  When  a foreign  corporation  sends  a representative  to  this  country  to  solicit  business^ 
the  merchandise  thus  sold  to  be  shipped  direct  to  the  consignee,  it  will  be  held  that 

such  corporation  Is  transacting  business  in  this  country.  The  fact  that  the  solicitor  or 
representative  has  only  a mailing  address  in  this  country  Is  immaterial,  he  is  none  the  less 
an  agent  of  the  foreign  corporation.  To  the  extent  that  he  sells  in  this  country  goods  or 
merchandise  for  the  foreign  corporation,  to  that  extent  the  foreign  corporation  is  trans- 
acting business  in  the  United  States,  and  the  net  income  arising  and  accruing  to  the  cor- 
poration by  reason  of  the  business  so  transacted  will  be  subject  to  the  income  tax  imposed 
by  section  2,  act  of  October  3,  1913. 

Any  foreign  corporation  transacting  business  in  this  country  in  the  manner  herein- 

2293  before  indicated  will  make  a return  of  annual  net  income  to  the  collector  of  the 
district  in  which  its  representative  has  his  mailing  address,  showing  in  such  return 

the  net  income  accruing  to  It  from  the  business  so  transacted.  (T.  D.  2161,  Feb.  19,  1915.) 

2294  Taxable  Income  of  Foreign  Steamship  Companies. — This  office  is  in  receipt  of  your 
letter  of  the  17th  instant,  in  which  you  quote  what  purports  to  be  a ruling  of  this 

office  with  respect  to  the  manner  of  computing  the  income,  taxable  under  the  federa 
income  tax  law  (Section  2,  Act  of  October  3,  1913),  against  foreign  steamship  companies 
doing  business  in  and  from  this  country,  and  you  ask  if  the  ruling  quoted  “represents 


INC. 


233  TAX 


FOREIGN  CORPORATIONS. 


the  stand  of  the  Bureau  of  Internal  Revenue  on  the  subject  in  qwestron.”  In  reply  you  are 
informed  that  the  ruling  referred  to  is  quoted  from  a letter  Written  by  this  office  and,  in 
the  main,  represents  the  position  of  this  Bureau  In  regard  to  the  question  raised.  ♦ * ♦ 

The  rule  or  position  of  this  office  with  respect  to  the  method  of  ascertaining  the  taxable 
income  of  foreign  steamship  companies,  whose  steamships  touch  at  American  ports  and 
which  carry  therefrom  freight  and  passengers  for  hire,  could  perhaps  be  better  stated  as 
follows:  The  returns  made  by  such  corporations,  for  the  purpose  of  the  income  tax  im- 
posed by  the  act  cited,  should  include  as  gross  income  the  total  receipts  of  all  outgoing 
business,  whether  freight  or  passengers.  With  the  gross  income  thus  ascertained,  the 
ratio  existing  between  It  and  the  gross  income  from  all  ports,  both  within  and  without 
the  United  States,  should  be  determined  as  the  basis  upon  which  allowable  deductions 
may  be  computed,  the  principle  being  that  allowable  deductions  shall  be  computed  upon 
a basis  which  recognizees  that  the  income  arising  and  accruing  from  business  done  in  and 
from  this  country  shall  bear  its  share,  and  no  more,  of  expense,  incident  to  the  earning 
or  creation  of  such  income,  in  the  ratio  that  the  gross  income  arising  in  and  from  this 
country  bears  to  the  entire  gross  income  arising  from  business  done  both  within  and  with- 
out this  country.  In  other  words,  the  net  income  of  a foreign  steamship  company  doing 
business  in  or  from  this  country,  for  the  purpose  of  the  income  tax  assessable  and  payable 
to  the  United  States,  will  be  ascertained  by  deducting  from  the  gross  receipts  from  out- 
going business  such  a portion  of  the  aggregate  expenses,  losses,  etc.,  as  such  receipts  bear 
to  the  aggregate  receipts  from  all  ports.  * * * [See  ^2305.1  (Letter  to  The  Corporation 

Trust  Company,  signed  by  Acting  Commissioner  David  A.  Gates,  and  dated  July  1'8,. 
1916.) 

2295  General  expenses,  such  as  coal,  ship  stores^  etc.,,  of  foreign  steamship  companies^, 

shall  be  prorated  as  provided  in  [112305  * * * ].  (Art.  116,  Reg.  33,  Jan.  5, 

1914.) 

2296  Law  1[285.  “Gross  Income”  of  a Foreign  Corporation  includes  Interest  on  the 
Obligations  of  all  Residents  and  Dividends  on  Stock  of  Resident  Corporations. — 

“including  the  interest  on  bonds,  notes,  or  other  interest-bearing  obligations  of  residents, 
corporate  or  otherwise,  div^idends  from  resident  corporations,  and’*  [See  112876.] 

2297  Gross  income  from  sources  within  the  United  States  as  ap-plied  to  foreign  corporations 
shall  include  interest  received  on  bonds,  notes,  or  other  interest-bearing  obliga- 
tions of  residents,  corporate  or  otherwise,  as  well  as  income^  derived  from  dividends  on 
capital  stock  or  from  the  net  earnings  of  resident  corporati-ons,^  joint-stock  companies, 
or  associations,  or  insurance  companies,  subject  to  tax  under  this  title,  and  likewise  income 
from  rentals  and  royalties,  from  business  transacted!  or  capital  invested  in  the  United 
States.  (Art.  89,  11350,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2298  Law  11286.  “Gross  Income”  of  a Foreign  Corporation  includes  Amounts  Re- 
ceived as  Profits  on  the  Manufacture  and  Disposition  of  Goods  within  the  United 

States. — “including  all  amounts  received  (although  paid  under  a contract  for  the  safe  of 
goods  or  otherwise)  representing  profits  on  the  mianufacture  and  disposition  of  goods 
within  the  United  States.”  [Reg.  45  reads  “manufacture  or  disposition”,  112876.1 

Comment. — [The  above  provision]  is  new.  The  foilowing  ruling  is  based  on  the 
old  law.] 

2299  A Foreign  Corporation  Having  no  Office  or  Agent  in  the  United  States,  Collecting 
Commissions  only  on  Account  of  Sales  of  American  Goods  Abroad,  is  Not  Liable 

to  Tax  on  Amounts  so  Earned. — Reference  is  made  to  your  letter  of  the  12th  instant,  in 
which  you  state  that  a corporation  located  at  Singapore,  incorporated  under  the  laws  of 
that  country,  which  has  no  office  or  agent  in  the  United  States,  and  is  engaged  in  the 
commission  business  has,  during  the  year  1917,  sold  in  Singapore  and  nearby  countries 
certain  products  of  manufacturing  establishments  in  the  United  States.  The  purchase 
price  of  these  goods  is  transmitted  by  the  purchasers  to  the  manufacturers  and  American 
houses  direct.  When  the  money  is  received  in  the  United  States  a commission  is  paid 
out  of  the  proceeds  of  sale  to  this  foreign  corporation.  IjRelative  to  your  inquiries,  you 
are  advised  that  under  the  above  statement  of  facts  the  commission  earned  by  the  Singapore 
corporation  is  not  considered  to  be  income  derived  from  sources  within  the  United  States, 
and  the  Singapore  corporation  is  not  required  to  report  such  commissions  as  income  under 
the  provisions  of  the  Act  of  September  8,  1916,  and  Titles  I and  II  of  the  Act  of  October  3, 
1917.  1[In  regard  to  your  second  inquiry,  you  state  that  a corporation  in  this  country 
receives  from  the  manufacturer  these  commissions  and  transmits  the  same  to  the  Singapore 
.corporation  and  ask  to  be  advised  whether  this  corporation  which  so  receives  and  trans- 


INC. 


234  TAX 


FOREIGN  CORPORATIONS. 


nits  these  commissions  is  under  obligations  to  report  such  commissions  in  its  return  of 
annual  net  income.  l[In  reply,  you  are  informed  that  if  the  American  corporation  in 
question  simply  acts  as  the  agent  for  the  Singapore  corporation  in  receiving  and  transmitting 
such  commissions,  and  does  not  retain  for  its  own  use  any  part  thereof,  it  is  held  that 
such  commissions  need  not  be  reported  as  income  by  the  domestic  corporation  referred 
to.  (Letter  to  Brower,  Brower  and  Brower,  Brooklyn,  New  York,  signed  by  Deputy 
Commissioner  L.  F.  Speer,  and  dated  April  20,  1918.) 

2300  Law  ^287.  Deductions  Allowed  Foreign  Corporations. — “Sec.  234.  (a)  That  in 

computing  the  net  income  of  a corporation  subject  to  the  tax  imposed  by  section 

230  there  shall  be  allowed  as  deductions:” 

2301  Comment. — [The  deductions  which  may  be  allowed  to  foreign  corporations  are 
in  character  the  same  as  those  allowed  to  domestic  corporations.  These  shall  be 

allowed  only  to  the  extent  indicated  below  in  paragraphs  2302,  2303,  and  2301.] 

2302  Law  ^293.  Interest  Allowed  as  a Deduction  to  Foreign  Corporations. — [Same  as 
for  domestic  corporations,  ^2027,  qualified  as  follows — ] “or,  in  the  case  of  a foreign 

corporation,  the  proportion  of  such  interest  which  the  amount  of  its  gross  income  from 
sources  within  the  United  States  bears  to  the  amount  of  its  gross  income  from  all  sources 
within  and  without  the  United  States;” 

2303  Law  11300.  Taxes  Allowed  as  a Deduction  to  Foreign  Corporations. — [Same  as 
for  domestic  corporations,  1[2036,  qualified  as  follows — ] “(e)  in  the  case  of  a foreign 

corporation,  by  the  authority  of  any  foreign  country  (except  income,  war-profits  and  excess- 
profits  taxes,  and  taxes  assessed  against  local  benefits  of  a kind  tending  to  increase  the 
value  of  the  property  assessed),  upon  the  property  or  business:” 

2304  Law  1[324.  The  Apportionment  and  Allocation  of  Deductions  Allowed  Foreign 
Corporations  other  than  Interest  and  Taxes. — “(b)  In  the  case  of  a foreign  cor- 
poration the  deductions  allowed  in  subdivision  (a)  [111788],  except  those  allowed  in  para- 
graph (2)  [1f2027]  and  in  clauses  (a)  [112037],  (b)  [112039],  and  (c)  [112040]  of  paragraph 
(3),  shall  be  allowed  only  if  and  to  the  extent  that  they  are  connected  with  income  arising 
from  a source  within  the  United  States;” 

2305  Law  1[325.  “and  the  proper  apportionment  and  allocation  of  the  deductions  with 
respect  to  sources  of  income  within  and  without  the  United  States  shall  be  de- 
termined under  rules  and  regulations  prescribed  by  the  Commissioner  with  the  approval 
of  the  Secretary.” 

2306  For  the  purpose  of  the  tax  the  net  income  of  foreign  corporations  shall  be  ascertained 
by  deducting  from  the  gross  amount  of  income  received  in  this  country  the  deduc- 
tions enumerated  in  the  act,  which  deductions  shall  be  limited  to  expenditures  or  charges 
actually  incurred  in  the  maintenance  and  operation  of  the  business  transacted  and  capital 
invested  in  the  United  States  or,  as  to  certain  charges,  such  proportion  of  the  aggregate 
charges  as  the  gross  income  from  business  done  and  capital  inVested  in  the  United  States 
bears  to  the  aggregate  infcome  within  and  without  the  United  States;  that  is  to  say,  the 
deductions  from  gross  income  of  a foreign  corporation  doing  business  in  this  country  or 
receiving  income  from  sources  within  the  United  States,  must,  as  nearly  as  possible,  repre- 
sent the  actual  expense  and  authorized  charges  incident  to  the  business  done  and  capital 
invested  in  this  country  and  must  not  comprehend,  either  directly  or  indirectly,  any 
expenditures  or  charges  incurred  in  the  transaction  of  business  or  the  investment  of  capital 
without  the  United  States.  (Art.  197,  1f590,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2307  Deductions  Permitted  to  Foreign  Corporations  Deriving  Their  Taxable  Income 
Solely  from  Stock  or  Bonds  of  Domestic  Corporations. — [Under  the  present  law 

the  dividends  themselves  would  constitute  an  allowable  deduction.  The  tax  on  the  bond 
interest  should  be  withheld  at  the  source  [1[572]  unless  the  corporation  had  an  “office” 
within  the  United  States.  Under  the  present  law  gross  income  of  a foreign  corporation 
includes  “only  the  gross  income  from  sources  within  the  United  States.”]  This  office  is  in 
receipt  of  your  letter  of  the  20th  ultimo,  in  which  you  refer  to  office  letter  of  April  8 [10], 
1916,  in  which  it  was  held  that  a non-resident  corporation,  holding  stock  of  a domestic 
corporation,  will  be  chargeable  with  such  income  tax  as  may  be  assessable  upon  the  divi- 
dends on  said  stock  and  will  he  subject  to  all  provisions  of  the  law  and  the  regulations 
for  making  return  and  paying  tax.  You  also  point  out  the  fact  that  the  income 
tax  law  provides,  in  paragraph  2 [G],  that  the  normal  tax  shall  be  imposed  upon 


INC. 


235  TAX 


FOREIGN  CORPORATIONS. 


the  net  income  accruing  to  a foreign  corporation  from  business  transacted  and  capital 
invested  within  the  United  States  during  the  year  and  prescribes  the  deductions  to  which 
such  foreign  corporations  are  entitled. 

You  therefore  ask:  ^ , 

2308  “if  the  foreign  corporation  is  not  engaged  in  business,  but  derives  its  income 
from  the  United  States  solely  in  the  form  of  dividends  or  interest,  to  what  extent  is 

it  entitled  to  take  advantage  of  the  deductions  prescribed  by  law.” 

In  reply  you  are  informed  that,  if  a foreign  corporation  is  liable  under  the  present 

2309  income  tax  law  to  the  tax  imposed  by  it,  it  is  liable  for  the  reason  that  such  cor- 
poration is  either  transacting  business  or  has  capital  invested  in  the  United  States. 

The  liability  of  a foreign  corporation  to  income  tax  on  the  income  received  by  it  from 
stocks  and  bonds  of  domestic  corporations  exists  because  of  the  fact  that  such  corporation 
has  capital  invested  in  the  securities  the  income  from  which  has  its  source  in  the  United 
States.  In  other  words,  a foreign  corporation  which  derives  its  income  from  the  United 
States  solely  in  the  form  of  dividends  or  interest  has  capital  invested  in  the  United  States, 
and,  under  the  ruling  hereinbefore  referred  to,  the  liability  of  the  corporation  to  tax  attaches 
by  reason  of  the  source  of  the  income  being  in  the  United  States,  the  domicile  of  the  securi- 
ties as  well  as  of  the  corporation  owning  them  being  immaterial. 

It  therefore  follows  that,  as  the  income  arising  and  accruing  to  a foreign  corporation 
231  0 from  capital  invested  in  stocks  and  bonds  of  domestic  corporations  is  subject  to  the 
tax  imposed  by  Section  2,  Act  of  October  3,  1913,  it  will  be  permissible  for  such  a 
foreign  corporation,  although  its  income  from  the  United  Satest  is  derived  “solely  in  the 
form,  of  dividends  and  interest”  on  domestic  stocks  and  bonds,  to  deduct  from  the  gross 
income  so  received  any  or  all  of  the  items  scheduled  in  the  law  as  proper  deductions  in  the 
case  of  a foreign  corporation,  regardless  of  the  source  of  the  income,  provided  the  amounts 
so  deducted  will  not  exceed  the  limit  defined  in  the  schedule  of  allowable  deductions.  In 
other  words,  the  fact  that  the  income  arising  or  accruing  in  the  United  States  to  a foreign 
corporation  is  “derived  solely  from  dividends  or  interest”  on  domestic  stocks  and  bonds 
will  not  operate  to  deprive  such  foreign  corporation  from  deducting  from  the  gross  income 
from  this  source  such  items  of  disbursement,  loss,  etc.,  as  would  be  properly  deductible  were 
the  income  derived  from  any  other  source. 

It  is  contemplated  by  this  ruling,  however,  that,  in  as  far  as  practicable,  the  deduc- 
23  1 I tions  shall  comprehend  only  such  expenditures,  losses,  etc.,  as  are  incurred  in,  or  are 
incidental  to,  the  creation  of  the  income  against  which  they  are  charged,  and  in  all 
cases  the  deductible  amounts  must  be  within  the  limit  fixed  by  the  law.  (Letter  to  The 
Corporation  Trust  Company,  signed  by  Commissionfer  W.  H.  Osborn,  and  dated  June 
6,  1916.) 

2312  Returns  by  Foreign  Corporations. — Every  foreign  corporation  having  income  from 
sources  within  the  United  States  must  makt  return's  of  annual  net  income  in  accord- 
ance with  the  rule  set  out  in  section  12  (b)  of  the  act  of  September  8,  1916,  as  amended  by 
the  act  of  October  3,  1917.  (Art.  66,  1[311,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2313  Law  ^359.  “('b)  Returns  shall  be  made  to  the  collector  of  the  district  in  which  is 

located  the  principal  place  of  business  or  principal  office  or  agency  of  the  corpora- 
tion,” 

2314  Law  ^345.  “If  any  foreign  corporation  has  no  office  or  place  of  business  in  the 
United  States  but  has  an  agent  in  the  United  States,  the  return  shall  be  made  by 

the  agent.” 

23  1 5 Law  ^360.  “or,  if  it  has  no  principal  place  of  business  or  principal  office  or  agency 
in  the  United  States,  then  to  the  collector  at  Baltimore,  Maryland.” 

2316  Obligation  of  a Foreign  Corporation  to  Make  Return. — If  a foreign  corporation 
having  no  office,  agent,  or  place  of  business  in  the  United  States  receives  income 

from  sources  within  this  country,  other  than  that  upon  which  the  tax  has  been  withheld  at 
the  source,  it  shall  make  a return  of  annual  net  income  to  the  collector  of  internal  revenue 
at  Baltimore,  Md.,  accounting  for  therein  all  the  income  received  during  the  year  from  all 
sources  in  the  United  States,  includine  that  upon  which  the  tax  has  been  withheld,  taking 
credit  for  the  amount  of  the  tax  so  withheld  at  the  source  under  the  conditions  hereinbefore 
set  out. 

Nothing  in  the  foregoing  provisions  shall  be  construed  to  relieve  a foreign  corpora- 

2317  tion  having  income  from  sources  within  the  United  States  from  making  a return 
of  annual  net  income.  (Art.  202,  ^604-605,  Reg.  33,  Rev.,  Jan.  2,  1918.) 


I^C. 


236 


TAX 


FOREIGN  CORPORATIONS. 


23 18  Foreign  Corporations  Having  Several  Branch  Offices  iri  the  United  * States. — 

A foreign  corporation  having  several  branch  offices  in  the  United;  States  should 
designate  one  of  such  branches  as  its  principal  office  and  should  also  designate  the  proper- 
officers  to  make  the  required  return.  (Art.  83,  Reg.  33,  Jan.  5,  1914.) 

2319  Form  to  be  Used  by  Foreign  Corporations  in  Making  Annual  Returns. — Receipt 
of  your  letter  of  the  5th  instant  is  acknowledged,  and  your  sug-gestion  that  a new 

form  of  return  in  lieu  of  1031  for  the  use. of  nonresident  alien  corporations  should  be  pre- 
pared, Is  noted,  and  will  have  careful  consideration  when  the  revision  of  forms  is  taken  up. 
You  are  informied,  however,  that  in  several  instances,  nonresident  alien  corpora- 

2320  tions  using  Form  1031  have  been  advised  that  on  blank  line.  No.  10  of  the  return 
proper,  they  should  take  credit  for  any  tax  that  had  been  withheld  at  the  source 

and  paid  to  the  proper  United  States  officer,  on  income  received  by  them  from  sources 
within  this  country.  ^Replying  to  your  further  inquiries  you  are  informed:  ^That 
it  will  be  sufficient  for  foreign  corporations  against  whom  income  tax  is  withheld  at  the 
source  to  give  the  name  of  the  withholding  agent  and  the  amount  so  withheld.  ^In 
the  case  of  bonds  which  contain  the  so-called  “tax-free”  covenant,  the  bondholders  have 
the  right  to  assum.e  that  the  fiscal  agent  of  the  corporation  has  withheld  and  paid  over  to 
the  proper  officers  of  the  United  States  Governmient  the  tax  due  on  the  bond  interest  due 
the  bondholders,  though  this  assumption  will  not  relieve  the  bondholder  from  the  tax 
should  it  develop  that  the  debtor  corporation  did  not  so  withhold  it  or  pay  It  over  to  the 
proper  United  States  officer.  ^Clearly,  when  the  tax  has  been  withheld  and  remitted 
to  the  Government  and  the  bondholder  Is  advised  of  that  fact,  such  bondholder  may 
take  credit  in  his  or  its  return  against  the  full  amount  of  tax  due  as  shown  by  the  return, 
for  the  am.ount  so  withheld  and  paid  over  to  the  United  States  officer.  In  other  words, 
when  withholding  agents  have  paid  the  tax  on  account  of  nonresident  alien  corporations 
having  incom.e  from,  interest  and  * * * from  sources  within  the  United  States,  they, 

are  entitled  to  the  benefit  of  a credit  for  such  payments  as  against  the  tax  due  and  assessable 
on  the  basis  of  the  incom.e  which  they  received  from  all  sources  within  the  United  States. 
As  to  the  case  you  cite  in  which  a nonresident  alien  corporation,  through  you 

2321  as  its  Am.erican  agent,  had  over-paid  Its  tax  by  reason  of  Its  not  having  been  able 
to  take  credit  for  the  am.ount  of  tax  withheld  at  the  source,  you  are  Inform.ed 

that  a claim  for  refund  [^^25 14]  of  the  amount  overpaid  may  be  filed  with  the  Collector 
to  whom  such  am.ount  was  paid.  With  the  claim,  a statement  setting  out  all  the  facts 
should  be  filed  and  the  m.atter  will  have  proper  consideration  and  as  prompt  attention 
as  possible.  (Letter  to  Lee,  Higginson  & Co.,  Boston,  Mass.,  signed  by  Commissioner 
Daniel  C.  Roper,  and  dated  November  10,  1917.) 

Consolidated  Returns. — [Read  at  ^1405.] 

General  Law  Provisions  and  Applicable  Regulations  Relative  to  Returns  by  Cor- 
porations.— [Read  at  If  1398.] 

2322  Credit  for  Amount  of  Tax  Withheld  at  the  Source. — [Sec.  237,  ^572,  provides  that 
a 10  per  cent  or  a 2 per  cent  tax  is  to  be  withheld  at  the  source  in  the  case  of  foreign 

corporations  not  engaged  in  trade  or  business  within  the  United  States  and  not  having 
any  office  or  place  of  business  therein,  in  the  sam.e  manner  as  is  provided  in  Sec.  221, 
^553  and  “subject  to  the  sam.e  conditions  as  provided  in  that  section.”  One  condition 
provided  for  in  Sec.  221  at  ^731,  is  that  any  am.ount  of  tax  withheld  is  to  be  credited  against 
the  income  tax  shown  in  the  taxpayer’s  return,  the  income  on  which  the  tax  has  been  with- 
held being  included  in  such  return.] 

2323  In  m.aking  its  return  a foreign  corporation  may  take  credit  against  the  tax  assess- 
able on  the  basis  of  the  net  incom.e  so  returned  for  any  tax  which  may  have  been 

withheld  at  the  source,  provided  the  income  upon  v.ffilch  the  tax  was  withheld  is  Included 
in  the  return  and  provided  that  the  name  of  the  withholding  agent  Is  given  in  the  return. 
(Art.  198,  11591,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2324  If  for  any  reason  there  is  Included  in  the  return  which  a foreign  corporation  is 
required  to  m.ake  of  all  income  received  from  sources  within  the  United  States 

any  incom.e  upon  which  tax  has  been  withheld  at  the  source,  such  foreign  corporation 
m.ay  take  credit  against  the  am.ount  of  tax  due  for  the  amount  of  the  tax  so  withheld  at 
the  source;  provided  a statement  is  attached  to  the  return  setting  forth  the  source  and 
am.ount  of  the  income  upon  which  the  tax  was  so  withheld.  (Art.  201,  1f602,  Reg.  33, 
Rev.,  Jan.  2,  1918.) 

Payment  of  Tax,  if  Any,  Not  Withheld  at  the  Source.  [Read  at  1[2339.] 


IXC. 


237  TAX 


CREDITS  TO  CORPORATIONS. 


2326  Law  1[327.  Credits  Allowed  to  Corporations. — “Sec.  236.  That  for  the  purpose 
only  of  the  tax  imposed  by  section  230  (1116621  there  shall  be  allowed  the  following 
credits:” 

2326  Law  1[328.  Any  Interest  from  Government  Obligations  and  from  War  Finance 
Corporation  Bonds  is  to  be  Credited  for  Purposes  of  the  Income  Tax. — “(a)  The 

amount  received  as  interest  upon  obligations  of  the  United  States  and  bonds  issued  by 
the  War  Finance  Corporation,  which  is  included  in  gross  income  under  Section  233  [1fl788]; 

2327  Law  1f329.  The  Amount  of  War  and  Excess-Profits  Tax  Imposed  for  the  Same 
Taxable  Year  is  to  be  Credited  Against  Income  for  Purposes  of  the  Income  Tax. — 

“(b)  The  amount  of  any  taxes  imposed  by  Title  III  for  the  same  taxable  year;!” 

2328  Law  1[330.  War  and  Excess-Profits  Tax  Credit  in  the  Case  of  Fiscal  Year  Cor- 
porations.— ^^Provided,  That  in  the  case  of  a corporation  which  makes  return 

for  a fiscal  year  beginning  in  1917  and  ending  in  1918,  in  computing  the  tax  as  provided 
in  subdivision  (a)  of  section  205  [1(1666],  the  tax  computed  for  the  entire  period  under 
Title  II  of  the^  Revenue  Act  of  1917  shall  be  credited  against  the  net  income  computed  for 
the  entire  period  under  Title  I of  the  Revenue  Act  of  1916  as  amended  by  the  Revenue 
Act  of  1917  and  under  Title  I of  the  Revenue  Act  of  1917,  and  the  tax  computed  for  the 
entire  period  under  Title  III  of  this  Act  at  the  rates  prescribed  for  the  calendar  year  1918 
shall  be  credited  against  the  net  income  computed  for  the  entire  period  under  this  title; 
and” 

When  the  net  incomm  has  been  ascertained  in  accordance  with  the  rule  set  out 

2329  in  Section  12  (a)  of  the  Act  of  September  8,  1916,  as  amended  by  the  Act  of  Octo- 
ber 3,  1917,  tl>e  income  so  ascertained  shall  be  credited  with  the  amount  of 

excess-profits  tax  assessed  or  to  be  assessed  for  the  same  year.  (Art.  199,1(594,  Reg.  33, 
Rev.,  Jan.  2,  1918.'' 

2330  Law  K331.  Domestic  Corporations  are  Allowed  a Specific  Credit  of  $2,000. — 
(c)  In  the  case  of  a domestic  corporation,  $2,000.” 

2331  Law  K4.  “Domestic  Corporation”  Defined. — “The  term  “domestic”  when 
applied  to  a corporation  or  partnership  means  created  or  organized  in  the  United 

States  [K2281];” 

Credit  of  $2,000  Apportioned  When  Returns  are  Being  Made  for  a Changed 
Accounting  Period. — [Read  at  1(1485.] 

2332  Law  K337.  Credit  to  a Domestic  Corporation  Against  Federal  Income  and  War 
and  Excess-Profits  Taxes  for  Certain  Income  and  Excess-Profits  Taxes  Paid 

to  Foreign  Countries  and  for  all  Such  Taxes  Paid  to  United  States  Possessions  Diming 
the  Taxable  Year. — “Sec.  238  (a).  That  in  the  case  of  a domestic  corporation  the  total 
taxes  imposed  for  the  taxable  year  by  this  title  and  by  Title  III  [war  and  excess-profits 
tax]  shall  be  credited  with  the  amount  of  any  income,  war-profits  and  excess-profits  taxes 
paid  during  the  taxable  year” 

2333  Law  K338.  “to  any  foreign  country,  upon  income  derived  from  sources  therein,” 

2334  Law  1(339.  “or  to  any  possession  of  the  United  States.” 

2335  Law  K340.  “If  accrued  taxes  when  paid  differ  from  the  amounts  claimed  as  credits 
by  the  corporation,  or  if  any  tax  paid  is  refunded  in  whole  or  in  part,  the  corporation 

shall  at  once  notify  the  Commissioner  who  shall  redetermine  the  amount  of  the  taxes  due 
under  this  title  and  under  Title  III  for  the  year  or  years  affected,  and  the  amount  of  taxes 
due  upon  such  redetermination,  if  any,  shall  be  paid  by  the  corporation  upon  notice  and 
demand  by  the  collector,  or  the  amount  of  taxes  overpaid,  if  any,  shall  be  credited  or  re- 
funded to  the  corporation  in  accordance  with  the  provisions  of  section  252  [1(2488].  In 
the  case  of  such  a tax  accrued  but  not  paid,  the  Commissioner  as  a condition  precedent  to 
the  allowance  of  this  credit  may  require  the  corporation  to  give  a bond  with  sureties  satis- 
factory to  and  to  be  approved  by  him  in  such  penal  sum  as  he  may  require,  conditioned 
for  the  payment  by  the  taxpayer  of  any  amount  of  taxes  found  due  upon  any  such  rede- 
termination; and  the  bond  herein  prescribed  shall  contain  such  further  conditions  as  the 
Commissioner  may  require.” 

[For  United  States  bonds  as  security  see  1(2220.] 


INC. 


238  TAX 


PAYMENT  OF  THE  TAX. 


2336  Law  1341.  “(b)This  credit  shall  be  allowed  only  if  the  taxpayer  furnishes  evidence 
satisfactory  to  the  Commissioner  showing  the  amount  of  income  derived  from 

sources  within  such  foreign  country  or  such  possession  of  the  United  States,  as  the  case  may 
be,  and  all  other  information  necessary  for  the  computation  of  such  credit.” 

2337  Law  1342.  Credit  to  a Domestic  Corporation  Making  Return  for  Fiscal  (Not 
Calendar)  Year  Ending  in  1918. — “(c)  If  a domestic  corporation  makes  a return  for 

a fiscal  year  beginning  in  1917  and  ending  in  1918,  only  that  proportion  of  this  credit  shall 
be  allowed  which  the  part  of  such  period  within  the  calendar  year  1918  bears  to  the  entire 
period.” 

2338  Any  Tax  Actually  Paid  by  Creditor  on  Tax-Free-Covenant  Bond  Interest  may  be 
Credited  by  Domestic  Corporation  Creditor  if  Interest  is  Being  Returned  as 

Income  (as  it  should  be). — If  a corporation  shall  have  returned  as  income  interest 
received  on  bonds,  the  interest  upon  which  the  debtor  corporation  had  agreed  to  pay 
without  deduction  of  income  taxes,  and  if  the  debtor  corporation  shall  have  actually 
paid  the  incom.e  tax  assessable  on  such  interest  income,  it  will  be  permissible  for  the  cor- 
poration receiving  such  interest  to  take  credit  against  the  tax  assessable  on  the  basis  of  its 
net  income  returned,  for  the  amount  of  tax  paid  thereon  by  the  debtor  corporation.  (Art. 
199,  ^593,  Reg.  33,  Rev.,  Jan.  2,  1918.) 


PART  IV.  ADMINISTRATIVE  PROVISIONS. 


PAYMENT  OF  THE  TAX. 

[For  “Paym.ent  of  Taxes”  in  Reg.  No.  45,  see  at  ^3031.] 

2339  Law  1[361.  The  Tax  is  to  b'  Paid  in  Four  Equal  Installments  Except  When  With- 
held at  the  Source. — “Sec.  250.  (a)  That  except  as  otherwise  provided  in  this 

section  and  sections  221  and  237  [1[553  and  ^572,  taxes  collected  at  the  source]  the  tax 
shall  be  paid  in  four  installments,  each  consisting  of  one-fourth  of  the  total  amount  of  the 
tax.” 

2340  Law.  ^362.  “The  first  installment  shall  be  paid  at  the  time  fixed  by  law  for  filing 
the  return  and” 


2341  Law  ^363. 
month,” 

2342  Law  ^364. 

2343  Law  1[365. 

2344  Law  ^[366. 


“the  second  installment  shall  be  paid  on  the  fifteenth  day  of  the  third 

“the  third  installment  on  the  fifteenth  day  of  the  sixth  month,  and” 
“the  fourth  installment  on  the  fifteenth  day  of  the  ninth  month,” 
“after  the  time  fixed  by  law  for  filing  the  return.” 


2345  Law  ^367.  When  First  Installment  is  Due  When  Time  For  Filing  Return  Has  Been 
Extended. — “Where  an  extension  of  time  for  filing  a return  is  granted  the  time 
for  payment  of  the  first  installment  shall  be  postponed  until  the  date  of  the  expiration  of 
the  period  of  the  extension,  but  the  time  for  payment  of  the  other  installments  shall  not  be 
postponed  unless  the  Commissioner  so  provides  in  granting  the  extension.” 


2346  Law  1(368.  Interest  Runs  on  Amount  of  Installment  During  Period  of  Extension 
Availed  of. — “In  any  case  in  which  the  time  for  the  payment  of  any  install  nent 

is  at  the  request  of  the  taxpayer  thus  postponed,  there  shall  be  added  as  part  of  such 
install  nent  interest  thereon  at  the  rate  of  H of  1 per  centum  per  month  from  the  time  it 
would  have  been  due  if  no  extension  had  been  granted,  until  paid.” 

2347  Law  K369.  If  Any  Installment  is  Not  Paid  When  Due  the  Entire  Unpaid  Tax 
Becomes  Due. — “If  any  installment  is  not  paid  when  due,  the  whole  amount  of  the 

tax  unpaid  shall  become  due  and  payable  upon  notice  and  demand  by  the  collector  [K2399].” 


INC. 


239  TAX 


PAYMENT  OF  THE  TAX. 


2348  Law  ^370.  The  Entire  Tax  May  Be  Paid  On  or  Before  the  Due  Date  of  the  Return. 

— “The  tax  may  at  the  option  of  the  taxpayer  be  paid  in  a single  payment  instead 
of  in  installments,  in  which  case  the  total  amount  shall  be  paid  on  or  before  the  time  fixed 
by  law  for  filing  the  return,  or,  where,  an  extension  of  time  for  filing  the  return  has  been 
granted,  on  or  before  the  expiration  of  the  period  of  such  extension.” 

2349  Law  1[371.  Recomputation  of  Instalhnents  After  an  Examination  of  the  Return 
by  the  Commissioner. — “(b)  As  soon  as  practicable  after  the  return  is  filed,  the 

Commissioner  shall  examine  [it].  If  It  then  appears  that  the  correct  amount  of  the  tax  is 
greater  or  less  than  that  shown  in  the  return,  the  installments  shall  be  recomputed.” 

2350  For  the  purpose  of  verifying  the  accuracy  of  a return,  or  for  making  one  where  none 
is  made,  the  books  of  corporations  and  all  other  relative  data  shall  be  open  to  the 

inspection  of  the  Commissioner  of  Internal  Revenue  or  his  duly  authorized  agents.  (Art. 
221,  11639,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2351  For  the  purpose  of  verifying  any  return,  made  pursuant  to  this  act,  the  Commis- 
sioner of  Internal  Revenue  may,  by  any  duly  authorized  revenue  agent  or  deputy 

collector,  cause  the  books  of  such  corporation  to  be  examined,  and  if  such  examination 
discloses  that  the  corporation  is  liable  to  tax  in  addition  to  that  previously  assessed,  or 
assessable,  the  same  shall  be  assessed  and  shall  be  payable  immediately  upon  notice  and 
demand.  For  the  purpose  of  such  examination,  the  books  of  corporations  shall  be  open 
to  the  examining  officer,  or  shall  be  produced  for  this  purpose  upon  summons  issued  by 
any  properly  authorized  officer.  (Art.  186,  Reg.  33,  Jan.  5,  1914.) 

2352  Law  1[372.  Crediting  or  refund  of  excess  payment. — “If  the  amount  already  paid 
exceeds  that  which  should  have  been  paid  on  the  basis  of  the  installments  as  re- 
computed, the  excess  so  paid  shall  be  credited  against  the  subsequent  installments;  and 
if  the  amount  already  paid  exceeds  the  correct  amount  of  the  tax,  the  excess  shall  be 
credited  or  refunded  to  tlie  taxpayer  in  accordance  with  the  provisions  of  section  252 
1112488]”. 

2353  An  excess  payment  of  tax  in  one  year  can  not  be  offset  against  an  assessment  of 
tax  for  a subsequent  year.  (Art.  39,  1[247,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2354  Law  1[373.  Pa3anent  of  Amounts  Due  Because  of  Underpayments  Originally. — 

“If  the  amount  already  paid  is  less  than  that  which  should  have  been  paid,  the  dif- 
ference shall,  to  the  extent  not  covered  by  any  credits  then  due  to  the  taxpayer  under 
section  252  [1[2488j,  be  paid  upon  notice  and  demand  by  the  collector.” 

2355  In  cases  wherein  additional  assessments  are  made  as  a result  of  an  examination  or 
audit  of  the  return,  the  taxpayer  shall,  immediately  following  the  making  of  the 

assessment,  be  notified  of  the  amount  thereof,  and  such  taxes  shall  be  paid  within  10  days 
from  the  date  of  such  notice.  (Art.  230,  1[655,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2356  Law  11374.  No  Penalty  for  Understatement  if  Return  be  Made  in  Good  Faith 
and  if  the  Understatement  is  Due  to  No  Fault  of  the  Taxpayer. — “In  such  case  if 

the  return  is  made  in  good  faith  and  the  understatement  of  the  amount  in  the  return  is 
not  due  to  any  fault  of  the  taxpayer,  there  shall  be  no  penalty  because  of  such  under- 
statement.” 

2357  Law  1[375.  Penalty  if  Understatement  is  Due  to  Negligence,  Merely. — “If  the 

understatement  is  due  to  negligence  on  the  part  of  the  taxpayer,  but  without  intent 
to  defraud,  there  shall  be  added  as  part  of  the  tax  5 per  centum  of  the  total  amount  of  the 
deficiency,  plus  Interest  at  the  rate  of  1 per  centum  per  month  on  the  amount  of  the  de- 
ficiency of  each  installment  from  the  time  the  installment  was  due.” 

2358  Law  1[376.  Penalty  if  Understatement  is  False  or  Fraudulent  with  Intent  to  Evade 
the  Tax. — “If  the  understatement  is  false  or  fraudulent  with  intent  to  evade  the 

tax,  then,  in  lieu  of  the  penalty  provided  by  section  3176  of  the  Revised  Statutes,  as 
amended,  for  false  or  fraudulent  returns  willfully  made  [50%  of  the  amount  of  the  tax, 
1[1556],  but  in  addition  to  other  penalties  provided  by  law  for  false  or  fraudulent  returns, 
there  shall  be  added  as  part  of  the  tax  50  per  centum  of  the  amount  of  the  deficiency.” 

2359  Law  1[377.  Payment  of  the  Tax  in  Installments  Does  Not  Apply  to  Tax  Due  on 
Returns  Made  by  the  Collector  or  by  the  Commissioner. — “(c)  If  the  return 

is  made  pursuant  to  section  3176  [1[1549]  of  the  Revised  Statutes  as  amended,  the  amount 
of  tax  determined  to  be  due  under  such  return  shall  be  paid  upon  notice  and  demand  by 
the  collector.” 


INC. 


240  TAX 


PAYMENT  OF  THE  TAX. 


2360  Law  ^378.  Five-Year  Limitation  on  the  Assessment  of  Taxes  and  on  the  Col- 
lection of  Taxes  by  Suit  Except  in  the  Case  of  False  or  Fraudulent  Return  With 

Intent  to  Evade  the  Tax. — “(d)  Except  in  the  case  of  false  or  fraudulent  returns  with  intent 
to  evade  the  tax,  the  amount  of  tax  due  under  any  return  shall  be  determined  and  assessed 
by  the  Commissioner  within  five  years  after  the  return  was  due  or  was  made,  and  no  suit 
or  proceeding  for  the  collection  of  any  tax  shall  be  begun  after  the  expiration  of  five  years 
after  the  date  when  the  return  was  due  or  was  made.  In  the  case  of  such  false  Or 
fraudulent  returns,  the  amount  of  tax  due  may  be  determined  at  any  time  after  the  return 
is  filed,  and  the  tax  may  be  collected  at  any  time  after  it  becomes  due.” 

2361  Law  1|461.  Continuing  Effect  of  Prior  Laws  for  the  Assessment  and  Collection 

of  Taxes,  and  the  Imposition  and  Collection  of  Penalties,  that  have  Accrued  There- 
under.— “Sec.  1400.  (a)  That  the  following  parts  of  Acts  are  hereby  repealed,  subject  to 

the  limitations  provided  in  sub-division  (b): 

(1)  The  following  titles  of  the  Revenue  Act  of  1916: 

Title  I (called  “Income  Tax”). 

♦ **♦*♦*♦*♦♦* 

(2)  The  following  parts  of  the  Act  entitled  “An  Act  to  provide  increased  revenue  to 
defray  the  expenses  of  the  increased  appropriations  for  the  Army  and  Navy  and  the  ex- 
tensions of  fortifications,  and  for  other  purposes,”  approved  March  3,  1917: 

♦ ♦ ♦. 

9 

Section  402  (called  “Returns  of  Dit^idends”). 

(3)  The  following  titles  of  the  Revenue  Act  of  1917: 

Title  I (called  “War  Income  Tax”). 

Title  X (called  “Administrative  Provisions”). 

Title  XII  (called  “Income-Tax  Amendments”). 

2362  Law  1(462.  “(b)  Such  parts  of  Acts  shall  remain  in  force  for  the  assessment  and 

collection  of  all  taxes  which  have  accrued  thereunder,  and  for  the  imposition  and 

collection  of  all  penalties  or  forfeitures  which  have  accrued  and  may  accrue  in  relation  to 
any  such  taxes,  and  except  that  the  unexpended  balance  of  any  appropriation  heretofore 
made  and  now  available  for  the  administration  of  any  such  part  of  an  Act  shall  be  available 
for  the  administration  of  this  Act  or  the  corresponding  provision  thereof:  Provided^  That, 
except  as  otherwise  provided  in  this  Act,  no  taxes  shall  be  collected  under  Title  I of  the 
Revenue  Act  of  1916  as  amended  by  the  Revenue  Act  of  1917,  or  Title  I or  II  of  the  Revenue 
Act  of  1917,  in  respect  to  any  period  after  December  31,  1917: 

************ 

2363  Law  1(463.  “In  the  case  of  any  tax  imposed  by  any  part  of  an  Act  herein  repealed, 
if  there  is  a tax  imposed  by  this  Act  in  lieu  thereof,  the  provision  imposing  such  tax 

shall  remain  in  force  until  the  corresponding  tax  under  this  Act  takes  effect  under  the  pro- 
visions of  this  Act.” 

2364  The  “Three-Year  Limitation  on  Assessments”  and  the  “No  Limitation  on  Collec- 
tion of  the  Tax  by  Suit”  Provisions  of  Prior  Laws. — [Sec.  9 (a)  of  Title  I of  the 

I "■'•enue  Act  of  1916  as  amended  by  the  Revenue  Act  of  1917  providing  for  the  assessment 
of  income  taxes  on  individuals  reads,  in  part,  as  follows: 

“except  in  cases  of  refusal  or  neglect  to  make  such  return  and  in  cases  of  erroneous,  false, 
or  fraudulent  returns,  in  which  cases  the  Comm.issioner  of  Internal  Revenue  shall,  upon 
the  discovery  thereof,  at  any  time  within  three  years  after  said  return  is  due,  or  has  been 
made,  m.ake  a return  upon  inform.ation  obtained  as  provided  for  in  this  title  or  by  existing 
law,  or  require  the  necessary  corrections  to  be  made,  and  the  assessment  m.ade  by  the  Com- 
missioner of  Internal  Revenue  thereon  shall  be  paid  by  such  person  or  persons  Immediately 
upon  notification  of  the  am.ount  of  such  assessment:” 

2365  [Sec.  14  (a)  of  Title  I of  the  Revenue  Act  of  1916  as  amended  by  the  Revenue  Act 
of  1917  providing  for  the  assessment  of  incom.e  taxes  on  corporations  reads,  in  part, 

as  follows: 

“except  in  cases  of  refusal  or  neglect  to  make  such  return,  and  in  cases  of  erroneous,  false, 
or  fraudulent  returns,  in  which  cases  the  Com.niissioner  of  Internal  Revenue  shall,  upon  the 
discovery  thereof,  at  any  tim.e  within  three  years  after  said  return  is  due,  make  a return 
upon  inform.ation  obtained  as  provided  for  in  this  title  or  by  existing  law;  and  the  assess- 
m.ent  m.ade  by  the  Comm.issioner  of  Internal  Revenue  thereon  shall  be  paid  by  such  corpora- 
tion, joint-stock  company  or  association,  or  insurance  com.pany  immediately  upon  notifi- 
cation of  the  am.ount  of  such  assessm.cnt;”] 


INC. 


241 


TAX 


PAYMENT  OF  THE  TAX. 


2366  Procedure  in  Cases  of  Delinquency. — In  cases  of  refusal  or  neglect  to  make  return 
and  in  cases  of  erroneous,  false,  or  fraudulent  returns  the  Commissioner  of  Internal 

Revenue  shall,  upon  the  discovery  thereof,  at  any  time  within  three  years  after 
said  return  is  due  or  has  been  made  make  a return  of  income  upon  information  obtained 
as  provided  for  by  law,  or  require  the  necessary  corrections  to  be  made,  and  the  assessment 
made  by  the  Com.m.issioner  of  Internal  Revenue  thereon  shall  be  paid  by  such  person  or 
persons  im.mediately  upon  notification  of  the  amount  of  such  assessment.  If  the  amount 
of  such  assessment  rem.ains  unpaid  for  10  days  after  notice  and  demand  therefor  by  the 
collector,  there  shall  be  added  the  sum  of  5 per  cent  on  the  amount  of  tax  unpaid  and  interest 
at  the  rate  of  1 per  cent  per  month  upon  such  tax  from  the  time  the  same  became  due,  except 
from  the  estates  of  insane,  deceased,  or  insolvent  persons.  (Art.  42,  1[253,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

2367  I n cases  wherein  corporations  have  neglected  or  refused  to  m.ake  returns,  and  in 
cases  wherein  returns  are  found,  upon  investigation  or  otherwise,  to  be  false  or 

fraudulent,  the  com.m.issioner  may,  upon  discovery  thereof,  at  any  tim.e  within  three  years 
after  such  return  is  due,  m.ake  a return  upon  the  information  obtained  in  the  manner  pro- 
vided in  the  act,  and  the  tax  so  discovered  to  be  due,  together  with  the  additional  tax  pre- 
scribed, shall  be  assessed,  and  the  amount  thereof  shall  be  paid  immediately  upon  notice 
and  demand.  (Art.  221,  1[638,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2368  The  statute  (Sec.  9 (a),  act  Sept.  8,  1916)  does  not  require  the  assessment  to  be  made 
within  three  years  from  the  time  a return  was  due.  The  limitation  is  upon  the 

discovery  of  delinquency  or  error,  within  three  years. 

Where  a further  tax  is  found  to  be  due  as  result  of  audit  of  a return  or  agent’s 

2369  report,  an  amended  return  or  waiver  will  not  be  required,  except  where  the  discovery 
of  the  tax  is  made  subsequent  to  the  expiration  of  the  three-year  period  of  limitation. 

(Art.  38,  1f243-244,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2370  Section  14  authorizes  the  Commissioner  of  Internal  Revenue  in  cases  of  refusal 
or  neglect  to  m.ake  returns,  or  in  cases  of  erroneous,  false  or  fraudulent  returns, 

upon  discovery  thereof  at  any  time  within  three  years  after  said  returns  are  due,  to  make 
returns  upon  inform.atlon  obtained  and  assess  the  tax  thus  found  to  be  due  against  such 
corporations  and  collect  it  in  the  ordinary  statutory  method;  and  section  38,  act  of  August 
5,  1909,  and  section  2,  act  of  October  3,  1913,  contain  similar  provisions.  Under  this  pro- 
vision, it  appears  that  the  commissioner  is  without  authority  to  make  a formal  assessment 
of  special  excise  or  income  tax  unless  the  liability  therefor  has  been  discovered  within  three 
years  from  the  date  when  the  return  is  due.  This  lim.itatlon  does  not,  however,  limit  the 
right  of  the  Government  to  claim  and  collect,  by  suit  or  otherwise,  any  additional  tax 
found  due  for  a period  antedating  the  three-year  limitation.  (Art.  233,  1[658,  Reg.  33, 
Rev.,  Jan.  2,  1918. 

2371  No  Three-Year  Limitation  to  Right  of  Government  to  Collect  Taxes  by  Suit. — 

In  numerous  cases  the  courts  have  held  that  there  is  no  limitation  upon  the  right 

of  the  Government  to  sue  for  and  recover  unpaid  taxes.  It  is  not  essential  that  assessment 
be  made;  or,  if  made,  that  it  be  made  within  a specified  time.  If  liability  to  original  or 
additional  tax  exists  or  has  been  discovered,  the  amount  thereof  may  be  recovered  by  suit, 
regardless  of  the  fact  that  no  assessment  of  the  amount  has  been  made,  and  regardless  of 
the  date  of  its  discovery  or  the  period  for  which  the  tax  is  due.  (Art.  233,  1[659,  Reg.  33, 
Rev.,  Jan.  2,  1918.) 

2372  The  appended  decision  [Corporation  Tax  Act  of  August  5,  1909]  of  the  United 
States  District  Court  for  the  Western  District  of  Alichigan,  in  the  case  of  the  United 

States,  plaintiff,  v.  Grand  Rapids  and  Indiana  Railway  Company,  defendant,  is  published 
for  the  information  of  internal-revenue  officers  and  others  concerned.  (T.  D.  2166,  March 
4,  1915.)  [239  Fed.  153.] 

1.  The  Three  Years’  Limitation. 

The  three-years’  limitation  in  section  38,  act  of  August  5,  1909,  fifth  subdivision,  is 
not  a limitation  upon  the  right  of  the  Government  to  sue  for  unpaid  taxes,  but  at  most 
is  a limitation  upon  tne  right  of  the  collecting  officers  to  make  assessment  and  to  enforce 
payment  by  the  customary  statutory  proceedings. 

2.  Suit  for  Taxes. 

A suit  for  taxes  will  lie  without  an  assessment. 


In  the  District  Court  of  the  United  States  for  the  Western  District  of  Michigan, 

Southern  Division. 

The  United  States,  plaintiff,  v.  Grand  Rapids  Indiana  Railway  Co.,  defendant. 


INC. 


242 


TAX 


PAYMENT  OF  THE  TAX. 


Demurrer. 

2373  A careful  study  and  analysis  of  the  statute  here  involved  and  an  examination  and 
consideration  of  the  applicable  and  controlling  authorities  lead  to  the  following 

conclusions: 

(1)  The  three-year  clause  of  the  fifth  subdivision  of  section  38  of  the  1909  excise 

2374  law  is  not  a limdt'atlon  upon  the  right  of  the  Government  to  sue  for  unpaid  taxes, 
but,  at  m.ost,  is  a limitation  upon  the  right  of  the  collecting  officers  to  make  assess- 
ment and  to  enforce  payment  by  the  summary  statutory  proceedings. 

(2)  In  the  collection  of  the  taxes  im.posed  by  the  statute  the  Government  is  not 

2375  confined  to  the  sum.mary  proceedings  therein  provided,  but  may  resort  to  a plenary 
suit;  and 

(3)  Where  a tax  of  a fixed  percentage  (like  the  one  here  sought  to  be  recovered! 

2376  is  imposed  by  the  statute  on  a subject  or  object  which  is  so  definitely  described 
in  the  statute  that  its  amount  or  value  on  which  the  fixed  per  centum  is  to  be  cal- 
culated can  be  ascertained  and  determined,  on  evidence,  by  a court,  a suit  for  the  tax  will 
lie  without  an  assessment.  United  States  v.  Tilden  (28  Fed.  Gas.,  161;  No.  16519);  United 
States  V.  Hazard  (26  Fed.  Gas.,  251;  No.  15337);  Dollar  Savings  Bank  v.  United  States 
(19  Wall.,  227);  United  States  v.  Ghamberlaln  (219  U.  S.,  250-264);  King  v.  United  States 
(99  U.  S.  229);  United  States  v.  Reading  R.  R.  (123  U.  S.,  113);  United  States  v.  Gobb 
(11  Fed.,  76);  United  States  v.  M.  H.  and  O.  R.  Go.  [W.  D.  Mich.],  (17  Fed.,  719;  22 
Cyc.,  1670,  and  cases  there  cited);  Eliot  National  Bank  v.  Gill  (210  Fed.,  923,  affirmed 
by  the  Gircuit  Gourt  of  Appeals  of  First  Gircuit,  December  21,  1914,  [218  Fed.  600].). 

The  demurrer  will  be  overruled  and  the  defendant  will  be  given  fifteen  days  within 

2377  which  to  plead  to  the  declaration. 

G.  W.  Sessions,  District  Judge. 

February  25,  1915.  (T.  D.  2166,  March  4,  1915.) 

[Gomment:  After  the  demurrer  w^as  overruled  the  case  went  on  trial,  resulting 

2378  in  judgment  in  favor  of  the  United  States.] 

2379  The  appended  decision  [captions  only  as  shown  below]  of  the  United  States  Gircuit 
Gourt  of  Appeals  for  the  Sixth  Gircuit,  in  the  case  of  the  United  States  v.  Nashville, 

Ghattanooga  & St.  Louis  Railway,  is  published  for  the  information  of  internal-revenue 
officers  and  others  concerned.  (T.  D.  2697,  April  16,  1918.) 

2380  1-  False  or  Incorrect  Returns. — The  word  “false,”  as  used  in  the  fifth  subdivision 
of  section  38,  of  the  act  of  August  5,  1909,  providing  that  in  case  of  any  return 

made  with  false  or  fraudulent  intent  the  Gommissioner  of  Internal  Revenue  shall  add  100 
per  centum  of  the  tax,  means  “untrue”  or  “incorrect,”  and  does  not  necessarily  mean 
intentionally  or  fraudulently  false. 

2.  Gommon-Law  Action  of  Debt  for  Taxes. — A common-law  action  of  debt  lies 

2381  in  favor  of  the  Government  whenever  by  accident,  mistake,  or  fraud,  taxes  have 
not  been  paid;  thus  the  Government  may  recover  a personal  judgment  for  a tax 

whenever  there  exists  a duty  to  pay,  provided  another  remedy  has  not  been  made  ex- 
clusive by  clear  and  specific  declaration. 

3.  Reassessment  as  Prerequisite  to  Suit. — Act  of  August  5,  1909,  section  38,  does 

2382  not  make  the  remedy  by  way  of  a reassessment  by  the  Gommissioner  of  Internal 
Revenue  exclusive  of  all  other  remedies  for  collection  of  excise  tax  imposed  on 

corporations,  and  suit  may  be  brought  under  Revised  Statutes,  section  3213,  providing 
that  taxes  may  be  sued  for  and  recovered  in  the  name  of  the  United  States,  In  any  proper 
form  of  action,  before  any  circuit  or  district  court  of  the  United  States  for  the  district  within 
which  liability  to  such  tax  is  incurred,  or  where  the  party  from  whom  such  tax  is  due  resides 
at  the  time  of  the  commencement  of  the  action,  without  any  such  reassessment. 

4.  Operating  Expenses  and  Depreciation. — Though  what  is  a necessary  expense 

2383  of  operation  and  what  is  a reasonable  allowance  for  property  depreciation  are 
ultimately  questions  of  fact,  so  far  as  they  involve  legal  questions  they  are  absolutely 

judicial  questions,  and  the  declaration  in  a suit  to  recover  excise  tax  imposed  on  corpora- 
tions by  the  act  of  August  5,  1909,  which  fails  to  show  the  making  of  a new  assessment 
by  the  Gommissioner  of  Internal  Revenue,  is  therefore  not  demurrable. 

5.  Declaration  in  Suit  to  Recover  Tax — Evidence. — Evidence  sustaining  allegations 

2384  of  incorrectness  in  returns  by  corporation  subject  to  excise  tax  imposed  by  act  of 
August  5,  1909,  need  not  be  set  out  in  the  declaration  in  a suit  to  recover  such 

tax;  declaration  here  sufficiently  averred  erroneous  or  untrue  return  of  operating  ex- 
penses and  deductions  for  depreciation. 

6.  Declaration  in  Suit  to  Recover  Tax — Bill  of  Particulars. — Where  declaration 

2385  in  action  to  recover  of  a corporation  the  excise  tax  imposed  by  act  of  August  5, 
1909,  expressly  avers  that  alleged  deductions  were  not  reasonable  allowances 

for  depreciation  within  the  meaning  of  such  act,  if  more  definite  or  detailed  information 
is  needed  to  enable  defendant  to  plead  or  prepare  for  trial,  remedy  is  by  bill  of  particulars. 

7.  Judgment  Reversed. — judgment  of  the  district  court  is  reversed.  (249  Fed.  678.) 

2386  (T.  D.  2697,  April  16,  1918.) 


INC. 


243  TAX 


PAYMENT  OF  THE  TAX. 


2ZS7  In  a case  [^2372]  recently  decided  in  the  United  States  District  Court  for  the  Western 
District  of  Michigan,  the  court  held  that  the  three-year  clause  of  the  special  excise 
corporation-tax  law  is  not  a limitation  upon  the  right  of  the  Government  to  sue  for  unpaid 
taxes,  but,  at  most,  is  a limitation  of  the  right  of  the  collecting  officers  to  make  assessments 
and  to  enforce  payment  by  the  ordinary  summary  statutory  proceedings.  It  was  also 
held  that,  in  a case  wherein  the  tax  was  measured  by  a fixed  percentage,  as  is  the  case  in 
the  special  excise  and  income  taxes,  and  the  amoun't  of  the  tax  is  capable  of  definite  ascer- 
tainment, a suit  for  tax  will  lie  without  assessment. 

It  follows,  therefore,  that  when  an  additional  tax  is  found  to  be  for  a period  ante- 
2388  dating  the  three-year  limit,  an  assessment  is  not  a necessary  condition  precedent 
to  the  collection  of  the  tax,  as  the  amount  of  the  tax  may  be  collected  by  suit. 

In  the  examination  of  books  of  corporations  for  the  purpose  of  verifying  their 
2383  returns  of  annual  net  income  for  years  antedating  the  three-year  limit,  examining 
officers  have  discovered  additional  tax  liability  in  many  cases  and  have  encountered 
some  difficulty  in  securing  either  amended  returns  or  waivers  in  order  that  assessments  of 
this  additional  tax  may  be  formally  made.  (Mimeograph  letter  No.  1192  to  Collectors, 
^Iarch  24,  1915;  continued  at  ^2391.) 

2390  The  Three-Year  Statutory  Limitation  May  be  Waived. — While  the  Government  is 
fully  authorized  to  recover  such  taxes  by  suit,  it  is  desirable,  in  order  to  obviate 
needless  expense  and  annoyance  to  the  taxpayer  and  the  Government,  that  the  collection 
be  made  as  a result  of  a formal  assessment.  In  order  that  this  may  be  done,  corporations 
owing  additional  taxes  for  any  period  antedating  the  three-year  limitation  should  file 
amended  returns,  together  with  a statement  formally  waiving  the  three-year  statutory 
limitation  and  consenting  to  assessm.ent.  In  executing  such  amended  returns  or  waivers, 
the  corporations  forfeit  none  of  their  rights  under  the  law,  and  no  penalty  is  Incurred  which 
might  not  be  otherwise  enforced  by  suit.  (Art.  233,  1[660,  Reg.  33,  Rev.,  Jan.  2,  1918.) 


2391  While  the  Government  is  fully  authorized,  as  hereinbefore  indicated,  to  recover  • 
such  taxes  by  suit,  this  office  prefers  that  the  collection  should  be  made  in  the 

ordinary  statutory  method,  that  is,  as  a result  of  a formal  assessment.  In  order  that  this 
may  be  done,  corporations  should  be  requested  to  make  amended  returns,  or  to  execute 
waivers  in  such  form  as  will  waive  the  three-year  statutory  limitation  as  to  the  time  within 
which  assessments  may  be  made,  and  the  corporations  should  be  informed  that,  in  execut- 
ing this  waiver,  they  forfeit  none  of  their  rights  under  the  law  or  assum.e  liability  to  no 
penalty  that  might  not  be  enforced  against  them  in  the  absence  of  such  waiver.  The  cor- 
porations should  also  be  given  to  understand  that  the  execution  of  the  waiver  is,  in  fact, 
to  their  advantage,  in  that  it  has  the  effect  to  eliminate  the  necessity,  on  the  part  of  the 
Government,  to  recover  taxes  by  suit.  If,  however,  the  corporations  against  which  addi- 
tional tax  liability  is  discovered  will  formally  accept  the  findings  of  the  examining  officer 
and  agree  to  voluntarily  pay  to  the  Collector  of  Internal  Revenue  the  amount  of  tax 
found  due,  amended  returns  or  waivers  need  not  be  required. 

In  cases  wherein  waivers  are  executed,  they  should  be  substantially  in  the  following 

2392  form: 


, a corporation  organized  under  the  laws  of  the  State 

of , hereby  consents  to  an  assessment  of  any  and  all  taxes  imposed  by 

section  38  of  the  Act  of  Congress  approved  August  5,  1909,  and  shown  or  found  to  be 

due  on  a basis  of  its  net  income  received  from  all  sources  during  the  year , 

and  any  and  all  penalties  attached  to  or  on  account  of  said  taxes,  and  said  corpora- 
tion hereby  waives  any  statutory  limitation  as  to  the  time  in  which  such  taxes  and 
penalties  should  have  been  assessed. 

(Signed) ^ 

(Corporation.) 


(Corporate  Seal.) 

It  is  believed  that  if  corporations  against  which  additional  tax  has  been  discovered 
2293  for  years  antedating  the  three-year  limit  are  fully  advised  that  the  making  of 
amended  returns  or  the  execution  of  waivers  does  not  in  any  way  imperil  any 
right  which  they  have  under  the  law  or  involve  them  in  any  additional  penalties,  no  dif- 
ficulty will  be  had  in  securing  such  amended  returns  or  waivers. 

Examining  officers  should  in  all  cases  clearly  present  this  matter  to_  the  corpora- 
2394  tions  and,  if  possible,  secure  either  amended  returns  or  waivers,  in  order  that 
formal  assessments  may  be  made  and  suit  to  recover  tax,  with  the  expense  incident 
thereto,  may  be  avoided.  (Mimeograph  letter  No.  1192,  to  Collectors,  March  24,  1915.) 


2395  When  Waiver  is  Given  the  Ad  Valorem  Penalty  Does  not  Accrue. — Where  the 
limitation  of  the  statute  as  to  assessment  has  run  and  a written  waiver  of  exemption 
from  assessment  is  given  by  the  taxpayer,  the  ad  valorem  penalties  of  50  per  cent,  addition  to 
tax,  is  not  to  be  assessed  for  delinquency  in  filing  return.  (Art.  52,  1f286,  Reg.  33,  Rev., 
Jan.  2,  1918.) 


INC. 


244 


TAX 


PAYMENT  OF  THE  TAX. 


2396  Past  Due  Taxes  Voluntarily  Paid. — If  the  corporation  against  which  additional 
tax  liability  is  discovered  will  formally  accept  the  findings  of  the  examining  officer 

and  agree  to  voluntarily  pay  the  additional  tax  to  the  Collector  of  Internal  Revenue  and 
does  so  pay  the  additional  tax,  amended  returns  or  waivers  will  not  be  required.  (Art.  234, 
1[661,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2397  Law  1[379.  Ad  Valorem  Penalty,  Plus  Interest,  for  Delay  in  Payment  of  Tax. — 
“(e)  If  any  tax  remains  unpaid  after  the  date  when  it  is  due,  and  for  ten  days  after 

notice  and  demand  by  the  collector,  then,  except  in  the  case  of  estates  of  insane,  deceased, 
or  insolvent  persons  [^2413],  there  shall  be  added  as  part  of  the  tax  the  sum  of  5 per  centum 
on  the  amount  due  but  unpaid,  plus  interest  at  the  rate  of  1 per  centum  per  month  upon 
such  amount  from  the  time  it  became  due:” 

2398  Law  11380.  Interest  Rate  Lower  as  to  any  Amount  Subject  to  a Fona  Fide  Claim 
for  Abatement. — Provided,  That  as  to  any  such  amount  which  is  the  subject 

of  a bona  fide  claim  for  abatement  [1[2499],  such  sum  of  5 per  centum  shall  not  be 
added  and  the  interest  from  the  time  the  amount  was  due  until  the  claim  is  decided 
shall  be  at  the  rate  of  of  1 per  centum  per  month.” 

2399  Form  17. — Collectors  should  Issue  Form  17  for  the  purpose  of  fixing  definitely 
the  date  when  the  5 per  cent  penalty  accrues  and  interest  at  1 per  cent  per  month 

begins  to  run,  and  a copy  of  this  notice  should  be  filed  as  provided  by  act  of  August  17, 
1912,  amending  section  3186,  Revised  Statutes.  (Art.  41,  1[252,  Reg.  33,  Rev.,  Jan.  2, 
1918.) 

2400  [If  any  Installment  is  not  paid  when  due]  notice  and  demand  (Form  17)  should  be 
at  once  Issued,  and  unless  the  tax  [all  of  the  tax  unpaid]  in  such  case  is  paid  within 

10  days  after  the  service  of  such  notice,  general  demand  for  tax,  penalty,  and  interest 
(Form  21)  should  at  once  be  issued.  Immediate  notice  and  demand  (Form  17)  will,  how- 
ever, be  served  in  case  of  failure  to  file  the  required  return  within  the  statutory  period. 
(Art.  197,  Reg.  33,  Jan.  5,  1914.) 

2401  It  appears  that  certain  collectors  hold  that  notice  of  assessment  and  demand, 
P'orm  17,  is  nbt  necessary  to  create  a liability  to  5 per  cent,  penalty  and  interest 

at  1 per  cent,  per  month  in  the  case  of  income  tax  remaining  unpaid  after  [ * * * the] 
due  date.  This  view  as  to  the  requirements  of  the  law  Is  clearly  wrong  and  contrary  to 
the  instructions  (Art.  197,  Reg.  33)  issued  on  the  subject. 

The  necessity  of  issuing  Form  17  is  twofold — first,  to  determine  the  date  when 

2402  5 per  cent,  penalty  accrues  and  Interest  at  1 per  cen't  per  month  begins  to  run, 
and,  second,  to  complete  the  Government’s  lien  on  property  belonging  to  the 

taxpayer. 

2403  In  case  of  non-payment,  * * * ^ formal  notice  and  demand  which  the  law  clearly 
contemplates  and  which  the  courts  hold  to  be  necessary  before  the  delinquent  tax- 
payer becomes  chargeable  with  penalty  and  interest  [is  to  be  issued]. 

In  all  cases,  therefore,  where  an  assessed  tax  remains  unpaid  after  it  becomes  due 

2404  a notice  on  Form  17  should  be  at  once  issued,  to  be  followed,  when  necessary, 
by  Form  21  and  69,  in  their  order.  The  fact  that  a claim  for  abatement  is  pending 

or  the  tax  is  in  litigation  does  not  relieve  the  collector  from  Issuing  the  notices,  demands, 
etc.,  required  by  law. 

A misunderstanding  on  the  part  of  certain  collectors  as  to  these  requirements 

2405  has  occasioned  a considerable  loss  to  the  Government  of  penalty  and  Interest, 
especially  where  claims  for  abatement  were  pending.  (T.  D.  19'95,  June  12,  1914.) 

2406  Notice  of  Assessment  (Form  17)  may  lawfully  be  given  by  mail,  and  when  so  given 
is  presumed  to  have  been  received.  The  burden  rests  on  the  taxpayer  to  prove 

the  contrary  in  order  to  avoid  penalty.  (U.  S.  v.  General  Inspection  & Loading  Company, 
204  F.  657.) 

2407  [Comment:  The  following  word  was  given  to  The  Corporation  Trust  Company 
orally,  regarding  the  practice  of  the  Department  relative  to  the  proof  “to  the 

contrary.”  The  taxpayer  is  required  only  to  prove  to  the  satisfaction  of  the  Commissioner 
that  he  did  not  receive  nbtice  of  assessment.  Under  such  conditions,  it  has  been  the  practice 
of  the  Bureau  of  Internal  Revenue  to  waive  the  penalties  and  give  the  taxpayer  an  oppor- 
tunity to  pay  his  taxes.  Of  course,  the  Collector  would  be  called  on  to  produce  his  records 
to  prove  his  assertion,  that  notice  had  been  sent,  but  that  would  not  stand  in  the  way  of 
the  taxpayer  offering  proof  that  the  notice  did  not  reach  him.  (July,  1917)]. 


INC. 


245 


TAX 


PAYMENT  OF  THE  TAX. 


2408  Notice  and  Demand  when  Taxpayer  is  Abroad,  or  Absent  from  Home  in  the  Military 
or  Naval  Forces  of  the  United  States. — By  reason  of  absence  in  foreign  countries 

or  on  account  of  traveling  abroad,  or  of  absence  from  their  homes  or  places  of  business 
in  the  military  or  other  service  of  the  country,  and  the  consequent  delay  in  receiving 
mail,  it  is  impossible  for  many  individuals  to  receive  notice  and  demand  on  Form  17  and 
make  payment  of  the  taxes  assessed  thereon  so  that  such  taxes  can  be  received  by  the 
collector  * ♦ * within  the  ten-day  period  following  the  service  of  notice. 

You  are  requested  therefore  to  enter  on  Form  17,  as  the  date  on  which  such  assessed 

2409  tax  becomes  due  and  payable,  as  near  as  possible,  a date  ten  days  subsequent  to 
the  time  that  said  notice  should  be  receiv^ed  in  the  ordinary  course  of  the  mails 

by  the  taxpayer,  and  where  it  appears  that  the  full  amount  of  tax  assessed  was  placed  in 
the  mails  within  the  ten-day  period  after  the  receipt  of  Form  17,  or  in  case  notice  so  sent 
is  not  delivered  in  due  time  by  reason  of  delay  in  the  mail  and  satisfactory  evidence  of  that 
fact  is  furnished,  the  penalty  and  interest  in  such  cases  will  not  be  collected.  This  ruling 
applies  to  excess  profits  taxes  as  well  as  to  income  taxes. 

2410  Where  the  office  of  a corporation,  joint  stock  company,  association  or  insurance 
company  to  which  the  collector  addresses  the  notice  and  demand  for  income 

taxes  or  income  and  excess  profits  taxes  is  situated  so  far  from  the  collector’s  office  that 
normal  conditions  render  it  impossible  for  payment  to  reach  the  collector  within  ten  days 
of  the  mailing  of  notice  and  demand,  the  procedure  herein  outlined  with  respect  to  in- 
dividuals will  govern  with  respect  to  corporations,  joint  stock  companies,  associations  and 
insurance  companies. 

Except  as  herein  indicated  the  five  per  cent  penalty  will  be  imposed  where  there 
241  1 is  a failure  of  the  tax  payment  to  reach  the  collector  within  ten  days  of  the  day  of 
mailing  by  the  collector  of  the  nbtice  and  demand.  (T.  D.  2679,  March  23,  1918.) 

2412  Penalties  for  Failure  to  Pay  Tax  When  Due. — Upon  failure  to  pay  the  tax  when 
^ , due  and  for  10  days  after  notice  and  demand,  a penalty  of  5 per  cent  of  the  amount 
of  tax  unpaid  and  interest  at  the  rate  of  1 per  cent  per  month  until  paid  shall  be  added 
to  the  amount  of  such  tax.  (Art.  231,  ^[656,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2413  Delay  in  Payment  of  Tax  from  Estates  of  Insane,  Deceased  or  Insolvent  Persons. — 
Receipt  is  acknowledged  of  your  letter  of  March  29,  1916,  reading,  in  part,  as 

follows : 

“Please  refer  to  that  portion  of  Paragraph  E of  the  Income  Tax  Law  [Identical  pro- 
visions in  Revenue  Act  of  1918  at  ^2397  above.]  which  exempts  the  estates  of  insane, 
deceased,  or  insolvent  persons. 

2414  (1)  Does  this  exempt  the  agent  of  an  insane  person,  the  executor  of  a deceased 
person,  or  the  receiver  for  an  insolvent  person,  from  penalty  for  failure  to  pay 
the  tax  in  due  course.^ 

2415  (2)  Does  it  exempt  such  fiduciary  from  penalty  for  failure  to  make  the  return  in 
due  course? 

24  1 6 (3)  In  the  case  of  deceased  persons,  does  it  cover  the  tax  due  upon  the  return  which 
is  filed  by  the  executor  for  the  period  from  the  first  of  the  year  to  the  date  of  death? 

2417  (4)  In  the  case  of  insolvent  persons,  does  it  cover  the  tax  based  on  the  return 
made  by  the  insolvent  person?” 

2418  Your  several  inquiries  are  answered  as  follows: 

2419  1.  With  reference  to  that  paragraph  of  the  Federal  Income  Tax  Law  to  which 

reference  is  made,  and  which,  in  part,  reads  as  follows:  “ * ♦ ♦ rjf  ^ny 

tax  remains  unpaid  after  the  date  when  it  is  due,]  and  for  ten  days  after  notice  and  de- 
mand thereof  by  the  collector,  there  shall  be  added  the  sum  of  5 per  centum  on  the 
amount  of  tax  unpaid,  and  interest  at  the  rate  of  1 per  centum  per  month  upon  the 
said  tax  from  the  time  the  same  became  due,  except  from  the  estates  of  insane,  de- 
ceased, or  insolvent  persons,”  the  office  holds  that  the  exemption  provision  contained 
therein  applies  in  a case  of  non-payment  of  tax  by  reason  of  insanity,  decease,  or  in- 
insolvency of  the  taxpayer  occurring  after  a personal  return  has  been  rendered  by  the 
incapacitated  person. 

2420  2.  The  provision  does  not  relate  to  returns  required  under  the  law  from  fiduciaries. 

2421  3.  No. 

4.  Yes,  it  being  understood  that  a return  was  rendered  in  due  course  by  the  in- 

2422  solvent  person,  and  that  insolvency  occurred  prior  to  required  date  of  payment 
of  tax.  (Letter  to  The  Corporation  Trust  Company,  signed  by  Acting  Commissioner 
David  A.  Gates,  and  dated  April  1,  1916.) 

2423  Law  ^[381.  Ipso  Facto  Assessment  of  the  Tax  and  Notice  and  Demand  for  ^e 
First  Installment. — “In  the  case  of  the  first  installment  provided  for  in  subdivision 

(a)  the  instructions  printed  on  the  return  shall  be  deemed  sufficient  notice  of  the  date  when 
the  tax  is  due  and  sufficient  demand,  and  the  taxpayer’s  computation  of  the  tax  on  the  ’•e- 
turn  shall  be  deemed  sufficient  notice  of  the  amount  due.” 


INC. 


246  TAX 


PAYMENT  OF  THE  TAX. 


2424  f Law  382.  $5  Penalty  for  Necessitating  a Warrant  of  Distraint. — “(f)  In  any  case 

in  which  in  order  to  enforce  payment  of  a tax  it  is  necessary  for  a collector  to  cause  a 
warrant  of  distraint  to  be  served,  there  shall  also  be  added  as  part  of  the  tax  the  sum  of  $5.** 

2425  Law  ^383.  Procedure  when  Commissioner  Finds  that  a Taxpayer  Designs  to  Pre- 
judice or  to  Render  Wholly  or  Partly  Ineffectual  Proceedings  to  Collect  the  Tax 

for  the  Preceding  or  Current  Taxable  Year. — “(g)  If  the  Commissioner  finds  that  a tax- 
payer designs  quickly  to  depart  from  the  United  States  or  to  remove  his  property  therefrom, 
or  to  conceal  himself  or  his  property  therein,  or  to  do  any  other  act  tending  to  prejudice 
or  to  render  wholly  or  partly  ineffectual  proceedings  to  collect  the  tax  for  the  taxable 
year  then  last  past  or  the  taxable  year  then  current  unless  such  proceedings  be  brought 
without  delay,  the  Commissioner  shall  declare  the  taxable  period  for  such  taxpayer  term- 
inated at  the  end  of  the  calendar  month  then  last  past  and  shall  cause  notice  of  such  finding 
and  declaration  to  be  given  the  taxpayer,  together  with  a demand  for  immediate  payment 
of  the  tax  for  the  taxable  period  so  declared  terminated  and  of  the  tax  for  the  preceding 
taxable  year  or  so  much  of  said  tax  as  Is  unpaid,  whether  or  not  the  time  otherwise  allowed 
by  law  for  filing  return  and  paying  the  tax  has  expired;  and  such  taxes  shall  thereupon  be- 
come immediately  due  and  payable.  In  any  action  or  suit  brought  to  enforce  payment 
of  taxes  made  due  and  payable  by  virtue  of  the  provisions  of  this  subdivision  the  finding 
of  the  Commissioner,  made  as  herein  provided,  whether  made  after  notice  to  the  taxpayer 
or  not,  shall  be  for  all  purposes  presumptive  evidence  of  the  taxpayer’s  design.  A tax- 
payer who  is  not  in  default  in  m.aking  any  return  or  paying  income,  war-profits,  or  excess- 
profits  tax  under  any  Act  of  Congress  may  furnish  to  the  United  States,  under  regulations 
to  be  prescribed  by  the  Commissioner  with  the  approval  of  the  Secretary,  security  approved 
by  the  Commissioner  that  he  will  duly  make  the  return  next  thereafter  required  to  be 
filed  and  pay  the  tax  next  thereafter  required  to  be  paid.  The  Commissioner  may  approve 
and  accept  in  like  manner  security  for  return  and  payment  of  taxes  made  due  and  payable 
by  virtue  of  the  provisions  of  this  subdivision,  provided  the  taxpayer  has  paid  in  full 
all  other  income,  war-profits,  or  excess-profits  taxes  due  from  him  under  any  Act  of  Con- 
gress. If  security  is  approved  and  accepted  pursuant  to  the  provisions  of  this  subdivision 
and  such  further  or  other  security  with  respect  to  the  tax  or  taxes  covered  thereby  is  given 
as  the  Commissioner  shall  from  time  to  time  find  necessary  and  require,  payment  of  such 
taxes  shall  not  be  enforced  by  any  proceedings  under  the  provisions  of  this  subdivision 
prior  to  the  expiration  of  the  time  otherwise  allowed  for  paying  such  respective  taxes.” 

2426  Law  ^434.  Fractional  Part  of  Cent  to  be  Disregarded  in  Payment  of  Tax. — “Sec. 

> 1313.  That  in  the  payment  of  any  tax  under  this  Act  not  payable  by  stamp  a 

fractional  part  of  a cent  shall  be  disregarded  unless  It  amounts  to  one-half  cent  or  more, 
in  which  case  it  shall  be  increased  to  1 cent.” 

2427  In  the  payment  of  income  tax  a fractional  part  of  a cent  shall  be  disregarded  unless 
it  amounts  to  a half  cent  or  more,  in  which  case  the  fraction  shall  be  increased  to 

1 cent.  (Art.  41,  1[251,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2428  Law  ^435.  Payment  of  the  Tax  by  Means  of  Treasury  Certificates  of  Indebtedness 
and  Uncertified  Checks. — “Sec.  1314.  That  collectors  may  receive,  at  par  with  an 

adjustment  for  accrued  interest,  certificates  of  indebtedness  issued  by  the  United  States 
and  uncertified  checks  in  payment  of  income,  war-profits  and  excess-profits  taxes  and 
any  other  taxes  payable  other  than  by  stam.p,  during  such  time  and  under  such  regulations 
as  the  Commissioner,  with  the  approval  of  the  Secretary,  shall  prescribe;  but  if  a check  so 
received  is  not  paid  by  the  bank  on  which  it  is  drawn  the  person  by  whom  such  check  has 
been  tendered  shall  remain  liable  for  the  payment  of  the  tax  and  for  all  legal  penalties  and 
additions  the  same  as  if  such  check  had  not  been  tendered.”  [^[3128,] 

2429  Instructions  Relative  to  Acceptance  of  Uncertified  Checks. — In  accordance  with 
the  provisions  of  Section  1010  [^2428]  of  the  Act  of  October  3,  1917,  collectors  may 

accept  uncertified  checks  in  payment  of  income  and  excess-profits  taxes.  If  such  check 
Is  not  paid  by  the  bank  on  which  it  is  drawn,  the  person  by  whom  it  has  been  tendered 
shall  remain  liable  for  the  payment  of  the  tax  and  for  all  legal  penalties  and  additions 
the  same  as  if  such  check  had  not  been  received. 

2430  Such  uncertified  checks  as  the  depositary  bank  is  willing  to  accept  should  be  in- 
cluded in  the  certificate  of  deposit  issued  to  the  collector. 

2431  All  other  uncertified  checks  will  be  carried  by  the  collector  as  “cash  on  hand” 
and  not  credited  as  “Collections,”  as  the  dates  of  the  certificates  of  deposit  de- 
termine the  dates  of  collections. 

2432  The  date  on  which  the  collector  receives  the  check  will  be  considered  the  one  on  which 
payment  is  made,  unless  the  check  is  return  dishonored. 


INC. 


247 


TAX 


PAYMENT  OF  THE  TAX. 


2433  Such  uncertified  checks  as  the  depositary  bank  is  not  willing  to  accept  for  immediate 
credit  may  be  deposited  for  collection  by  the  collector  of  internal  revenue  to  his 

official  credit,  under  his  bond,  with  a regular  depositary  bank,  and  when  the  check  or  checks 
have  been  collected  the  proceeds  should  be  immediately  deposited  by  him  with  his  other 
collections  for  the  day.  At  the  same  time  the  collector  will  charge  his  account  “Cash  on 
hand”  and  credit  the  taxpayer  from  whom  the  particular  uncertified  check  was  received. 
(T.  D.  2627,  Dec.  28,  1917.) 

2434  Instructions  to  Public. — 1.  Collectors  should  give  the  widest  possible  publicity, 
through  newspapers  and  by  all  other  available  means,  to  the  fact  that  all  checks 

in  paym.ent  of  incom.e  and  excess-profits  taxes  must  be  collectible  at  par  (without  any  de- 
duction). Taxpayers  who  are  not  sure  that  their  checks  will  be  paid  at  par  should  be 
advised  to  write  beneath  the  amount  “without  deduction  for  exchange,”  or  “with 
exchange.” 

Indorsement  of  Checks. — 2.  The  collector  need  not,  however,  examine  all  checks  to 

2435  see  whether  or  not  they  are  collectible  at  par,  but  should  stamp  on  the  face  of  each  the 
words  “This  check  is  in  payment  of  an  obligation  to  the  United  States  and  must 

be  paid  at  par.  No  protest,”  with  his  nam.e  and  title.  If  the  bank  on  which  a check  is 
drawn  should  refuse  to  pay  it  at  par,  it  will  be  returned  through  the  depositary  bank  and 
should  be  treated  in  the  same  manner  as  a bad  check  (see  paragraphs  4 and  5). 

Obtaining  Certificates  of  Deposit  for  Out-of-Town  Checks. — 3.  All  out-of-town  checks 

2436  for  which  the  depositary  bank  is  unwilling  to  issue  an  immediate  certificate  of  deposit 
to  the  credit  of  the  Treasurer  of  the  United  States  should  be  deposited  separately 

in  a collection  account  as  provided  in  T.  D.  2627,  dated  Decem.ber  28,  1917.  The  col- 
lection account  will  be  charged  and  the  Treasurer’s  general  account  credited  by  the  issuance 
of  a certificate  of  deposit  on  Form.  15,  either  (a)  as  the  checks  are  collected  or  (b)  after  a 
number  of  days  as  agreed  upon  with  the  depositary,  subject  to  the  Secretary’s  approval, 
not  exceeding  five  days,  depending  upon  the  average  time  of  collection. 

Redeeming  Bad  Checks  Deposited  to  the  Credit  of  the  Treasurer. — 4.  If  any  check 

2437  for  which  a certificate  of  deposit  to  the  credit  of  the  Treasurer  of  the  United  States 
has  been  issued  should  be  returned  to  the  depositary  bank  unpaid,  the  collector 

will  be  promptly  notified  and  the  check  will  be  held  in  suspense  for  a few  days,  during 
which  the  collector  should  make  an  effort  to  recover  the  am.ount  from  the  taxpayer.  If 
the  am:ount  of  the  check  is  recovered  from,  the  taxpayer,  the  collector  should  Im.m.ediately 
turn  it  over  to  the  depositary  in  exchange  for  the  bad  check,  which  should  be  returned  to 
the  drawer.  If  he  fails  to  obtain  the  amount  from,  the  taxpayer  within  a reasonable  time, 
the  depositary  will  return  the  check  with  a letter  of  transmittal  and  ask  a receipt  from 
the  collector.  The  collector  should  give  such  a receipt  in  duplicate,  retaining  one 
copy.  The  depositary  will  charge  the  amount  to  the  Treasurer’s  account  in  its  next 
daily  transcript. 

Redeeming  Bad  Check  Deposited  in  Collection  Account. — 5.  If  a check  deposited 

2438  in  the  collection  account  should  be  returned  unpaid,  and  no  certificate  of  deposit 
on  Form  15  covering  the  amount  thereof  has  been  issued,  the  amount  of  the  check 

will  be  charged  by  the  depositary  to  the  collection  account,  after  being  held  in  suspense 
account  for  a few  days  while  an  effort  is  made  to  recover  the  amount  from  the  taxpayer. 
Collecting  Taxes  for  Which  Bad  Checks  Have  Been  Tendered. — 6.  Taxpayers 

2439  whose  checks  have  been  returned  uncollected  by  the  depositary  bank  should  be 
immediately  notified,  as  indicated  in  paragraph  4,  to  make  the  checks  good.  If 

any  taxpayer  should  fail  to  do  so,  the  collector  should  proceed  to  collect  the  taxes  by  the 
usual  methods,  as  though  no  check  had  been  given. 

Correcting  Assessment  List. — 7.  If  the  recapitulation  of  the  assessment  list  for 

2440  the  month  has  not  yet  been  sent  to  the  Commissioner,  cancel  the  original  entry 
of  the  payment,  at  the  same  time  noting  in  the  “Remarks”  column  “Check  returned 

unpaid;  transferred  to  p.  ,1  ,”  with  the  date,  and  reenter  the  item  in  the  unpaid 

section  of  the  list,  with  the  notation  “Transferred  from  p.  , 1 .”  Submit  in  support 

of  a new  entry  a copy  of  the  collector’s  letter  to  the  taxpayer  with  regard  to  the  non-pay- 
ment of  the  check.  Be  careful  not  to  duplicate  the  charge  in  the  monthly  recapitulation 
of  the  list. 

8.  If  the  monthly  recapitulation  has  gone  forward  make  a note  in  the  “Remarks” 

2441  column,  opposite  the  original  entry,  “Check  returned  unpaid,”  with  the  date,  and 
let  the  item  stand  as  an  unpaid  item  to  be  cleared  by  an  entry  of  the  date  on  which 

the  amount  is  finally  paid. 

Posting  Records  1 and  9. — 9.  Record  1 for  income  tax  collections  should  be  posted 

2442  in  accordance  with  previous  Instructions  and  the  daily  totals  should  be  transferred 
to  line  1 or  Record  9.  As  the  daily  total  in  Record  9 will  not  agree  with  the  total 

deposit  for  the  day  in  the  Treasurer’s  general  account,  the  certificate  of  deposit  numbers 
should  not  be  entered  on  line  48  of  Record  9. 


INC. 


248  TAX 


PAYMENT  OF  THE  TAX. 


10.  The  balance  in  the  collection  account  at  the  close  of  each  month  should  be 

2443  subtracted  from  the  balance  at  the  close  of  the  preceding  month  (or  vice  versa). 
If  the  balance  in  the  collection  account  shows  an  increase  for  the  month,  such  in- 
crease should  be  added  to  the  amount  of  returned  checks  (if  any)  charged  back  to  the 
Treasurer’s  general  account  during  the  month  and  the  total  should  be  entered  on  line  8 
in  the  total  column  of  Record  9 in  red  ink,  to  be  deducted  from  the  other  entries  in  the 
same  column. 

11.  If  the  balance  in  the  collection  account  shows  a decrease  for  the  month,  and 

2444  the  amount  of  returned  checks  charged  back  to  the  Treasurer’s  general  account 
for  the  month  is  less  than  the  decrease  in  the  balance,  the  amount  of  such  returned 

checks  should  be  substracted  from  the  decrease  in  the  balance  and  the  difference  entered 
in  black  ink  on  line  8 in  the  total  column  of  Record  9,  to  be  added  to  the  other  entries  in 
the  same  column. 

12.  If  the  amount  of  returned  checks  charged  back  to  the  Treasurer’s  general 

2445  account  for  the  month  should  exceed  the  decrease  in  the  balance  for  the  month, 
such  decrease  should  be  subtracted  from  the  amount  of  such  returned  checks  and 

the  difference  entered  in  red  ink  on  line  8 in  the  total  column  of  Record  9. 

13.  The  net  total  for  each  month  entered  on  line  9 of  Record  9 will  thus  agree 

2446  with  the  amount  deposited  that  month  on  account  of  collections  on  lists. 

Monthly  Accounts. — 14.  Form  325  should  be  prepared  from  Record  1 in  accordance 

2447  with  previous  instructions. 

At  the  close  of  the  month  the  entry  on  line  8 in  the  total  column  of  Record  9 (black 

2448  or  red  ink)  should  be  entered  in  column  8 of  the  second  table  on  Form  5lB,  on  the 
blank  line  following  the  line  for  “Old  regular”  lists.  If  the  amount  entered  in  column 

8 is  in  black  ink  the  same  amount  should  be  entered  in  red  ink  on  the  same  line  in  column. 
11.  If  the  amount  entered  in  column  8 is  in  red  ink  the  same  amount  should  be  entered 
in  black  ink  on  the  same  line  in  column  11. 

15.  The  amount  of  returned  checks  charged  to  the  Treasurer’s  general  account 

2449  each  month  should  be  deducted  on  Form  49  from  the  total  of  the  certificates  of 
deposit  for  the  month  in  which  the  checks  are  returned.  The  entry  making  the 

deduction  should  be  supported  by  the  banks’  letters  returning  the  checks. 

16.  The  collector  should  submit  with  his  monthly  account  on  Form  51B  a monthly 

2450  statement  signed  by  the  cashier  of  the  depositary  bank  in  the  following  form: 


Total  amount 

Amount  trans- 
ferred each  day 
to  Treasurer’s 
general  acet. 

Checks 

Day 

deposited 
each  day 

charged  back 
each  day 

Balance 

Balance  from  last  month’s  accou: 

1 1 

nt. 

1 

2 

Etc 



Quarterly  Account. — 17.  On  Form  79  the  balance  in  the  collection  account  should  be 

2451  included  in  item  9 as  part  of  the  balance  due  the  United  States  and  interlined  in 
the  analysis  of  the  balance  (at  the  foot  of  the  account)  as  “Uncollected  checks.”” 

(T.  D.  2666,  March  8,  1918.) 

2452  Instructions  Relative  to  Acceptance  of  Certificates  of  Indebtedness  for  Income 
Taxes. — [The  law  formerly  read  “at  par  and  accrued  interest”  instead  of  “at  par 

with  an  adjustment  for  accrued  interest.”]  Collectors  of  Internal  Revenue  are  directed 
to  receive  at  par  United  States  Treasury  certificates  of  indebtedness  of  the  Tax  Series  of 
1919,  dated  August  20,  1918,  and  maturing  July  15,  1919,  and  of  Series  T,  dated  November 
7,  1918,  and  maturing  March  15,  1919,  in  payment  of  income  and  profits  taxes  when  payable 
at  or  before  the  maturity  of  the  certificates.  The  amount,  at  par,  of  the  Treasury  certi- 
ficates of  indebtedness  presented  by  any  taxpayer  in  payment  of  income  and  profits  taxes 
must  not  exceed  the  amount  of  the  taxes  to  be  paid  by  him.  Deposits  of  certificates  of 
indebtedness  must  be  made  by  collectors  with  the  Federal  Reserve  Banks  of  the  districts 
in  which  the  respective  collectors’  offices  are  located.  Such  certificates  of  Indebtedness 
may  be  accepted  by  the  collector  prior  to  the  date  the  tax  is  due  and  in  that  case  should 
be  forwarded  by  the  collector  to  the  Federal  Reserve  Bank  to  be  held  for  account  of 
the  collector  until  the  date  the  tax  is  due  and  for  deposit  on  such  date.  Certificates  of 
indebtedness  should  be  stamped  as  follotvs  by  the  collector  and  when  so  stamped 
transmitted  to  the  Federal  Reserve  Bank  by  registered  mail  uninsured: 


INC. 


249 


TAX 


PAYMENT  OF  THE  TAX. 


,191.... 

This  certificate  has  been  accepted  in  payment  of  income  and  profits  taxes  and  will 
not  be  redeemed  by  the  United  States  except  for  credit  of  the  undersigned. 


Collector  of  Internal  Revenue 
for  the district  of 

Each  unmatured  coupon  attached  to  each  such  certificate  of  indebtedness  must  be  stamped 
across  the  face  by  the  collector  as  follows:  “Paid.” 

All  coupons  maturing  on  or  before  the  date  the  tax  is  due  must  be  detached  by  the 

2453  taxpayer  and  collected  in  ordinary  course;  but  all  other  coupons  must  be  attached 
to  the  certificates  and  forwarded  to  the  Federal  Reserve  Bank.  Any  accrued  inter- 
est to  the  date  the  tax  is  due  not  covered  by  coupons  detached  as  above  provided  will  be 
remitted  to  the  taxpayer  by  the  Federal  Reserve  Bank  by  check  and  the  collector  must 
furnish  to  the  Federal  Reserve  Bank  the  name  and  address  of  the  taxpayer,  the  amount  and 
serial  numbers  of  the  certificates  presented  in  each  case,  the  date  of  issue  of  the  certificates, 
and  the  date  the  tax  is  due.  Collectors  shall  in  no  case  pay  interest  on  such  certificates 
nor  accept  them  for  an  amount  other  or  greater  than  their  face  value.  Receipts  given 
by  collectors  to  taxpayers  should  show  the  amount  of  certificates  of  each  series  received 
in  payment  of  taxes. 

The  collectors  should  make  in  tabular  form  a schedule  in  duplicate  of  the  certi- 

2454  ficates  of  indebtedness  to  be  sent  to  the  Federal  Reserve  Bank,  showing  the  serial 
number  of  each  certificate,  date  of  issue,  and  face  value.  Certificates  of  indebted- 
ness accepted  prior  to  the  date  the  tax  is  due  must  be  scheduled  separately,  and  such 
date  must  appear  on  the  schedule.  At  the  bottom  of  the  schedule  there  should  be  written 

or  stamped  “Income  and  Profits  Taxes  $ ,”  which  must  agree  with  the  total  shown 

on  the  schedule.  Such  income  and  profits  tax  deposits  must  in  all  cases  be  shown  on  the 
face  of  the  certificate  of  deposit  (National  Bank  Form  15)  separate  and  distinct  from 
the  item  of  miscellaneous  internal  revenue  collections  (formerly  called  Ordinary),  but  it 
is  not  necessary  to  give  the  separation  into  corporation  income,  individual  income  and 
profits  taxes.  One  copy  of  this  schedule  must  accompany  the  certificates  sent  to  the 
Federal  Reserve  Bank,  and  the  other  be  retained  by  the  collector. 

Until  certificates  of  deposit  are  received  from  the  Federal  Reserve  Banks,  the 

2455  amounts  must  be  carried  as  cash  on  hand,  and  not  credited  as  collections,  as  the 
dates  of  certificates  of  deposit  determine  the  dates  of  collections. 

For  the  purpose  of  saving  taxpayers  the  expense  of  transmitting  such  certificates 

2456  as  are  held  in  Federal  Reserve  cities  to  the  office  of  the  collector  in  whose  district 
the  taxes  are  payable,  taxpayers  desiring  to  pay  income  and  profits  taxes  by  Treasury 

certificates  of  indebtedness  acceptable  in  paym.ent  of  such  taxes,  should  communicate 
with  the  collector  of  the  district  in  which  the  taxes  are  payable  and  request  from  him 
authority  to  deposit  such  certificates  with  the  Federal  Reserve  Bank  in  the  city  in  which 
the  certificates  are  held. 

Collectors  are  authorized  to  permit  deposits  of  Treasurv  certificates  of  indebtedness 

2457  in  any  Federal  Reserve  Bank  with  the  distinct  understanding  that  the  Federal 
Reserve  Bank  is  to  issue  a certificate  of  deposit  in  the  collector’s  name  covering 

the  amount  of  the  certificates  of  indebtedness  at  par  and  to  state  on  the  face  of  the  certi- 
ficate of  deposit  that  the  amount  represented  thereby  is  in  payment  of  income  and  profits 
taxes.  The  Federal  Reserve  Bank  should  forward  the  original  certificate  of  deposit  to  the 
Treasurer  of  the  United  States,  with  its  daily  transcript,  and  transmit  to  the  collector 
the  duplicate  and  triplicate,  accompanied  by  a statement  giving  the  name  of  the  tax- 
payer for  whom  the  payment  is  made  in  order  that  the  collector  may  make  the  necessary 
record  and  forward  the  duplicate  to  this  office.  (T.  D.  2778,  Dec.  11,  1918.) 

2458  Payment  of  Taxes  at  Collector’s  Offices. — In  view  of  the  conditions  existing  in  the 
offices  of  many  collectors,  especially  in  the  rush  season  of  June  and  July,  beginning 

with  June  1,  1915,  collectors  may  close  to  the  public  the  sale  of  stamps  and  the  payment 
of  taxes  not  earlier  than  3 p.  m.  daily,  and  on  Saturdays  or  other  days  when  the  office 
is  closed  at  1 p.  m.  by  order  of  the  Secretary  of  the  Treasury  not  earlier  than  12  noon,  to 
enable  the  cashiers  to  balance  up  with  the  bookkeepers  before  making  their  daily  deposits. 
[Read  1[2462  below.] 

2459  The  public  should  be  given  due  notice  of  any  change  in  the  hours  for  the  sale  of 
stamps  and  payment  of  taxes. 

2460  To  accommodate  those  who  may  come  to  make  payments  after  the  closing  time,  a 
mail  box  should  be  provided  at  the  cashier’s  wdndow  for  the  deposit  of  such  collec- 
tions. [See  Treasury  Decision  1728,  dated  September  28,  1911  [office  routine].) 

This  order  in  no  wise  affects  the  hours  of  service  required  daily  of  each  govern- 

2461  ment  employee — nor  the  hours  that  collector’s  offices  will  be  open  for  the  transaction 
of  business  other  than  the  sale  of  stamps  and  payment  of  taxes.  (T.  D.  2205, 

May  19,  1915.) 


INC. 


250 


TAX 


PAYMENT  OF  THE  TAX. 


2462  The  following  instructions  issued  by  the  Assistant  Secretary  of. the  Treasury  on 
May  3 relative  to  depositing  collections  are  published  for  your  information  and  guid- 
ance: 

To  Collectors  of  Customs  and  Internal  Revenue: 

In  view  of  the  existing  conditions  in  the  offices  of  many  collectors  and  the  hour  at  which  . 
Government  depositaries  require  daily  deposits  to  be  made  therewith,  collectors  may  close 
their  business  day  at  an  hour  sufficiently  early  to  enable  them  to  make  the  deposits  for  that 
day  before  the  banks  close. 

After  balancing  the  accounts  for  the  day,  the  collection  of  taxes  and  the  sale  of  stamps 
should  be  resumed  and  continued  until  the  official  closing  time,  and  such  transactions 
should  be  accounted  for  as  collections  of  the  following  business  day,  except  on  th.Q  last 
business  day  of  each  fiscal  year,  when  all  collections  made  for  that  day  should  be  deposited 
with  the  regular  depositary,  which  will  be  instructed  to  remain  open  to  receive  the  par- 
ticular deposit. 

Please  instruct  your  deputies  who  deposit  receipts  to  be  governed  in  accordance  with  the 
above. 

This  method  is  adopted  for  the  convenience  of  both  the  collectors  and  the  depositaries 
and  in  order  that  all  collections  actually  made  within  the  fiscal  year  may  be  deposited 
therein  and  so  covered  into  the  Treasury. 

Wm.  P.  Malburn, 

Assistant  Secretary, 

To  THE  Assistant  Treasurers  of  the  United  States,  Federal  Reserve  Banks 
and  Active  National-Bank  Depositaries: 

Collectors  of  customs  and  internal  revenue  have  been  authorized  to  close  the  bus- 
iness day  in  their  respective  offices  sufficiently  early  to  enable  them  to  deposit  their 
collections  during  banking  hours,  and  to  include  collections  made  later  In  the  day  as 
transactions  of  the  next  day,  except  on  the  last  business  day  of  each  fiscal  year,  when 
they  will  deposit  the  receipts  for  the  entire  day. 

You  are  therefore  requested  to  remain  open  on  the  last  business  day  of  the  fiscal 
year  for  the  purpose  of  receiving  deposits  from  the  collecting  officers  who  deposit  with 
your  bank,  notwithstanding  the  fact  that  the  bank  has  been  closed  to  the  public  at  the 
usual  hour.  This  will  enable  the  department  to  include  all  customs  and  internal- 
revenue  collections  made  during  a fiscal  year  in  its  accounts  and  reports  for  that  year. 
Compliance  with  the  above  instructions  Is  requested. 

Wm.  P.  Malburn, 

Assistant  Secretary. 

2463  The  instructions  contained  in  T.  D.  2205  [^[2458-}-],  dated  May  19,  1915,  are 
modified  accordingly.  (T.  D.  2332,  May  8,  1916.) 

2464  Income  Tax  Due  Has  Status  of  Debt  to  United  States. — Tax  due  on  income  has 
the  status  of  a debt  due  to  the  United  States.  Persons  receiving  property  charged 

with  such  indebtedness  must  answer  for  the  debt.  (Art.  39,  ^248,  Reg.  33,  Rev.,  Jan. 
2,  1918.) 

2465  Law  ^384.  Receipts  for  Taxes. — “Sec.  251.  That  every  collector  to  whom  any 
payment  of  any  tax  is  made  under  the  provisions  of  this  title  shall  upon  request 

give  to  the  person  making  such  payment  a full  written  or  printed  receipt,  stating  the 
amount  paid  and  the  particular  account  for  which  such  payment  was  made;”  [1[3044.] 

2466  The  department  has  received  from  time  to  time  complaints  from  taxpayers,  especi- 
ally those  paying  corporation  income  tax,  that  collectors  refuse  to  sign  what  is 

known  as  commercial  receipts,  or  refuse  to  indorse  what  is  generally  known  as  voucher 
checks,  many  of  such  receipts  and  checks  stating  on  the  face  that  by  indorsement  the 
voucher  check  or  receipt  becomes  a receipt  in  full  for  amount  and  purpose  drawn. 

The  only  official  receipt  for  taxes  that  collectors  may  sign  under  the  law  are  stamps,' 

2467  where  stamps  are  issued,  or  Form  1,  when  the  tax  is  not  payable  by  stamp,  which 
receipts  are  to  be  issued  to  every  taxpayer  for  taxes  paid.  However,  the  depart- 
ment has  no  objection  to  collectors  signing  commercial  receipts  or  voucher  checks  (subject , 
in  the  latter  case  to  the  rules  of  the  depositary),  but  they  should,  in  signing  such  receipts 
or  vouchers,  write  or  stamp  across  the  face  thereof  the  words  “Not  an  official  receipt.” 
The  official  receipt  on  Form  1 must,  however,  be  furnished;^  and  it  is  to  be  distinctly  under- 
stood that  an  unofficial  receipt  is  not  in  any  manner  binding  on  the  department,  and  will  . 
not  be  received  by  it  as  evidence  of  payment  of  the  tax.  (T.  D.  2226,  July  14,  1915.) 


INC. 


251 


TAX 


ADMINISTRATIVE  PROVISIONS. 


2468  Deputy  Collectors  to  Give  Personal  Receipts  for  Collections  Made  by  Them. — 
After  careful  consideration,  this  office  has  reached  the  conclusion  that,  in  order 

thoroughly  to  protect  the  interests  of  both  the  taxpayers  and  the  Government,  some 
evidence  of  payment  should  be  given  at  the  time  to  taxpayers  who  pay  taxes  directly  to 
deputy  collectors,  and  that  such  a receipt  as  herein  described  is  not  in  violation  of  Section 
3188,  which  prohibits  the  issuance  of  a receipt  in  lieu  of  a stamp. 

You  are  therefore  instructed  to  direct  your  deputies  hereafter  to  give  to  special  and 

2469  other  taxpayers,  at  the  time  of  payment,  a personal  receipt  for  moneys  collected, 
substantially  in  the  following  form: 

“Received  of  JOHN  DOE  $ , to  be  forwarded  to  the  Collector  to  cover 

special  tax  due  as ” 

2470  In  case  the  payment  is  for  stamp  tax  or  for  amounts  other  than  special  tax,  the 
form  of  receipt  may  be  modified  accordingly.  (T.  D.  2341,  June  19,  1916.) 

247  1 Law  ^385.  Receipts  to  be  Given  for  Payments  Made  by  Withholding  Agents  on 
Account  of  Amounts  Deducted  at  the  Source. — “and  whenever  any  debtor  pays 
taxes  on  account  of  payments  made  or  to  be  made  by  him  to  separate  creditors  the  collector 
«hall,  if  requested  by  such  debtor,  give  a separate  receipt  for  the  tax  paid  on  account  of  each 
creditor  in  such  form  that  the  debtor  can  conveniently  produce  such  receipts  separately 
to  his  several  creditors  in  satisfaction  of  their  respective  demands  up  to  the  amounts 
stated  in  the  receipts;  and  such  receipt  shall  be  sufficient  evidence  in  favor  of  such  debtor 
to  justify  him  in  withholding  from  his  next  payment  to  his  creditor  the  amount  therein 
stated;  but  the  creditor  may,  upon  giving  to  his  debtor  a full  written  receipt  acknowledg- 
ing the  payment  to  him  of  any  sum  actually  paid  and  accepting  the  amount  of  tax  paid^as 
aforesaid  (specifying  the  same)  as  a further  satisfaction  of  the  debt  to  that  amount,  require 
the  surrender  to  him  of  such  collector’s  receipt.” 

2472  Procedure  Under  Which  Collectors  Are  Authorized  to  Refund  Excessive  Payments 
of  Internal  Revenue  Tax. — Beginning  April  1,  1918,  there  will  be  advanced  to  each 

Collector  of  Internal  Revenue,  at  the  beginning  of  each  quarter  of  the  fiscal  year,  out  of  the 
.-appropriation  for  the  refundment  of  internal  revenue  taxes,  a sum  estimated  to  be  sufficient 
tfor  the  repayment  to  taxpayers  of  certain  excessive  collections,  as  follows: — 

1.  Collections  exceeding  the  tax  shown  by  the  return  of  the  taxpayer  to  be  due. 

'2.  Collections  exceeding  the  amount  of  tax  shown  by  the  assessment  list  to  be  due. 

3.  Duplicate  payments  where: — 

(a)  Both  are  made  in  advance  of  assessment; 

Jb)  Both  are  made  after  assessment; 

{c)  One  is  made  before,  and  one  after  assessment. 

2473  1.  Procedure  where  a collection  has  exceeded  the  tax  shown  in  the  taxpayers  return 
as  due. 

2474  The  Collector  will  enter  on  the  assessment  list  the  full  amount  paid,  and  in  the 
“Remarks”  column  of  the  list  will  note  the  amount  of  the  excess. 

S475  The  complete  data  regarding  the  excessive  collection  is  then  to  be  entered  on  the 
schedule  of  Claims  for  Authority  to  Refund,  Form  751.  The  “Paid,”  “Due,” 
sand  “Refundable  Excess”  columns  on  the  Form  will  be  totaled. 

Form  751  ’s  to  rrlade  in  triplicate,  one  copy  to  be  retained  by  the  Collector,  and 
2476  two  to  be  forwarded  securely  attached  to  the  proper  assessment  list.  A single 
Form  751  cannot  be  used  for  items  on  lists  of  the  separate  classes. 

247  7 In  the  Proving  Division  of  the  Bureau  the  amount  shown  on  Form  751  as  due 
will  be  checked  against  the  taxpayer’s  return,  and  the  amount  shown  on  the  assess- 
ment list  as  paid  will  be  checked  against  the  similar  item  on  Form  751.  _ 

The  original  Form  751  will  remain  attached  to  the  assessment  list  and  will  form 

2478  an  integral  part  thereof,  so  that  the  Commissioner’s  signature  of  approval  of  the 
assessment  list  will  be,  to  the  Collector,  sufficient  evidence  of  the  Commissioner’s 

approval  of  the  claim.  To  effectuate  this,  there  should  be  typewritten  on  the  first  page  of 
Form  no,  below  the  line  reading,  “Total  Chargeable  to  Collector,”  the  words,  “Amount 
Refundable  on  Form  751.” 

Upon  receipt  of  the  returned  ffalm,  thus  determined  as  approved  by  the  Com- 

2479  missioner,  the  Collector  will  immediately  make  refund  to  the^  taxpayer,  clearly 
designating  upon  the  draft  the  nature  of  the  refund,  as,  for  instance,  “Refund 

cinder  Claim  on  Form  751,  March  list,  1918.”  The  list  to  be  designated  is  the  list  on  which 
the  claim  was  approved,  rather  than  the  list  on  which  the  assessed  or  overpayment  was 
reported. 

2480  2.  Procedure  where  a collection  has  exceeded  the  tax. 

The  procedure  will  be  identical  with  that  outlined  under  subheading  (1),  above, 
except  that  in  the  “Remarks”  column  on  the  assessment  list  the  exact  amount  paid 
is  to  be  noted. 


INC. 


252 


Tixy 


ADMINISTRATIVE  PROVISIONS. 


2481  3.  Procedure  where  a tax  has  been  paid  wholly  or  in  part  in  duplicate. 

2482  (a)  Where  both  payments  are  in  advance,  there  shall  be  entered  on  Form  751 
a notation  showing  both  lines  of  the  advance  payment  list  or  lists  on  which  pay- 
ments appear.  If  the  amounts  of  the  two  payments  differ,  the  Collector  shall  claim 
authority  for  refund  of  the  lesser  payment. 

2483  (b)  Where  the  assessment  has  been  made,  entries  will  be  made  on  the  assessment 
list  to  show  both  dates  of  payment. 

2484  A similar  notation  should  be  made  under  the  item  claimed  on  Form  751  as  re- 
fundable. 

2485  The  total  amount  collected  is  to  be  reported  on  Forms  325  and  51  B. 

(c)  Where  one  payment  has  been  made  before  and  one  after  the  entry  of  assessment, 

2486  notations  will  be  made  on  Form  751  showing  the  line  of  the  list  on  which  the  advance 
payments  was  reported  and  the  line  on  which  the  assessment  was  entered. 

2487  Except  as  indicated,  the  balance  of  procedure  under  subheading  (3)  will  correspond 

to  the  procedure  fully  outlined  under  subheading  (1).  (T.  D.  2688,  April  1,  1918.) 

2488  Law  ^386.  Credit  or  Refund,  on  Disclosure  by  Examination  of  Any  Return,  of 
Amount  Paid  in  Excess  of  that  Properly  Due. — “Sec.  252.  That  if,  upon  examina- 
tion of  any  return  of  income  made  pursuant  to  this  Act,  the  Act  of  August  5,  1909,  entitled 
“An  Act  to  provide  revenue,  equalize  duties,  and  encourage  the  industries  of  the  United 
States,  and  for  other  purposes,”  the  Act  of  October  3,  1913,  entitled  “An  Act  to  reduce 
tariff  duties  and  to  provide  revenue  for  the  Government,  and  for  other  purposes,”  the 
Revenue  Act  of  1916,  as  amended,  or  the  Revenue  Act  of  1917,  it  appears  that  an  amount  of 
income,  war-profits  or  excess-profits  tax  has  been  paid  in  excess  of  that  properly  due,  then, 
notwithstanding  the  provisions  of  section  3228  of  the  Revised  Statutes  [^2615],  the  amount 
of  the  excess  shall  be  credited  against  any  income,  war-profits  or  excess-profits  taxes,  or 
installment  thereof,  then  due  from  the  taxpayer  under  any  other  return,  and  any  balance 
of  such  excess  shall  be  immediately  refunded  to  the  taxpayer:”  [^3045.] 

2489  Law  ^387.  Five-Year  Limitation  for  Making  Claim  for  Credit  or  Refund. — 

Provided^  That  no  such  credit  or  refund  shall  be  allowed  or  made  after  five  years 
from  the  date  when  the  return  was  due,  unless  before  the  expiration  of  such  five  years  a 
claim  therefor  is  filed  by  the  taxpayer.” 

2490  Claims  Heretofore  Rejected  May  be  Reopened. — Sir:  This  office  is  in  receipt  of 
your  letter  of  the  26th  ultimo,  asking  for  a ruling  as  to  whether,  under  section  14, 

paragraph  A,  of  the  act  of  September  8,  1916,  claims  for  refund  which  have  once  been 
rejected  by  the  commissioner  because  of  the  statute  of  limitation  in  existence  at  that  time 
may  be  reopened.  The  portion  of  section  4 referred  to  is  in  the  following  words: 

Provided,  That  upon  the  examination  of  any  return  of  income  made  pursuant  to  this 
title,  the  act  of  August  5,  1909,  * * * ^nd  the  act  of  October  3 1913,  * * * 

it  shall  appear  that  amounts  of  tax  have  been  paid  in  excess  of  those  properly  due,  the 
taxpayer  shall  be  permitted  to  present  a claim  for  refund  thereof  notwithstanding  the  pro- 
visions of  section  3228. 

This  office  is  of  the  opinion  that  claims  can  now  be  made  for  refund  under  that 

2491  provision.  Claims  rejected  can  also  be  reopened  if  the  question  involves  an  exam- 
ination of  the  return.  The  power  does  not  extend  to  other  claims  whose  ad- 
justment does  not  necessitate  an  examination  of  the  return.  (T.  D.  2396,  Nov.  1,  1916.) 

2492  Claims  for  Refund  on  Account  of  Taxes  Paid  Under  the  Act  of  Oct.  3,  1913,  on 
Stock  Dividends. — In  order  to  complete  claims  for  the  refunding  of  Income  tax 

collected  under  the  Act  of  October  3,  1913,  on  stock  dividends;  that  is,  claims  based  upon 
the  decision  of  the  Supreme  Court  in  the  case  of  Towne  vs.  Eisner  ^2738],  the  following 
evidence  is  required. 

An  affidavit  showing: 

1.  The  name  of  the  corporation  which  declared  and  paid  the  stock  dividend. 

2.  The  date  of  declaration  of  the  stock  dividend  and  date  of  receipt  by  claimant, 

3.  In  which  year’s  return  of  annual  net  income  did  the  claimant  include  this 
stock  dividend? 

4.  Under  what  Item  on  the  return  was  the  value  of  the  stock  dividend  included, 
and  what  was  the  valuation  placed  upon  the  dividend  in  the  return? 

5.  Has  the  stock  thus  received  and  returned  as  a dividend  been  sold  by  the  claim- 
ant, and  if  so,  what  was  the  date  of  sale;  how  much  did  claimant  receive  from  the 
sale;  and  what  part  of  the  total  amount  received  from  the  sale  was  included  by  the 
claimant  in  its  return  of  annual  net  income  for  the  year  in  which  the  sale  occurred? 

6.  Did  the  dividend  consist  of  stock  of  the  corporation  distributing  the  dividend 
to  claimant,  or  did  It  consist  of  stock  acquired  by  the  distributor  in  another  corporation  ? 


INC. 


253  TAX 


ADMINISTRATIVE  PROVISIONS. 


Note. — A stock  dividend  is  a distribution  by  a corporation  to  its  stockholders 

2493  of  capital  stock  of  the  distributing  corporation.  A distribution  of  capital 
stock  other  than  that  of  the  distributing  corporation  is  not  a stock  dividend  but 
a dividend  in  property. 

2494  The  receipt  on  Form  No.  1 should  also  be  filed  with  the  claim. 

In  giving  publicity  to  this  requirement  please  inform  taxpayers  that  there  is  no 

2495  possible  advantage  in  the  employm.ent  of  special  attorneys  for  the  prosecution  of 
claims.  Preparations  are  being  made  for  the  prompt  handling  of  these  cases  and 

it  is  believed  that  they  can  be  disposed  of  with  minimum  delay  and  inconvenience  to  the 
taxpayer.  Claims  filed  directly  by  the  claimants  will  receive  in  every  respect  as  careful 
and  expeditious  consideration  as  those  filed  through  special  attorneys.  (IT-Cls.  Mim. 
1795,  Feb.  26,  1918.) 

2496  Refund  of  Taxes  Paid  on  Account  of  Stock  Dividends  Under  Revenue  Acts  of 
1916  and  1917,  in  Event  such  Taxes  are  Hereafter  Held  to  Have  Been  Erroneously 

Assessed. — Receipt  is  acknowledged  of  your  letter  of  October  28,  1918,  in  which  * * * 
you  ask  to  be  advised  whether  persons  who  w'ish  to  take  advantage  of  a possible  decision 
that  the  taxing  of  stock  dividends  as  income  is  unconstitutional,  would  be  required  to  begin 
suit  wdthin  two  years  after  the  payment  of  the  tax  in  order  to  prevent  their  right  to  recover} 
being  outlawed,  in  accordance  with  the  provisions  of  Sec.  3227  Revised  Statutes  [^2614.]. 
^In  reply,  you  are  advised  that  Sec.  14  (a)  [^2488]  of  the  Act  of  September  8,  1916,  pro- 
vides in  part  as  follows:  “Upon  the  examination  of  any  return  of  income  made  pursuant 
to  this  title,  the  Act  of  August  5,  1909 — and  the  Act  of  October  3,  1913 — if  it  shall  appear 
that  amounts  of  tax  have  been  paid  in  excess  of  those  properly  due,  the  taxpayer  shall 
be  permitted  to  present  a claim  for  refund  thereof,  notwithstanding  the  provisions  of 
Sec.  3228  [^2615]  Revised  Statutes.”  ^In  accordance  with  that  portion  of  the  Section 
above  quoted,  it  is  held  that  it  is  not  necessary  for  an  individual  to  institute  suit  or  file 
a claim  within  two  years  after  the  payment  of  income  tax,  in  order  to  obtain  a refund 
of  taxes  which,  by  a later  court  decision  or  ruling  of  the  Department,  are  held  to  have  been 
erroneously  assessed.  (Letter  to  Herbert  J.  Lyall,  New  York,  N.  Y.,  signed  by  Deputy 
Commissioner  L.  F.  Speer,  and  dated  Nov.  2,  1918.) 

Lower  Court  Decision  on  Stock  Dividends  Under  the  Act  of  September  8,  1916,  ^815. 

2497  Law  ^436.  Taxes  Erroneously  Assessed  or  Collected,  Penalties  Collected  Without 
Authority,  and  Excessive  Taxes  May  be  Remitted  or  Refunded  by  the  Commissioner 

— “Sec.  1316.  (a)  That  section  3220  of  the  Revised  Statutes  is  hereby  amended  to  read 

as  follows: 

‘Sec.  3220.  The  Commissioner  of  Internal  Revenue,  subject  to  regulations  prescribed 
by  the  Secretary  of  the  Treasury,  is  authorized  to  remit,  refund,  and  pay  back  all  taxes 
erroneously  or  illegally  assessed  or  collected,  all  penalties  collected  without  authority, 
and  all  taxes  that  appear  to  be  unjustly  assessed  or  excessive  in  amount,  or  in  any  m.anner 
wrongfully  collected;  also  to  repay  to  any  collector  or  deputy  collector  the  full  amount 
of  such  sums  of  money  as  may  be  recovered  against  him  in  any  court,  for  any  internal 
revenue  taxes  collected  by  him,  with  the  cost  and  expenses  of  suit  [^2521];  also  all  damages 
and  costs  recovered  against  any  assessor,  assistant  assessor,  collector,  deputy  collector, 
agent,  or  inspector,  in  any  suit  brought  against  him  by  reason  of  anything  done  in  the  due 
performance  of  his  official  duty,  and  shall  make  report  to  Congress  at  the  beginning  of 
each  regular  session  of  Congress  of  all  transactions  under  this  section’.”  [Effective  as 
amended  on  day  after  “the  passage”  of  the  Revenue  Act  of  1918,  ^2823.  See  ^2603.] 

2498  Abatement  of  Second  Assessments  and  Refund  of  Taxes  Collected  under  Second 
Assessments. — [Comment. — The  following,  formerly  incorporated  in  Sec.  3220 

Revised  Statutes,  ^2497,  has  been  eliminated: 

Provided^  That  where  a second  assessment  is  made  in  case  of  a list,  statement,  or  return 
which  in  the  opinion  of  the  collector  or  deputy  collector  was  false  or  fraudulent,  or  contained 
any  understatement  or  undervaluation,  such  assessment  shall  not  be  remitted,  nor  shall 
taxes  collected  under  such  assessment  be  refunded,  or  paid  back,  unless  it  is  proved  that 
said  list,  statement,  or  return  was  not  false  or  fraudulent,  and  did  not  contain  any  under- 
statement or  undervaluation.” 

A companion  change  has  been  made  in  Sec.  3225  Revised  Statutes,  ^2590,  which  governs 
directly  the  remitting  of  second  assessments,  the  refund  of  taxes  collected  on  such  assess- 
ments, and  the  recovery  by  suit  of  taxes  so  paid.] 


INC. 


254  TAX 


ADMINISTRATIVE  PROVISIONS. 


2499  Form  47.  Preparation  of  Claims  for  the  Abatement  of  Taxes  and  Penalties  Alleged 
to  Have  Been  Erroneously  or  Illegally  Assessed  or  to  be  Abatable  Under  Remedial 

Acts. — Claims  for  the  abatement  of  taxes  or  penalties  erroneously  or  illegally  assessed 
or  which  are  abatable  under  remedial  acts,  etc.,  must  be  m.ade  out  upon  Form  47,  and  must 
be  sustained  by  the  affidavits  of  the  parties  against  whom  the  taxes  were  assessed,  or 
of  other  parties  cognizant  of  the  facts,  and  must  be  accom.panied  by  affidavits  of  the  deputy 
collectors  of  the  divisions  in  which  the  claims  arise. 

But  if  the  deputy  collector  has  reason  to  doubt  the  correctness  of  the  statements 

2500  m.ade  by  a claimant  he  should  modify  his  affidavit  accordingly,  a space  being  left  for 
that  purpose  at  the  close  of  the  affidavit.  If  he  has  not  investigated  all  the  facts  he 

should  state  in  the  blank  space  left  in  the  body  of  the  affidavit  for  that  purpose  what 
facts  he  has  not  investigated. 

If  there  are  any  objections  to  a claim,  the  collector  should  be  careful  to  state  them 

2501  fully  in  a certificate  to  be  attached  to  and  m.ade  part  of  the  claim..  In  some  cases, 
wffiere  the  collector  has  certified  to  the  correctness  of  claim.s,  the  deputy  collector 

makes  exceptions  to  the  facts  as  stated  by  the  claim.ants.  Unless  the  collector  m.akes  a 
special  explanation  in  every  such  case,  the  claim  will  be  returned  for  such  explanation. 

The  claim  should  be  still  further  supported  by  a certificate  of  the  collector  show- 

2502  ing  the  list,  page,  and  line  of  all  assessments  therein  referred  to,  not  only  of  the 
assessm.ent  of  the  tax  for  the  abatement  of  which  the  claim  is  filed,  but  also  of 

each  and  every  other  assessment  m.entioned  in  the  claim,.  Even  where  only  a portion 
of  a tax  is  claim.ed  as  erroneous,  the  collector  should  be  careful  to  certify  the  full  amount 
assessed. 

When  a tax  has  been  assessed  and  turned  over  to  the  collector,  the  presumption 

2503  is  that  the  assessm.ent  is  correct.  The  burden  of  proof  in  rebutting  that  presum.p- 
tion,  and  showing  that  it  was  improperly  or  illegally  assessed  or  that  relief  should 

be  given  under  a rem.edial  statute,  rests  upon  the  applicant  for  abatem.ent.  The  affidavits 
must,  therefore,  contain  full  and  explicit  statements  of  all  the  m.aterial  facts  relating  to  the 
claims  in  support  of  which  they  are  offered,  and  which  are  essential  to  their  proper  con- 
sideration. Nothing  should  be  left  to  mere  inference,  but  all  the  facts  relied  upon  should 
appear  on  the  papers  them.selves.  It  is  only  the  correctness  of  the  statement  of  facts 
to  which  the  deputy  collector  certifies,  not  the  legality  of  the  claim.  The  legality  of 
the  claim,  is  to  be  determ.ined  by  the  Com.m.issioner  of  Internal  Revenue  upon  the  facts 
presented  and  proved  by  the  affidavits. 

When  a case  is  compromised,  in  which  an  assessment  Is  Involved,  the  am.ountpald 

2504  as  tax  should  be  credited  to  the  list.  The  amount,  if  any,  remaining  outstanding, 
should  be  claim.ed  for  abatement  on  Form  47,  if  the  terms  of  the  com.oromise  so 

required.  (Art.  258,  1[734-739,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2505  Claims  on  Form  47  for  abatement  of  errors  in  assessment  made  In  the  collector’s 
office,  which  errors  are  not  corrected  by  the  filing  of  Form  488,  should  be  executed 

by  the  collector,  but  briefed  in  the  name  of  the  taxpayer  against  whom  the  assessment 
was  made.  [Read  at  ^[2558]. 

When  claims  for  the  abatement  of  taxes,  either  as  uncollectible  or  erroneous,  are 

2506  allowed  in  the  office  of  the  Commissioner  of  Internal  Revenue,  schedule  Form  7220 
for  abatement  is  drawn  for  the  aggregate  of  so  much  as  is  abated  upon  each  claim 

named  in  the  schedule.  The  schedule  Is  sent  directly  to  the  collector  of  internal  revenue 
to  whom  the  taxes  are  charged,  and  is  his  authority  for  taking  credit  on  Form  51  B and 
his  quarterly  account.  Form  79,  for  taxes  abated.  No  credit  for  abatements  shall  be  taken 
except  upon  schedule  Form  7220  from  the  Commissioner  of  Internal  Revenue.  Orders  for 
abatement  are  sent  to  the  Auditor  for  the  Treasury  Department.  [Read  at  ^[2558.]  (Art. 
259,  1f740-741,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2507  If  a collector  should  discover  from  the  schedule  of  abated  taxes  that  a mistake  has  oc- 
curred, either  in  having  abated  a larger  amount  than  that  claimed,  or  in  abating 

a tax  which  has  been  previously  abated,  he  should  immediately  notify  the  commissioner 
of  the  fact,  so  that  the  order  may  be  recalled,  and  the  error  be  corrected  by  the  issuing 
of  a new  one  in  its  place.  In  such  a case  no  credit, /or  any  amount  whatever^  should  be  taken 
upon  Form  51  B,  or  upon  the  quarterly  account  until  the  order  of  abatement  and  schedule 
have  been  corrected.  [Read  at  ^2558.]  (Art.  260,  1[742,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2508  Filing  of  a Claim  for  Abatement  Does  not  Operate  as  a Delay  of  Collection. — 
The  filing  of  a claim  for  the  abatement  of  a tax  alleged  to  have  been  erroneously 

assessed  does  not  necessarily  operate  as  a suspension  of  the  collection  of  the  tax,  or  make 
it  any  less^  the  duty  of  the  collector  to  exercise  due  diligence  to  prevent  the  collection  of 
the  tax  being  jeopardized.  He  should,  if  necessary,  collect  the  tax  and  leave  the  taxpayer 
to  his  remedy  by  claim  on  Form  46.  (Art.  261,  ^[743,  Reg.  33,  Rev.,  Jan.  2,  1918.) 


INC. 


255  TAX 


ADMINISTRATIVE  PROVISIONS. 


2509  Penalty  of  5 Per  Cent  and  Interest  at  the  Rate  of  1 Per  Cent  or  of  i % a Month, 
Section  3184,  Revised  Statutes. — Where  it  is  not  otherwise  provided  the  collector 

shall  in  person  or  by  deputy,  within  10  days  after  receiving  any  list  of  taxes  from  the 
Commissioner  of  Internal  Revenue,  give  notice  to  each  person  liable  to  pay  any  taxes 
stated  therein,  to  be  left  at  his  dwelling  or  usual  place  of  business,  or  to  be  sent  by  mail, 
stating  the  amount  of  such  taxes  and  demanding  payment  thereof.  If  such  person  does 
not  pay  the  taxes  within  10  days  after  the  service  or  the  sending  by  mail  of  such  notice 
it  shall  be  the  duty  of  the  collector  or  his  deputy  to  collect  the  said  taxes,  with  a penalty 
of  5 per  cent,  additional  upon  the  amount  of  taxes  and  interest  at  the  rate  of  1 per  centum 
a month.  (Art.  262,  ^[744,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2510  When  an  assessment  is  made  for  a tax  or  penalty  and  demand  made  for  payment, 
if  a claim  for  abatement  (From  47)  is  filed  within  10  days  after  such  demand  and 

accepted  by  the  collector,  the  amount  of  the  5 per  cent  penalty  on  the  tax  claimed  will 
wait  on  the  determination  of  the  claim.  Upon  receipt  of  the  notice  of  rejection  of  the 
claim  (or  so  much  thereof  as  shall  not  be  allowed)  the  collector  should  immediately  notify 
the  party  assessed  and  demand  the  payment  of  the  tax;  if  the  tax  is  not  then  paid  within 
10  days  after  mailing  of  the  notice  to  the  claimant  by  the  collector  of  the  rejection  of  the 
claim,  the  5 per  cent  penalty  accrues  on  the  amount  not  allowed.  If  entire  amount 
of  assessment  is  not  demanded  in  claim  for  abatement  and  balance  of  tax  is  not  paid 
within  the  required  10  days,  the  5 per  cent  penalty  accrues  on  the  balance  not  claimed. 
Interest  at  1 per  cent  per  month  continues  to  run  and  should  be  collected  with  the  tax 
at  the  time  of  payment  for  the  full  num.ber  of  calendar  months  which  intervene  between 
the  date  of  the  expiration  of  the  first  10  days’  notice  and  the  date  of  the  payment  of  the 
tax,  notwithstanding  the  fact  that  a claim  for  abatement  has  been  filed.  [Interest  runs  at 
3^  of  1 per  cent  only,  as  to  any  amount  which  is  the  subject  of  a bona  fide  claim  for  abate- 
ment, 112398.]  (Art.  263,  1f745,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

25 1 1 Duplicate  Charges. — Taxes  erroneously  or  illegally  assessed  are  by  the  Commissioner 
of  Internal  Revenue  abated  to  the  taxpayer,  while  taxes  uncollectible  are  simply 
abated  by  the  commissioner  to  the  collector  against  whom  they  are  charged:  but  amounts 
which  by  error  or  otherwise  have  been  twice  charged  to  a collector,  are  held  by  the 
accounting  officers  to  be  matters  of  account,  and  not  subjects  for  abatement. 

The  collectors  shall  use  Form  488  to  adjust  the  errors  in  income-tax  matters 

2512  held  to  be  matters  of  account  and  not  subjects  for  abatement,  and  forward  the 
completed  form  to  the  Commissioner  of  Internal  Revenue,  marked  “Income  Tax 

Division.”  [Read  at  1[2558.] 

See  Regulations  No.  2,  Article  41,  pages  47  and  48,  for  further  information  to 

2513  collectors  as  to  entries  to  be  made  in  records  and  accounts.  [Read  at  1[2558.] 
(Art.  264,  11746-748,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2514  Form  46. — Preparation  of  Claims  for  the  Refunding  of  Taxes  and  Penalties 
Claimed  to  have  Been  Erroneously  or  Illegally  Collected,  or  Refundable  Under 

Remedial  Statutes. — Claims  for  the  refunding  of  assessed  taxes  and  penalties  must  be 
made  out  upon  Form  46.  In  this  case,  as  in  that  of  claims  for  abatement  upon  Form  47, 
the  burden  of  proof  rests  upon  the  claimant.  All  the  facts  relied  upon  in  support  of  the 
claim  should  be  clearly  set  forth  under  oath.  The  claim  should  be  still  further  supported 
by  an  affidavit  of  the  deputy  collector  of  the  proper  division,  and  by  the  certificate  of  the 
collector,  showing  the  list,  page  and  line  upon  which  the  assessment  appears,  the  amount 
of  the  tax,  and  the  date  of  payment  thereof. 

Collectors  and  deputy  collectors  are  cautioned  that  these  certificates  and  affidavits 

2515  should  not  be  made  in  a merely  perfunctory  manner.  Claims  have  been  received  at 
the  office  of  the  Commissioner  of  Internal  Revenue  wherein  the  statements  of  the 

claimant  have  been  certified  by  the  collector  and  deputy  collector  as  “in  all  respects  just  and 
iruef^  whereas  a slight  examination  of  the  records  of  their  own  offices  would  have  disclosed 
an  entirely  different  state  of  facts.  (Art.  265,  1[749-750,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

A claim  for  refunding  should  be  made  in  the  name  of  the  party  assessed,  if  living; 
251  6 if  he  is  dead,  the  claim  should  be  made  in  the  name  of  the  executor  or  administrator. 

Certified  copies  of  the  letters  of  administration  or  letters  testamentary,  or  other 
similar  evidence,  should  be  annexed  to  the  claim  to  show  that  the  claimant  is  adminis- 
trator, etc. 

The  affidavit  may  be  made  by  an  agent  of  the  party  assessed;  but  in  such  a case, 
2517  a power  of  attorney  must  accompany  the  claim.  (Art.  266,  11751-752,  Reg.  33, 
Rev.,  Jan.  2,  1918.) 


I’^C. 


256 


TAX 


ADMINISTRATIVE  PROVISIONS. 


251  8 Claims  for  Refund  of  Excess  Amounts  Withheld  at  the  Source. — When,  however, 
claims  for  exem.ption  * * * as  above  described  [i.  e.,  made  to  the  source  by  the 

taxpayer]  are  not  filed  within  the  prescribed  time  the  tax  collected  in  excess  can  be 
remitted  only  on  presentation  of  a claim  for  refund  under  the  provisions  of  Section  3220, 
Revised  Statutes  [paragraph  2497]  said  claims  to  be  made  either  by  the  withholding  agent 
against  w'hom  the  assessm'ent  was  made,  or  by  the  person  on  account  of  whom  such  taxes 
were  withheld. 

Claim.s  for  abatement  of  taxes  erroneously  assessed,  or  which  are  excessive  in 

2519  am.ount,  m.ay,  prior  to  collection  thereof,  be  filed  under  the  provisions  of  said 
Section  3220,  Revised  Statutes,  either  by  the  withholding  agent  against  whom 

the  assessment  was  m.ade,  or  by  the  persons  on  account  of  whom  such  taxes  were  withheld. 
(Art.  33,  Reg.  33,  Jan.  5,  1914.) 

2520  W hen  it  is  found  that  a withholding  agent  has  failed  to  withhold  tax  and  make 
return,  field  officers  will  at  once  procure  the  return  required  by  law  and  regulations. 

The  delinquent  return  should  be  accom.panied  by  a claim,  executed  on  Form  47,  for  the 
abatem.ent  of  such  item.s  of  tax  as  can  be  shown  to  have  been  paid  by  the  individual  tax- 
payers. The  delinquent  withholding  return  will  then  receive  consideration  in  connection 
with  the  personal  returns  made  or  to  be  made  by  the  individuals  concerned.  (Mim.  1265, 
Jan.  23,  1915.)  [In  connection  with  the  above  paragraph  read  1[734.] 

2521  Claims  for  Sums  Recovered  by  Suit. — Claims  for  sums  of  money  recovered  by 
suit  for  any  of  the  causes,  and  against  any  of  the  officers,  enumerated  in  section 

3220,  Revised  Statutes,  should  be  made  upon  Form  46.  The  claimant  should  state  the 
grounds  of  his  claim  under  oath,  giving  the  names  of  all  the  parties  to  the  suit,  the  cause 
of  action,  date  of  its  commencement,  the  date  of  the  judgment,  court  in  which  it  was 
recovered,  and  its  amount.  To  this  affidavit  there  should  be  annexed  a duly  certified 
copy  of  the  record  of  the  court  in  the  case,  copy  of  the  final  judgment,  certificate  of  probable 
cause,  and  itemized  bill  of  costs  paid  receipted  by  the  clerk  or  other  proper  officer  of  the 
court.  (Art.  274,  ^[772,  Reg.  33,  R'ev.,  Jan.  2,  1918.) 

2522  Payment  of  Claims  Allowed. — Warrants  in  payment  of  claims  allowed 
will  be  drawn  in  the  names  of  the  parties  entitled  to  the  money,  and  shall,  unless 

otherwise  directed,  be  sent  by  the  Treasurer  of  the  United  States  directly  to  the  proper 
parties  or  their  duly  authorized  attorneys  or  agents.  But  if  the  claimants  are  indebted 
to  the  United  States  for  taxes,  they  must  be  paid  before  the  warrants  are  delivered.  (Art. 
267,  1[753,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2523  Deductions  of  Amounts  Due  by  Claimants,  etc. — Attention  is  called  to  the  following 
act,  approved  March  3,  1875  (18  Stat.  L.,  481),  concerning — 

2524  tV  enacted  by  the  Senate  and  House  of  Representatives  of  the  United  States  of 
America  in  Congress  assembled^  That  when  any  final  judgment  recovered  against 

the  United  States  or  other  claim,  duly  allowed,  by  legal  authority,  shall  be  presen'ted  to  the 
Secretary  of  the  Treasury  for  payment,  and  the  plaintiff  or  claimant  therein  shall  be 
indebted  to  the  United  States  in  any  manner,  whether  as  principal  or  surety,  it  shall  be  the 
duty  of  the  Secretary  to  withhold  payment  of  an  amount  of  such  judgment  or  claim  equal 
to  the  debt  thus  due  to  the  United  States;  and  if  such  plaintiff  or  claimant  assents  to  such 
set-off,  and  discharges  his  judgment  or  an  amount  thereof  equal  to  said  debt  or  claim,  the 
Secretary  shall  execute  a discharge  of  the  debt  due  from  the  plaintiff  to  the  United  States. 
But  if  such  plaintiff  denies  his  indebtedness  to  the  United  States,  or  refuses  to  consent 
to  the  set-off,  then  the  Secretary  shall  withhold  payment  of  such  further  amount  of  such 
judgment,  or  claim,  as  in  his  opinion  will  be  sufficient  to  cover  all  legal  charges  and  costs 
in  prosecuting  the  debt  of  the  United  States  to  final  judgment.  And  if  such  debt  is  not 
already  in  suit,  it  shall  be  the  duty  of  the  Secretary  to  cause  legal  proceedings  to  be  im- 
mediately commenced  to  enforcfe  the  same,  and  to  cause  the  same  to  be  prosecuted  to 
final  judgment  with  all  reasonable  dispatch.  And  if  in  such  action  judgment  shall  be 
rendered  against  the  United  States,  or  the  amount  recovered  for  debt  and  costs  shall  be 
less  than  the  amount  so  withheld  as  before  provided,  the  balance  shall  then  be  paid  over 
to  such  plaintiff  by  such  Secretary,  with  six  per  centum  interest  thereon,  for  the  time  it 
has  been  withheld  from  the  plaintiff.”  (Art.  268,  ^754-755,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2525  Instructions  to  Collectors  Relative  to  Refund  Claims. — Section  14  {a)^  act  of 
September  8,  1916,  provides  that  upon  the  examination  of  any  return  of  income 

made  pursuant  to  the  act  of  August  5,  1909,  levying  an  excise  tax,  and  the  acts  of  October 
3,  1913,  September  8,  1916  (and  the  same  act  as  amended  October  3,  1917),  and  the  act 
of  October  3,  1917,  levying  an  income  taXy  “and  for  other  purposes,”  if  it  shall  appear  that 
amounts  of  tax  have  been  paid  in  excess  of  those  properly  due,  the  taxpayer  shall  be  per- 


INC. 


257 


TAX 


ADMINISTRATIVE  PROVISIONS. 


mitted  to  present  a claim  for  refund  thereof  notwithstanding  the  provisions  of  section 
3228  of  the  Revised  Statutes.  (Art.  269,  1[757,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2526  The  lodging  of  an  appeal  [1[25 14]  (claim  for  refund)  made  out  in  due  form  with  the 
proper  collector  of  internal  revenue,  for  the  purpose  of  transmission  to  the  Comrnls- 

sioner  of  Internal  Revenue  in  the  usual  course  of  business  under  the  requirements  of  the 
regulations  of  the  Secretary  of  the  Treasury,  is  in  legal  effect  a presentation  of  the  appeal 
to  the  Commissioner.  (14  Otto,  728;  28  Int.  Rev.  Rec.,  87.)  (Art.  270,  ^758,  Reg.  33, 
Rev.,  Jan.  2,  1918.) 

2527  All  claims  for  the  refunding  of  taxes  should  be  received  by  the  collector  and  for- 
warded to  the  Commissioner  of  Internal  Revenue.  In  no  case  should  the  collector 

refuse  to  forward  a claim  for  the  reason  that  it  was  not  presented  to  him  within  two  years 
after  payment  of  tax.  (Art.  271,  1[759,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2528  The  collector  should  keep  a perfect  record,  in  the  book  furnished  for  the  purpose, 
of  all  claims  presented  to  the  Commissioner,  and  must  certify  as  to  each  claim 

whether  it  has  been  before  presented  or  not.  (Art.  272,  1[760,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2529  If  any  claim  on  form  46  or  47  is  presented  without  the  affidavit  of  the  deputy 
collector,  the  reason  for  the  omission  must  be  given. 

If  in  any  case,  after  a full  investigation,  the  collector  can  not  certify  to  the  facts 

2530  set  forth  in  the  affidavit,  he  should  state  the  reason  for  his  dissent,  and  allow  the 
party  to  corroborate  his  statements  by  such  other  proof  as  he  may  be  able  to 
furnish. 

2531  All  amendments  in  the  statement  of  facts  in  claims  must  be  made  under  oath. 

2532  All  copies  should  be  certified  to  be  true  ones. 

2533  Care  should  be  taken  to  certify,  in  every  instance  where  a previous  claim  has  been 
presented  in  the  same  case,  the  date  of  the  previous  claim. 

When  an  affidavit  is  made  upon  form  46  by  some  other  party  than  the  one  against 

2534  whom  the  tax  was  assessed,  the  name  of  the  party  assessed  should  appear  upon 
the  outside  of  that  form. 

When  a firm  is  the  claimant  the  claim  should  be  in  the  name  of  the  firm;  but  a 

2535  member  of  the  firm  or  authorized  agent  or  attorney  should  swear  to  the  facts  set 
forth,  including  that  of  membership  or  agency,  and  should  subscribe  his  individual 
name.^  The  artificial  person,  to  wit,  the  firm,  can  not  make  oath. 

2536  In  claims  for  abatement  or  refunding  the  collector  will  in  all  cases  insert  in  his 
certificate  the  full  amount  of  the  assessment^  and  not  simply  the  amount  claimed. 
When  the  collector  has  twice  collected  the  tax  upon  the  same  assessment  he  will 

2lBZ7  charge  himself  with  the  duplicate  payment  on  form  58;  and  when  a claim  is  made 
he  will  state  in  his  certificate,  upon  form  46,  that  he  has  so  charged  himself  with  said 
amount,  stating  the  m'onth,  list,  page,  line,  amount,  and  date  of  payment. 

When  a claim  for  refunding  is  made  on  the  ground  of  a duplicate  assessment  and 

2538  payment,  _ the  collector  will  certify  to  the  duplicate  assessment  and  payment  of 
form  46,  giving  the  full  amount  both  of  the  assessment  and  of  the  payment,  and  will 

also  give  the  page,  list,  and  line  in  each  case. 

Many  of  the  rules  for  the  preparation  of  claims  upon  form  47  are  equally  applicable 

2539  to  the  preparation  of  those  upon  form  46.  They  should  be  followed  wherever  they 
are  not  manifestly  inapplicable.  (Art.  273,  ^761-771,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2540  Special  Instructions  to  Collectors  in  Connection  with  Claims  for  Refund  or  Abate- 
ment of  Income  Tax  [Read  at  ^2558.] — Section  3218,  Revised  Statutes. — Every 

collector  shall  be  charged  with  the  whole  amount  of  taxes,  whether  contained 
in  lists  transmitted  to  him  by  the  Commissioner  of  Internal  Revenue  or  by  other  collectors, 
or  delivered  to  him  by  his  predecessor  in  office,  and  with  the  additions  thereto,  ♦ * ♦ ^ 
and  with  all  moneys  collected  for  penalties,  forfeitures,  fees,  or  costs;  and  he  shall  be 
credited  with  all  payments  into  the  Treasury  made  as  provided  by  law,  * * ♦ ^ 
and  with  the  amount  of  taxes  contained  in  the  lists  transmitted,  in  the  manner  heretofore 
provided,  to  other  collectors,  and  by  them  receipted  as  aforesaid;  also  with  the  amount 
of  the  taxes  of  such  persons  as  may  have  absconded  or  become  insolvent  prior  to  the  day 
when  the  tax  ought,  according  to  the  provisions  of  law,  to  have  been  collected,  and  with 
all  uncollected  taxes  transferred  by  him,  or  by  his  deputy  acting  as  collector,  to  his  successor 
in  office:  Provided^  That  It  shall  be  proved  to  the  satisfaction  of  the  Commissioner  of 
Internal  Revenue,  who  shall  certify  the  facts  to  the  (First)  Comptroller  of  the  Treasury, 
that  due  diligence  was  used  by  the  collector.  And  each  collector  shall  also  be  credited  with 
the  amount  of  all  property  purchased  by  him  for  the  use  of  the  United  States,  provided 
he  faithfully  account  for  and  pay  over  the  proceeds  thereof  upon  a resale  of  the  same, 
as  required  by  law.  (Art.  247,  ^715,  Reg.  33,  Rev.,  Jan.  2,  1918.) 


INC. 


258  TAX 


ADMINISTRATIVE  PROVISIONS. 


2541  Credit  to  Collectors  for  Taxes  Charges  Against  Them  Which  Are  Uncollectible. — 
[Read  at  lf2558.]  Collectors  are  entitled  to  credit  for  taxes  assessed  against  parties 

who  may  have  absconded  or  become  insolvent  prior  to  the  day  when  the  tax  ought,  accord- 
ing to  the  provisions  of  the  law,  to  have  been  collected:  Providedy  That  it  shall  be  proved 
to  the  satisfaction  of  the  Commissioner  of  Internal  Revenue,  who  shall  certify  the  fact  to 
the  Auditor  for  the  Treasury  Department,  that  due  diligence  was  used  by  the  collector. 

It  should  be  borrle  in  mind  that,  though  credits  allowed  on  account  of  insolvency 

2542  or  absconding  release  the  collector  from  the  obligation  created  by  his  receipt  for 
the  amount  credited,  the  obligation  to  pay  still  remains  upon  the  parties  assessed. 

Collectors ’should  therefore  keep  a record  (No.  23)  of  all  taxes  thus  credited  and  of  the 
persons  from  whom  they  are  due,  and  should  enforce  payment  whenever  it  is  in  their 
power  to  do  so. 

If  a tax  reported  as  uncollectible  on  account  of  the  insolvency  or  absconding  of 

2543  the  party  owing  it  is  paid  after  credit  has  been  given  for  it,  it  should  be  returned 
upon  Form  58.  (Art.  248,  ^716-718,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2544  Preparation  of  Claims  for  Credit  for  Taxes  and  Assessed  Penalties  Alleged  to  be 
Uncollectible — Form  53. — (Read  at  ^2558.]  When  a tax  is  found  to  be  uncollectible 

the  collector  or  deputy  collector  who  made  the  demand  for  payment  and  is  conversant 
with  the  facts  should  prepare  a claim  on  Form  53,  showing  the  name  and  address  of  the 
party  assessed,  the  article  or  occupation  for  and  on  account  of  which  the  assessment  was 
made,  the  list,  page,  and  line  on  which  assessed,  the  amount  claimed,  the  date  of  first 
demand,  and  the  date  when  the  tax  was  found  to  be  uncollectible,  and  the  cause  of  inability 
to  collect.  The  amount  or  amounts  claimed  should  be  entered  on  the  Form  53  under  the 
respective  column  in  which  it  or  they  are  charged  to  the  collector  on  Form  23.  One  or 
more  claims,  covering  taxes  of  the  same  nature,  may  be  entered  upon  one  Form  53,  and  in 
cases  where  a tax  and  a penalty  are  both  claimed  to  be  uncollectible  but  one  entry  of  the 
name,  address,  etc.,  should  be  made,  but  the  amounts  should  be  entered  in  their  respective 
columns. 

Collectors  are  required  to  make  demand  within  the  time  prescribed  by  law,  and 

2545  either  to  collect  the  taxes  or  prove  them  to  be  uncollectible,  within  six  weeks  after 
the  receipt  of  the  list,  unless  special  reasons  are  furnished,  such  as  lack  of  mail 

facilities,  great  extent  of  territory,  etc.,  showing  why  they  could  not  be  collected  within 
that  time. 

Six  months  are  allowed  from  the  receipt  of  a list  in  which  to  close  it  up,  either 

2546  by  collection  or  by  presenting  claims  for  abatement;  but  when  an  abatement 
of  taxes  alleged  to  be  uncollectible  is  asked,  it  must  be  showm  in  the  vouchers, 

by  dates,  or  otherwise,  that  they  could  not  have  been  collected  at  the  tim.e  they  first  became 
due  and  payable  according  to  law,  not  at  any  time  since.  Where  dates  can  not  be  given, 
it  should  appear  in  each  case  that  they  were  uncollectible  before  distraint  was  or  could  have 
been  made. 

When  it  happens  that  a tax  has  been  paid  for  which  a claim  on  Form  53  has  been 

2547  filed  and  is  pending,  the  collector  should  at  once  notify  the  departm.ent  of  such 
payment. 

When  the  claim.s  have  been  thus  prepared  they  should  be  carefully  sealed  up  and 

2548  mailed  to  the  Commissioner  of  Internal  Revenue,  m.arked  “Income  Tax  Division.” 
Letters  of  transmittal  should  not  be  sent  with  claims  unless  they  contain  necessary 

explanations. 

The  Form  53  should  show  v/hen  the  tax  first  became  due;  whether  the  taxpayer 

2549  had  any  property  liable  to  distraint  at  that  time  or  thereafter;  and  whether  the 
collector  used  due  diligence  at  all  times  to  collect  the  tax. 

It  is  the  duty  of  the  collector  to  use  the  same  diligence  to  collect  a tax  after  it  has 

2550  been  abated  as  uncollectible,  or  as  in  suit,  as  before  abatement.  Such  an  abate- 
ment does  not  impair  the  claim  of  the  Government  against  the  taxpayer.  (Art. 

249,  ^719-725,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2551  Taxes  that  Are  or  Have  Been  in  Litigation.  [Read  at  ^[2558.] — No  suit  will  be 
brought  for  the  recovery  of  unpaid  Internal-revenue  taxes  until  the  collector  of  the 

district  shall  have  submitted  to  the  Commissioner  of  Internal  Revenue  a full  report  of  all 
material  facts  and  circumstances  with  the  case,  and  shall  have  received  from  him  express 
authority  to  report  the  case  to  the  United  States  attorney  for  suit.  (Art.  250,  T[726,  Reg. 
33,  Rev.,  Jan.  2,  1918.) 

2552  Am.ounts  collected  by  distraint  or  otherwise,  subsequent  to  the  institution  of  the 
suit,  should  be  at  once  reported  to  the  United  States  attorney  for  his  guidance  in 

his  further  prosecution  of  the  case  in  court.  (Art.  251,  ^727,  Reg.  33,  Rev.,  Jan.  2,  1918.) 


INC. 


259 


TAX 


ADMINISTRATIVE  PROVISIONS. 


2553  Credit  given  the  collector  for  taxes  abated  as  uncollectible  will  not  affect  a 
suit  pending  for  their  recovery,  nor  will  it  relieve  the  collector  from  the  duty  of 

distraining  any  property  of  the  taxpayer  that  may  be  found  at  any  time  before  judgment. 
(Art.  252,  ^728,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2554  When  a suit  for  the  recovery  of  a tax  is  decided  in  favor  of  the  United  States,  and 
execution  issued  and  returned  nulla  hona,  as  respects  the  whole  or  a part  of  the 

judgment,  the  collector  should  satisfy  himself  by  careful  inquiry,  whether  any  personal 
property  can  be  found  to  satisfy  the  judgment  in  whole  or  in  part,  and  whether  there  is  any 
real  estate  which  can  be  subjected,  by  distraint  or  by  suit  in  equity,  under  section  3207, 
Revised  Statutes  of  the  United  States,  to  sale  in  satisfaction  of  the  judgment;  and  if  he 
should  be  fully  satisfied  that  there  is  no  such  real  or  personal  property,  he  should  there- 
upon present  to  the  Comimissioner  of  Internal  Revenue  a claim,  on  Form  53,  for  the  abate- 
ment of  the  amount  which  has  not  been  and  can  not  be  collected,  if  it  has  not  already 
been  abated,  making  a statement  thereon  of  his  action,  accompanied  by  a certificate  of 
the  clerk  of  the  court  as  to  the  facts  in  the  case.  (Art.  253,  1f729,  Reg.  33,  Rev.,  Jan.  2, 
1918.) 

2555  When  a suit  for  taxes  not  abated  as  uncollectible  is  dismissed  upon  a technical 
defeat  in  the  proceedings,  or  when  an  adverse  verdict  is  rendered  on  some  technical 

ground  not  reaching  the  merits  of  the  case,  and  the  right  to  a new  trial  or  to  an  appeal  has 
lapsed,  and  the  tax  can  not  be  collected  by  distraint  or  by  suit  in  equity  to  subject  real  estate 
to  sale,  the  claim  for  abatement  of  the  taxes  should  be  made  on  Form  53.  (Art.  254,  1f730, 
Reg.  33,  Rev.,  Jan.  2,  1918.) 

2556  Collectors  are  authorized  to  pay  the  clerk  of  the  court  his  legal  fees  for  the  certi- 
ficates required  by  the  regulations  of  this  department  furnished  by  him  relative 

to  litigated  taxes,  and  will  be  credited  in  their  expense  accounts  for  the  amounts  so  paid 
on  filing  therewith  vouchers  covering  the  expenses  thus  incurred.  (See  Regs.  No.  2,  p.  84.) 
(Art.  255,  1[731,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2557  Where  land  is  sold  to  satisfy  assessments  the  amount  realized,  after  deducting 
expenses  of  sale,  should  be  credited  to  the  lists,  and  the  remiainder,  if  uncollectible, 

claimed  on  Form  53.  If  land  is  bid  in  by  the  collector  for  the  United  States,  the  amount 
for  which  the  same  is  purchased,  after  deducting  expenses  of  sale,  should  be  credited  to 
the  assessments  under  the  lim.itations  prescribed  in  Regulations  No.  2,  revised,  and  the 
remainder,  if  uncollectible,  claimed  on  Form  53.  (Art.  256,  ^732,  Reg.  33,  Rev.,  Jan.  2, 
1918.) 

2558  The  following  m.odifications  in  the  procedure  with  regard  to  claims  on  Forms  46, 
47,  53  and  488  are  prescribed. 

1.  Claims  on  Form  46  and  Form  47  will  not  hereafter  be  referred  to  division  deputies 

2559  for  investigation,  and  the  division  deputy’s  certificate  on  page  2 of  the  claims 
need  not  be  executed.  Where  an  investigation  is  necessary  it  will  be  directed  by  the 

Commissioner  to  be  m,ade. 

2.  All  claim.s  on  Form.s  46  and  47  are  to  be  stamped  with  the  date  of  receipt  imme- 

2560  diately  on  presentation  to  the  collector  or  division  deputy,  and  thereafter  are  to  be 
forwarded,  without  further  recording  or  certification,  immediately  to  the  Com- 
missioner. Two  exceptions  to  this  rule  are  to  be  especially  noted. 

(a)  The  certificate  on  page  2 of  the  claim  is  to  be  executed  in  the  case  of  claims 

2561  for  taxes  paid  by  special  tax  stam.p,  since  there  is  no  data  in  the  Commissioner’s 
office  which  will  permit  the  verification  of  these  claims  without  the  collector’s  certi- 
ficate. 

(b)  When  a claim,  is  filed  for  abatement  such  notation  is  to  be  made  on  the  col- 

2562  lector’s  assessm.ent  list  on  Form  23  as  vdll  the  issuance  of  collection  notices  until 
after  the  abatement  claim  has  been  acted  upon,  unless,  of  course,  the  collector 

deems  the  interests  of  the  Government  insufficiently  protected  to  justify  suspension  of 
the  collection. 

3.  The  use  of  Record  22  is  to  be  abandoned.  Record  23  will  continue  to  be  used, 

2563  as  at  present. 

4.  Form,  7213,  notification  of  allowance  of  refunding  claim,  will  no  longer  be  for- 

2564  warded  to  collectors. 

5.  Hereafter,  where  an  abatement  claim  is  acted  upon,  the  collector  will  receive 

2565  an  original  letter  addressed  to  the  claimant  and  a carbon  c^y  for  the  collector’s 
files.  The  original  is  to  be  mailed  the  claimant  immediately  with  notice  and  demand 

for  the  payment  of  any  tax  shown  by  the  letter  and  the  assessment  list  to  be  due. 

6.  Where  the  claim  is  allowed  in  full,  credit  for  the  abated  tax  is  not  to  be  taken 

2566  by  the  collector  until  the  receipt  of  schedule  on  Form  3220.  This  schedule  will 
be  prepared  and  mailed  to  the  collector  monthly,  as  heretofore. 


INC. 


260 


T,A.X 


ADMINISTRATIVE  PROVISIONS. 


2567  7.  Because  of  the  distribution  of  the  claims  work  to  the  various  divisions  of  the 
Bureau,  it  is  no  longer  practicable  to  consider  a claim  on  Form.  46  or  47,  53  or 

488,  covering  taxes  assessed  upon  m.ore  than  one  of  the  lists  of  the  various  classifications. 
In  presenting  their  own  claim.s  on  Form.s  53  and  488,  therefore,  collectors  will  hereafter 
group  in  their  claim.s  the  item.s  which  are  upon  the  list,  or  lists,  of  a given  class,  and  if  a 
claimant  makes  claim,  on  Form.  46  or  47  for  the  rem.ission  or  refund  of  taxes  assessed  upon 
m.ore  than  one  kind  qf  list,  the  collector  will  assist  the  claimant  in  formulating  new  claims 
correctly  prepared. 

2568  Regulations  2,  14  and  33  (.4rt.  247-273)  are  modified  accordingly. 

The  purposes  of  the  m.odification  of  the  form.er  procedure  with  regard  to  claims 

2569  are  to  elim.inate  a duplication  of  detail  in  the  collector’s  and  the  Comm.issioner’s 
office,  and  the  accomm.odation  of  the  taxpayer  by  making  it  possible  for  him  to  secure  a 
m.uch  m.ore  prom.pt  consideration  of  his  claims  than  has  been  possible  heretofore.  (T.  D. 
2654,  February  19,  1918.) 

2570  Authorizing  Collectors  in  Certain  Cases  of  Erroneous  Assessment  to  Present 
Blanket  claims  Monthly  on  Form  No.  47. — Hereafter,  collectors  will  present  once 

a month  a blanket  claim  on  Form  47  for  the  abatement  of  taxes  coming  within  the  following 
classes  of  taxes  erroneously  assessed: 

1.  Duplicate  assessm.ents. 

2.  Cases  where  specific  exemption  has  not  been  taken  on  the  taxpayer’s  return  and 

assessment  has  accordingly  been  excessive  to  the  extent  of  the  tax  assessed 
because  of  failure  to  take  exemption. 

3.  Cases  of  excessive  assessm.ent  caused  by  mathematically  erroneous  calculations  of 

tax  by  the  taxpayer  upon  his  return. 

4.  50%  additional  taxes  where  a tentative  return  has  been  filed  within  the  time  required 

by  law,  but  where  the  fact  of  such  filing  has  been  overlooked  in  the  collector’s 
office  and  an  assessm.ent  of  50%  additional  tax  has  accordingly  been  made, 
and  is  unquestionably  erroneous.  In  all  other  cases  of  50%  additional  tax 
assessm.ents,  a claim,  m.ust  be  presented  by  the  taxpayer,  as  at  present. 

In  preparing  these  claim.s,  the  collector  will  paste  upon  the  blank  space  on  Form  47 
257  1 a schedule  showing  the  name  and  address  of  the  taxpayers;  the  m.onth,  page,  and 
line  of  the  assessm.ent  list,  am.ount  assessed,  am.ount  due,  amount  abateable;  the 
nature  of  the  erroneous  assessm.ent,  as  classified  above;  and  a brief  and  clear  statement  of 
the  ground  for  abatement. 

These  claim.s  should  be  forwarded  so  as  to  be  received  in  the  Com.m.issioner’s  office 

2572  by  the  5th  of  the  m.onth,  in  order  that  the  allowance  m.ay  be  scheduled  on  the 
Form  7220  for  the  same  month. 

2573  Where  am.ounts  abateable  have  been  assessed  upon  lists  of  the  different  classes, 

2574  separate  claim.s  must,  of  course,  be  presented,  each  to  cover  the  items  upon  the  list, 
or  lists,  of  a given  class.  (T.  D.  2698,  April  16,  1918.) 

2575  Internal-Revenue  Officers  Forbidden  to  Furnish  Unauthorized  Statements  or 
Certificates  in  Support  of  Claims  for  Remission  of  Taxes  or  Penalties  Under  Inter- 
nal Revenue  Law. — The  attention  of  this  office  has  recently  been  called  to  voluntary 
written  statements  or  certificates  furnished  by  certain  revenue  officers  in  support  of  claims 
pending  in  this  office  for  rem.ission  of  taxes  and  penalties  found  to  have  been  incurred  by 
distillers  or  other  taxpayers. 

All  such  statem.ents  or  certificates  are  not  only  wholly  unauthorized,  but  in  many 

2576  instances  are  m.isleading  and  tend  to  defeat  the  Government’s  claim. 

Revenue  officers  are  therefore  positivelv  prohibited  from  furnishing  statements 

2577  in  cases  pending  before  this  office  unless  called  for  by  this  office  or  required  by 
regulations  to  be  furnished  in  cases  when  originally  presented  to  this  office  through 

the  regular  official  channels. 

In  this  connection  attention  is  called  to  T.  D.  1607  of  March  1,  1910,  forbidding 

2578  revenue  officers  from  preparing  affidavits  for  claimants  in  like  cases.  Any  viola- 
tion of  the  instructions  contained  in  that  decision  or  herein  contained  will  subject 

the  offending  officer  to  dismissal  from  the  service,  and,  where  the  circumstances  justify, 
to  prosecution  under  Section  3169  of  the  Revised  Statutes.  (T.  D.  2443,  Feb.  9,  1917.) 

2579  Suits  to  Restrain  Assessment  or  Collection  of  Taxes.— “No  suit  for  the  purpose 
of  restraining  the  assessment  or  collection  of  any  tax  shall  be  maintained  in  any 

court.”  (Section  3224,  Revised  Statutes.) 

2580  The  appended  decision  of  the  Supreme  Court  of  the  United  States  in  the  case  of 
podge  V.  Osborn,  Commissioner  of  Internal  Revenue,  is  published  for  the  informa- 
tion of  internal-revenue  officers  and  other  concerned.  ('F.  1).  2301,  March  3,  1916.) 


INC.  261 


TAX 


ADMINISTRATIVE  PROVISIONS. 


Decision. 

(February  21,  1916.) 

240  U.  S.  118. 

John  F.  Dodge  and  Horace  E.  Dodge,  Appellants,  v.  William  H.  Osborn,  Commissioner 
of  Internal  Revenue. 

Appeal  from  the  Court  of  Appeals  of  the  District  of  Columbia. 

Mr.  Chief  Justice  White  delivered  the  opinion  of  the  Court. 

2581  The  appellants  filed  their  bill  in  the  Supreme  Court  of  the  District  of  Columbia 
against  the  Commissioner  of  Internal  Revenue  to  enjoin  the  assessment  and  col- 
lection of  the  taxes  imposed  by  the  Incom.e  Tax  section  of  the  Tariff  Act  of  October  3, 
1913  (38  Stat.  166,  181)  and  especially  the  surtaxes  therein  provided  for  on  the  ground 
that  the  statute  was  void  for  repugnancy  to  the  Constitution  of  the  United  States.  The 
case  is  here  on  appeal  from  the  judgment  of  the  court  below  affirming  the  action  of  the 
trial  court  in  sustaining  a m.otlon  to  dismiss  the  complaint  for  want  of  jurisdiction  because 
the  complainants  had  an  adequate  rem.edy  at  law  and  because  of  the  provision  of  section 
3224  Revised  Statute  that  “No  suit  for  the  purpose  of  restraining  the  assessment  or  col- 
lection of  any  tax  shall  be  maintained  in  any  court.” 

We  at  once  put  out  of  viev/  a contention  that  section  3224  [^2579]  is  not  applicable 

2582  to  taxes  imposed  by  the  Income  Tax  Law  since  we  are  clearly  of  the  opinion  that 
It  Is  within  the  contem.plation  of  paragraph  L of  the  act  which  provides: 

[f^l620.]  “That  all  admiinistrative,  special  and  general  provisions  of  law,  includ- 
ing the  laws  in  relation  to  the  assessment,  remission,  collection,  and  refund  of  internal- 
revenue  taxes  not  heretofore  specifically  repealed  and  not  inconsistent  with  the  provisions 
of  this  section,  are  hereby  extended  and  made  applicable  to  all  the  provisions  of  this  section 
and  to  the  tax  herein  imposed.” 

And  for  the  same  reason  we  do  not  further  notice  a contention  as  to  the  inapplica- 

2583  bility  of  sections  3220,  3226  and  3227,  to  which  effect  was  given  by  the  court  below 
requiring  an  appeal  to  the  Commissioner  of  Internal  Revenue  after  payment  of  a tax 

claimed  to  have  been  erroneously  and  illegally  assessed  and  collected  and  upon  his  refusal 
to  return  the  sum  paid  giving  a right  to  sue  for  Its  recovery. 

The  question  for  decision  therefore  Is  v.^hether  the  sections  of  the  Revised  Statutes 

2584  referred  to  are  controlling  as  to  the  case  in  hand.  The  plain  purpose  and  scope 
of  the  sections  are  thus  stated  in  Snyder  v.  Marks,  109  U.  S.  189,  193-194,  a suit 

brought  to  enjoin  the  collection  of  a revenue  tax  on  tobacco: 

“The  inhibition  of  Section  3224  applies  to  all  assessments  of  taxes,  made  under  color 
of  their  offices,  by  internal  revenue  officers  charged  with  general  jurisdiction  of  the  subject 
of  assessing  taxes  against  tobacco  mianufacturers.  The  remedy  of  a suit  to  recover  back 
the  tax  after  it  is  paid  is  provided  by  statute,  and  a suit  to  restrain  its  collection  is  for- 
bidden. The  remedy  so  given  is  exclusive,  and  no  other  remedy  can  be  substituted  for  it. 
Cheatham  v.  United  States,  92  U.  S.  85,  88,  and  again  in  State  Railroad  Tax  Cases,  92 
U.  S.  575,  613,  it  was  said  by  this  court  that  the  system  prescribed  by  the  United  States 
in  regard  to  both  customs  duties  and  internal  revenue  taxes,  of  stringent  measures,  not 
judicial,  to  collect  them,  with  appeals  to  specified  tribunals,  and  suits  to  recover  back 
moneys  illegally  exacted  was  a system  of  corrective  justice  intended  to  be  complete,  and 
enacted  under  the  right  belonging  to  the  government  to  prescribe  the  conditions  on  which 
it  would  subject  itself  to  the  judgment  of  the  courts  in  the  collection  of  its  revenues.  In 
the  exercise  of  that  right  it  declares,  by  Sec.  3224,that  its  officers  shall  not  be  enjoined 
from,  collecting  the  tax  claim.ed  to  have  been  unjustly  assessed,  when  those  officers,  in_ the 
course  of  general  jurisdiction  over  the  subject  matter  in  question  have  made  the  assign- 
ment (assessm.ent)  and  claim  that  it  is  valid.” 

And  this  doctrine  has  been  repeatedly  applied  until  it  is  no  longer  open  to  question 

2585  that  a suit  may  not  be  brought  to  enjoin  the  assessment  or  collection  of  a tax  because 
of  the  alleged  unconstitutionality  of  the  statute  imposing  it,  Sheldon  v.  Platt,  139 

U.  S.  591;  Pittsburgh,  etc.,  Ry.  v.  Board  of  Public  Works,  172  U.  S.  32;  Pacific  Whaling 
Company  v.  United  States,  187  U.  S.  447,  451,  452. 

But  it  is  contended  that  this  doctrine  has  no  application  to  a case  where  wholly 

2586  independent  of  any  claim  of  the  constitutionality  of  the  tax  sought  to  be  enjoined, 
additional  equities  sufficient  to  sustain  jurisdiction  are  alleged,  and  this,  it  is 

asserted,  being  such  a case,  falls  within  the  exception  to  the  general  rule.  But  conceding 
for  argument’s  sake  only  the  legal  prem.ise  upon  which  the  contention  rests,  we  think  the 
conclusion  that  this  case  falls  within  such  exception  Is  wholly  without  merit,  since  after 
an  examination  of  the  complaint  we  are  of  the  opinion  that  no  ground  for  equitable  juris- 
diction is  alleged.  It  is  true  the  complaint  contains  averments  that  unless  the  taxes 
are  enjoined  m.any  suits  by  other  persons  will  be  brought  for  the  recovery  of  the  taxes 
paid  by  them.,  and  also,  that  by  reason  of  Section  3187  Rev.  Stat.  making  the  tax  a lien 
on  plaintiffs’  property  the  assessment  of  the  taxes  would  constitute  a cloud  on  plaintiffs’ 
title.  But  these  allegations  are  wholly  inadequate  under  the  hypothesis  which  we  have 
assumed  solely  for  the  sake  of  the  argument,  to  sustain  jurisdiction,  since  it  is  apparent 


INC. 


262 


TAX 


ADMINISTRATIVE  PROVISIONS. 


on  their  face  they  allege  no  ground  for  equitable  relief  independent  of  the  mere  complaint 
that  the  tax  is  illegal  and  unconstitutional  and  should  not  be  enforced — allegations  which 
if  recognized  as  a basis  for  equitable  jurisdiction  would  take  every  case  where  a tax  wa* 
assailed  because  of  its  unconstitutionality  out  of  the  provisions  of  the  statute  and  thuf 
render  it  nugatory,  while  it  is  obvious  that  the  statute  plainly  forbids  the  enjoining  of  a 
tax  unless  by  some  extraordinary  and  entirely  exceptional  circumstance  its  provisions  are 
not  applicable. 

There  is  a contention  that  the  provisions  requiring  an  appeal  to  the  Commissioner 

2587  of  Internal  Revenue  after  payment  of  the  taxes  and  giving  a right  to  sue  in  case 
of  his  refusal  to  refund  are  wanting  in  due  process  and  therefore  there  is  jurisdic- 
tion. But  we  think  it  suffices  to  state  that  contention  to  demonstrate  its  entire  want 
of  merit. 

2588  Affirmed.  (240  U.  S.  118.— T.  D.  2301,  March  3,  1916.) 

2588  No  Suit  to  Enjoin  Collection  of  Penalties  Shall  be  Maintained  in  Any  Court.— In 

Kohlham.er  vs.  Smietanka,  Collector  (239  Fed.  408),  it  was  held  that  while  Section 
3224  R.  S.  [Paragraph  2579]  which  prohibits  suits  to  enjoin  the  collection  of  internal 
revenue  taxes,  does  not  specifically  include  “penalties”  as  such,  yet  where  penalties  are 
authorized  by  statute  to  be  added  to  the  tax  and  collected  as  a part  of  the  tax,  the  court 
will  hold  that  the  penalty  is  a part  of  the  tax,  the  assessment  and  collection  of  which  arc 
governed  by  Section  3224.  (239  Fed.  408.) 

2580  Law  1[437.  Abatement  of  Second  Assessments,  Refund  of  Taxes  Collected  on 

Such  Assessments,  and  the  Recovery  by  Suit  of  Taxes  so  Paid. — “Sec.  1316.  (b) 

Section  3225  of  the  Revised  Statutes  of  the  United  States  is  hereby  amended  to  read  as 
follows: 

‘Sec.  3225.  When  a second  assessment  is  made  in  case  of  any  list,  statement,  or  return, 
which  in  the  opinion  of  the  collector  or  deputy  collector  was  false  or  fraudulent,  or  con- 
tained any  understatement  or  undervaluation,  such  assessment  shall  not  be  remitted, 
nor  shall  taxes  collected  under  such  assessment  be  refunded,  or  paid  back,  or  recovered 
by  any  suit,  unless  it  is  proved  that  such  list,  statement,  cr  return  was  not  willfully  false 
or  fraudulent  and  did  not  contain  any  willful  understatement  or  undervaluation.’ 
(Effective  as  amended  on  the  day  after  “the  passage”  of  the  Revenue  Act  of  1918,  ^2823. 
(See  ^2603.] 

2581  Law  ^433.  The  Cemmissioner  Authorized  to  Make  Rules  and  Regulations. — 
“Sec.  1309.  That  the  Commissioner,  with  the  approval  of  the  Secretary,  is  hereby 

authorized  to  make  all  needful  rules  and  regulations  for  the  enforcement  of  the  provisions 
of  this  Act.” 

2582  Effective  Date  of  Treasury  Decisions. — Treasury  decisions  promulgating  rulingt 
of  the  Internal  Revenue  Bureau  become  effective  upon  the  date  of  approval  unless 

otherwise  stated  therein.  Cases  previously  adjusted  in  contravention  of  law  as  pro- 
nounced in  such  decisions,  are  subject  to  readjustment  in  accordance  with  the  decision. 
(Art.  38,  ^245,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2583  Burden  of  Proof  as  to  Fraud,  etc.,  in  Suits  to  Recover  Taxes  Collected  Undef 
Second  Assessment  Under  Sec.  3225  Prior  to  Amendment. — [Comment:  Sec. 

3225,  Revised  Statutes,  as  amended  by  the  Revenue  Act  of  1916  read  as  follows: 

“Sec.  3225.  When  a second  assessment  is  made  in  case  of  any  list,  statement,  or  return, 
which  in  the  opinion  of  the  collector  or  deputy  collector  was  false  or  fraudulent,  or  con- 
tained any  understatement  or  undervaluation,  no  tax  collected  under  such  assessment 
shall  be  recovered  by  any  suit  unless  it  is  proved  that  the  said  list,  statement  or  return 
was  not  false  nor  fraudulent  and  did  not  contain  any  understatement  or  undervaluation; 
but  this  section  shall  not  apply  to  statements  or  returns  made  or  to  be  made  in  good  faith 
under  the  laws  of  the  United  States  regarding  annual  depreciation  of  oil  and  gas  wells  and 
mines.” 

T.  D.  2661,  the  Camp  Bird  (Ltd.)  case,  and  the  Northwestern  Mutual  Life  Insurance 
Company  case,  reported  below  at  f 2594  to  ^[2612,  refer  to  Sec.  3225  as  it  was  prior  to  its 
amendment  by  the  Revenue  Act  oif  1916  and  as  it  was  amended  by  such  Act.  In  giving 
consideration  to  Sec.  3225  as  now  again  amended,  ^2590,  the  reader  should  note  ^2603. J 

2584  The  Camp  Bird  (Ltd.)  Case. — The  appended  decision  of  the  United  States  Circuit 
Court  of  Appeals  for  the  Eighth  Circuit,  in  the  case  of  Camp  Bird  (Ltd.)  v.  Frank 

W.  Howbert,  collector  of  internal  revenue,  is  published  for  the  information  of  internal- 
revenue  officers  and  others  concerned.  (T.  D.  2661,  March  5,  1918.) 


INC.  263 


TAX 


ADMINISTRATIVE  PROVISIONS. 


1.  Section  3225,  Revised  Statutes. 

The  plaintiff  having  understated  in  its  original  return  the  amount  for  which  it  was 
subject  to  tax  is  not  entitled  to  recover  any  part  of  a second  assessment  paid,  although 
the  original  return  was  made  in  good  faith  and  without  any  intention  to  escape  lawful 
tax. 

2.  Amendment  to  Section  3225,  Revised  Statutes. 

The  amendment  to  section  3225,  Revised  Statutes  (sec.  14,  act  of  Sept.  8,  1916), 
providing  that  it  shall  not  apply  to  statements  or  returns  made  or  to  be  made  in  good 
faith  regarding  annual  depreciation  of  oil  or  gas  wells  and  mines,  does  not  purport 
to  be  retroactive  in  its  operation. 

3.  Judgment  Affirmed. 

The  judgment  of  the  United  States  District  (T.  D.  2366)  is  affirmed. 

United  States  Circuit  Court  of  Appeals,  Eighth  Circuit. 

(249  Fed.  27) 

Camp  Bird  {Ltd.)^  a corporation^  plaintiff  in  error,  v.  Frank  W.  Howbert,  as  collector  of 
internal  revenue  within  and  for  the  district  of  Colorado,  defendant 
in  error. 

In  error  to  the  District  Court  of  the  United  States  for  the  district  of  Colorado. 

Before^  Carland,  Circuit  Judge,  and  Amidon  and  Mungel,  District  Judges. 
Mungel,  District  Judge,  delivered  the  opinion  of  the  court: 

This  action  was  brought  by  plaintiff  in  error,  hereafter  called  plaintiff,  against 

2595  defendant  in  error,  as  collector  of  internal  revenue  of  the  United  States  for  the 
district  of  Colorado,  hereafter  called  defendant.  The  object  of  the  action  was  to 

recover  sums  of  money  that  plaintiff  had  paid  to  defendant  as  an  internal-revenue  tax. 
A jury  was  waived  and  the  trial  court  entered  judgment  upon  special  findings  of  facts, 
dismissing  plaintiff’s  action. 

Briefly  stated,  the  court  found  that  the  plaintiff  was  the  owner  of  valuable  and  pro- 

2596  ductive  mining  property  in  Colorado,  after  the  year  1902,  and  that  it  made  a return 
for  each  of  the  years  1909,  1910  and  1911  to  the  collector  of  internal  revenue,  pur- 
porting to  set  forth  its  income  for  each  of  those  years,  under  the  provisions  of  the  act  of 
Congress  approved  August  5,  1909  (36  Stat.  1 12),  relating  to  an  excise  tax  on  corporations. 
In  these  returns  the  plaintiff  stated  the  items  of  charge  and  credit  and  the  net  annual 
income  which  it  considered  subject  to  the  tax.  The  Commissioner  of  Internal  Revenue 
found  that  deductions  claimed  in  each  of  these  returns  had  been  overstated,  and  that  the 
amount  subject  to  the  tax  had  been  understated,  and  made  additional  assessments  against 
the  plaintiff  and  notified  it  of  his  action.  The  plaintiff,  under  protest,  paid  the  additional 
taxes  levied.  An  application  to  the  Comtnissioner  of  Internal  Revenue  for  an  abatement 
of  the  additional  tax  was  denied  by  the  commissioner,  and  this  action  was  then  begun. 
While  the  court  found  that  the  plaintiff  had  understated  its  net  income  upon  which  it 
was  required  to  pay  the  excise  tax,  it  was  further  found  that  the  understatement  was  not 
made  fraudulently,  knowingly,  willfully,  nor  for  the  purpose  of  defrauding  the  United 
States,  but  was  made  in  good  faith,  and  with  the  belief  that  the  figures  presented  stated 
the  facts.  The  only  question  in  the  case  is  whether  the  judgment  is  supported  by  these 
findings. 

Section  3225  of  the  Revised  Statutes  as  it  existed  at  the  time  these  taxes  were 

2597  levied  and  collected  was  as  follows: 

When  a second  assessment  is  made  in  case  of  any  list,  statement,  or  return,  which 
in  the  opinion  of  the  collector  or  deputy  collector  was  false  or  fraudulent,  or  contained 
any  understatemjfent  or  undervaluation,  no  taxes  collected  under  such  assessment  shall  be 
recovered  by  any  suit,  unless  it  is  proved  that  the  said  list,  statement,  or  return  was  not 
false  nor  fraudulent,  and  did  not  contain  any  understatement  or  undervaluation. 

It  is  contended  that  this  section  was  meant  to  be  applied  only  to  those  who  inten- 

2598  tionally  made  false  statements  or  undervaluations,  because  when  this  act  was 
passed  an  accurate  statement  of  the  facts  required  in  returns  by  taxpayers  could  be 

made,  whereas  returns  under  the  corporation  tax  law  necessarily  must  be  estimates. 

By  the  acts  of  Congress  approved  June  30,  1864  (13  Stat.,  223),  as  amended  and 

2599  supplemented  by  the  acts  of  Congress  of  March  3,  1865  (13  Stat.,  469),  of  July  13, 
1866  (14  Stat.,  98),  and  March  2,  1867  (14  Stat.,  471),  a general  system  of  internal 

revenue  was  provided  to  meet  the  financial  burdens  imposed  by  the  Civil  War.  Taxes 
were  imposed  generally  upon  property,  occupations,  industries,  and  intomes.  Many 
classes  of  persons  subject  to  taxation  were  required  to  make  sworn  lists  or  returns  of  prop- 
erty subject  to  the  tax.  The  values  of  property  were  to  be  reported  and  amounts  of  net 
income,  and  the  accurate  statement  of  many  of  the  items  required  were  quite  as  difficult 
as  the  ascertainment  of  the  required  items  under  the  present  corporation  tax.  Section^l4 
gave  the  assessor  poWer  to  summon  a declarant  and  to  examine  him  and  his  books,  if  in 
his  opinion  the  return  was  either  false  or  fraudulent  or  contained  any  understatement  or 
undervaluation.  If  the  return  was  false  or  fraudulent,  the  assessor  was  required  to  increase 


INC. 


264 


TAX 


ADMINISTRATIVE  PROVISIONS. 


the  tax  by  100  per  cent.  An  unexcused  neglect  or  refusal  to  make  or  to  verify  a list  was 
penalized  by  the  addition  of  50  per  cent  to  the  tax.  By  section  20  the  assessor  was  em- 
powered to  fix  the  amount  of  additional  tax  to  be  paid,  when  there  had  been  an  omission, 
understatement,  undervaluation,  or  false  or  fraudulent  statement.  Section  44  authorized 
the  Commissioner  of  Internal  Revenue  to  refund  excessive  taxes  collected  and  to  repay|[to 
collectors  amounts  recovered  in  court  against  them  for  taxes  collected  by  them,  but  pro- 
vided that  no  taxes  should  be  recovered,  refunded,  or  paid  back,  where  a second  assessment 
had  been  made  because  the  first  list  had  been,  in  the  opinion  of  the  assessor,  either  false, 
fraudulent,  or  contained  any  understatement  or  undervaluation,  unless  it  was  proved 
that  the  return  was  not  false  or  fraudulent,  or  did  not  contain  any  understatement  or  under- 
valuation. The  substance  of  these  enactments  has  continued  in  force  ever  since.  (See 
Rev.  Stats.,  secs.  3173,  3176,  3182,  3220,  3225;  U.  S.  Comp.  Stats.  Ann.,  secs.  5896,  5899, 
5904,  5944,  5948.)  They  evince  a discriminating  use  of  terms  as  between  false  and  fraud- 
ulent returns  and  those  that  contain  only  an  understatement  or  valuation,  and  provided 
remedies  and  penalties  apportioned  to  the  several  delinquencies.  The  mere  undervaluation 
or  understatement  in  a return  is  made  a basis  for  summoning  the  delinquent  to  appear 
and  be  examined  and  a basis  also  for  imposing  an  additional  assessment,  and  prevents 
the  Commissioner  of  Internal  Revenue  from  making  a refund  or  remission  of  taxes.  The 
further  provision  found  in  section  3225  of  the  Revised  Statutes,  denying  recovery  by  suit 
of  any  tax  imposed  under  a second  assessment,  because  in  the  opinion  of  the  collector 
or  his  deputy,  the  former  return  was  false  or  fraudulent  or  contained  an  understatement  or 
undervaluation,  unless  it  is  proved  that  the  prior  list  was  not  false  nor  fraudulent  nor 
contained  any  understatement  nor  undervaluation,  is  in  harmony  with  these  provisions, 
and  manifests  the  intention  of  Congress  that  no  recovery  may  be  had  although  the  under- 
valuation or  understatement  was  made  unintentionally.  See  Bergdoll  vs.  Pollock  (95 
U.  S.,  337). 

The  proposition  is  advanced  that  this  construction  of  section  3225  renders  it  vio- 

2600  lative  of  the  Constitution,  as  it  would  result  in  the  confiscation  of  the  plaintiff’s 
property.  It  is  well  settled  that  “this  corporation  tax  act  imposed  an  excise  tax 

and  the  only  limitation  on  the  power  of  Congress  in  the  imposition  of  excise  taxes  is  that 
they  shall  be  uniform  throughout  the  United  States.”  United  States  vs.  Singer  (15  Wall., 
Ill,  121);  Pacific  Insurance  Co.  vs.  Soule  (7  Wall.,  433,  446).  By  this  a geographical 
uniformity  is  meant.  Flint  vs  Stone  Tracy  Co.  (220  U.  S.  107).  The  provisions  laying 
an  additional  tax  proportionate  to  the  property  omitted  from  the  list  on  all  who  make  any 
understatement  or  undervaluation  operates  uniformly  on  all  of  that  class  of  persons  where- 
ever  found  and  hence  was  within  the  power  of  Congress.  The  refusal  of  a right  of  action 
to  recover  such  taxes,  unless  proof  is  made  that  there  was  no  understatement  or  under- 
valuation is  likewise  within  the  scope  of  the  legislative  power.  It  is  claimed  that  “section 
3225,  Revised  Statutes,  does  not  apply  to  the  suit  for  the  recovery  of  taxes  collected  under 
the  corporation  tax  of  1909.  This  section  applies  to  internal  revenue  taxes  generally” 
and  the  corporation  tax  is  one  embraced  in  that  class.  In  addition  the  corporation 
tax  law  contained  a clause  as  follows  (p.  951  Supp.  to  U.  S.  Comp.  Stats.,  1911): 

All  laws  relating  to  the  collection,  remission,  and  refund  of  internal-revenue  taxes, 
80  far  as  applicable  to  and  not  inconsistent  with  the  provisions  of  this  section,  are  hereby 
extended  and  made  applicable  to  the  tax  imposed  by  this  section. 

We  think  that  section  3225,  Revised  Statutes,  is  a part  of  the  laws  relating  to  the 

2601  refund  of  internal-revenue  taxes,  as  section  3220,  Revised  Statutes,  provides  that 
the  Commissioner  of  Internal  Revenue  is  authorized  to  refund  to  the  collector  any 

amount  that  may  be  recovered  against  him  in  any  court  for  any  internal  taxes  collected  by 
him. 

Plaintiff  also  contends  that  the  judgment  is  erroneous,  because  after  final  judgment 

2602  was  entered  in  this  case  Congress  enacted  an  amendment  to  section  3225,  Revised 

Statutes,  which  reads  (p.  6984,  6 U.  S.  Comp.  Stats.,  Ann.);  “*  * * But  this 

section  shall  not  apply  to  statements  or  returns  made  or  to  be  made  in  good  faith  under  the 
laws  of  the  United  States  regarding  annual  depreciation  of  oil  or  gas  wells  and  mines.” 
This  statute  does  not  purport  to  be  retroactive  in  its  operation  and  hence  can  not 

2603  affect  the  judgment  in  this  case.  This  disposes  of  all  questions  that  require  con- 
sideration. 

2604  The  judgment  will  be  affirmed.  (249  Fed.  27.)  (T,  D.  2661,  March  5,  1918.) 


INC.  265 


TAX 


ADMINISTRATIVE  PROVISIONS. 


2605  The  Northwestern  Mutual  Life  Insurance  Company  Case  (248  Fed.  568). — [Com- 
.ment:  The  following  is  extracted  from  Judge  Geiger’s  opinion  in  this  case  in 

which  judgment  was  rendered  for  plaintiff,  and  reproduced  here  because  of  the  importance 
of  the  fundamental  question  discussed.] 

*******3^*^*ttl 

2606  A final  question,  one  not  suggested  in  the  pleadings,  briefly  referred  to  in  oral 
argumfent,  but  later  elaborately  discussed  in  briefs,  arises  on  these  facts:  In 

making  its  return  for  the  year  1910,  plaintiff  omitted  an  item  of  $77,000  from  the  income 
aggregate  of  receipts  from  agencies,  omitted  because  information  respecting 
the  accounts  to  which  individual  items  were  distributable  was  not  at  hand  at  the  time  of 
making  the  return,  and,  apparently,  was  in  good  faith  treated  as  a “suspense”  item  which 
would  naturally,  upon  later  ascertainment,  go  into  the  return  for  the  ensuing  year.  There 
IS  no  suggestion  that  the  facts  are  not  consistent  with  perfect  good  faith.  The  record 
attests  fully  that  the  omission,  if  it  involved  delinquency  at  all,  arose  as  stated — it  was  an 
erroneous  failure  to  include  the  items. 

The  government  urges  that  such  failure  bars  the  right  to  maintain  the  action, 

2607  and  bases  its  contention  upon  section  3225,  R.  S.  U.  S.  (Comp.  St.  1916,  Sec.  5948), 
which  is  asserted  to  be  incorporated  into  the  excise  law  in  question: 

“When  a second  assessment  is  made  in  case  of  any  list,  statement,  or  return,  which  in 
the  opinion  of  the  collector  or  any  deputy  collector  was  false  or  fraudulent,  or  contained 
any  understatement  or  undervaluation,  no  tax  collected  under  such  assessment  shall  be 
recovered  by  any  suit  unless  it  is  proved  that  the  said  list,  statement,  or  return  was  not 
•false  nor  fraudulent,  and  did  not  contain  any  understatement  or  undervaluation.” 

The  broad  proposition  is  that  any  and  every  error  of  understatement  or  under- 

2608  valuation,  howsoever  innocently  made,  bars  relief  against  a reassessment,  how- 
soever inaccurate,  or  unjust  it  may  be.  It  may  be  said,  confidently,  that  so  drastic 

-a  rule  should  not  be  accepted  unless  unmistakably  clear  language,  disclosing  a legislative 
purpose  and  intent  viewed  in  the  light  of  history  and  results  to  be  achieved,  leaves  no 
alternative. 

I shall  assume  that  section  3225  is  brought  into  the  tax  law  in  question;  and  it 

2609  necessitates  consideration  of  that  section  as  part  of  a chapter,  dealing  generally 
with  practice,  procedure,  rights  and  remedies  awarded  to  both  government  and 

taxpayer  or  citizen,  in  the  matter  of  assessment,  collection,  remission,  and  refund  of  public 
dues.  These  laws  are  not  of  recent  enactment.  The  times  and  conditions  at  and  under 
which  they  came  into  being  to  further  the  raising  of  revenue  to  meet  a situation  of  great 
national  stress,  the  administrative  recognition  and  application  accorded  them  for  over 
fifty  years,  may  safely  aid  in  throwing  light  upon  the  just  interpretation  to  be  given. 
Without  narrating  historically  the  advent  and  amendment  of  this  particular  section  3225 
and  allied  provisos,  it  suffices  to  say  that  they  had  their  beginnings  in  the  Civil  War  Rev- 
enue Act  of  June  30,  1864  (13  U.  S.  Stat.  p.  223,  c.  173),  as  amended  by  the  Act  of  July 
13,  1866  (14  U.  S.  Stat.  98,  c.  184).  They  exhibit  the  early  recognition  by  the  government 
of  the  necessity  of  ways  and  means  for  revising,  both  in  the  interest  of  the  government  and 
the  taxpayer,  the  returns  or  assessments  made  or  levied,  and  for  refunding  or  recovery  of 
taxes  actually  paid;  and  from  the  earliest  occasions  when  Interpretation  of  these  statutes 
was  called  for  the  courts  here  have  uniformly  given  to  the  resultT*"accomplished  by  legis- 
lation on  the  general  subject,  this  broad  characterization: 

“The  revenue  measures  of  every  civilized  government  constitute  a system  which  pro- 
vides for  its  enforcement  by  officers  commissioned  for  that  purpose.  In  this  country, 
the  system  for  each  state,  or  for  the  federal  government,  pro /ides  safeguards  of  its  own 
against  mistake,  injustice,  or  oppression,  in  the  administration  of  its  revenue  laws.  Such 
appeals  are  allowed  to  specified  tribunals  as  the  lawmakers  deem  expedient.  Such 
remedies,  also,  for  recovering  back  taxes  illegally  exacted,  as  may  seem  wise  are  provided. 
In  these  respects,  the  United  States  have,  as  was  said  by  the  court  in  Nichols  v.  United 
States,  7 Wall.  122  [19  L.  Ed.  125],  enacted  a system  of  corrective  justice,  as  well  as  a 
system  of  taxation  in  both  its  customs  and  internal  revenue  branches.  That  system  is 
intended  to  be  complete.  * ^ * So  also  in  the  internal  revenue  department,  the 

•tatute  allows  appeals  from  the  assessor  to  the  Commissioner  of  Internal  Revenue;  and,  if 
dissatisfied  with  his  decision,  on  paying  the  tax  the  party  can  sue  the  collector;  and  if  the 
money  was  wrongfully  exacted,  the  courts  will  give  him  relief  by  a judgment,  which  the 
United  States  pledges  herself  to  pay.”  Per  Miller,  Justice,  Cheatham  v.  U.  S.,  92  U.  S. 
88,  23  L.  Ed.  561. 

A careful  reading  of  adjudicated  cases — Indeed,  all  legislation  upon  the  varied 

2610  phases  of  public  revenue — ^suggests  that  at  no  time  has  there_  been  a purpose  to 
cut  off  or  to  impair,  either  as  against  the  government  or  the  citizen,  this  “system 

of  corrective  justice”  attending  the  administration  of  revenue  laws. 


INC. 


266 


TAX 


ADMINISTRATIVE  PROVISIONS. 


At  the  outset,  the  proposition  advanced  by  the  defense  is  repugnant,  utterly, 
261  1 to  this  view,  and  the  broad  purpose  disclosed.  If  it  is  not  obviously,  it  is  easily 
demonstrably  so.  A few  considerations  of  a practical  nature — which  a court  may 
entertain — will  be  helpful.  When  property  is  assessed  for  taxation  upon  an  ad  valorem 
basis,  the  taxing  officers  frequently  must,  initially,  determine  values.  Even  in  such  cases, 
the  taxpayer  is  not  left  wholly  remediless  to  review  or  revise  the  finding  of  the  assessing 
or  taxing  officer.  In  very  rare  situations  is  it  possible,  justly,  to  ascribe  to  any  individual, 
whether  he  be  the  interested  taxpayer  or  the  public  assessor,  the  power  or  the  duty  to  make 
an  initial  valuation  to  be  accepted  by  the  one  adversely  interested,  as  indubitably  fair; 
and,  as  indicated,  there  have  arisen  of  necessity,  in  the  interest  of  just  dealing,  the  varying 
methods  of  revision  and  correction.  Coming  to  the  particular  case  before  us,  where  assess- 
ments are  based  upon  returns  exhibiting  great  magnitude  and  complexity  of  business 
operations,  the  possibility  and  the  probability  of  errors — without  a suggestion  of  attendant 
bad  faith — is  increasingly  present.  It  may  safely  be  said  that  the  great  majority  of  returns 
under  these  excise  and  income  tax  laws  contain  items  involving  for  their  fixing  and  deter- 
mination, judgment,  honestly  and  conscientiously  exercised;  and  It  is  equally  true  that, 
no  matter  how  conscientiously  one  man  may  fix  and  determine  an  item,  another,  with 
equal  probity  and  integrity,  may  fix  It  at  a substantially  higher  or  lower  figure.  The  very 
purpose  is  to  enable  revision,  to  correct  the  mistake,  of  omission  or  commission,  or  to  prevent 
frauds;  and  it  would  be  anomalous  to  assume  infallibility  on  the  part  of  the  government 
in  its  efforts  at  revision,  wherefore  mistakes  of  the  citizens  only  are  to  be  corrected.  This 
is  said  because,  in  my  judgment,  the  drastic  construction  of  section  3225,  now  Insisted  upon, 
will,  if  adopted,  lead  to  that  result  as  a matter  of  practical  administration  and  application. 
It  means  that  the  taxpayer  cannot  prevail  unless  he  succeeds  in  reinstating  his  own  return, 
item  for  item,  against  the  revision  or  reassessment.  Naturally,  suits  to  recover  can  rarely 
be  brought  when  the  reassessment  is  more  favorable  than  the  original  return,  though  even 
such  result  can  conceivably  come  through  an  entire  rearrangement  of  the  return  through 
the  exclusion  of  items  admitted  and  the  Inclusion  of  items  contested  by  the  taxpayer. 
But  this  is  true  as  a practical  matter:  Every  reassessment,  which  results  In  an  Increased 
tax,  must  involve,  expressly  or  by  necessary  Implication,  the  opinion  or  conviction  of  the 
reviewing  officer  that  the  original  return  contained,  somewhere  or  somehow,  an  understate- 
ment or  undervaluation,  a false  (erroneous,  or  fraudulent)  item  or  items.  Therefore,  unless 
the  taxpayer  can  establish  that  his  original  return  was  right,  and  hence  that  the  reassess- 
ment, in  Its  attempted  revision  or  additions,  is  wrong,  in  every  particular,  he  must  fail 
in  his  action.  If  this  is  possible,  and  It  must  follow  so  strict  an  interpretation ^of  the 
statute  (section  3225),  then  there  is  little  left  that  can  commend  itself — to  the  citizen  or 
taxpayer — of  any  so-called  system  of  “corrective  justice.” 

The  present  case  furnishes  a good  illustration:  Assuming  that  the  exaction  of  1 

2612  per  cent,  on  the  millions  of  dividends  treated  as  income  is  illegal  and  unjust,  a 
remedy  would  have  to  be  denied  because  of  an  honest  error  respecting  an  item,  by 

comparison,  trifling.  I am  unwilling  to  give  to  the  section  in  question  any  such  inter- 
pretation; and,  no  matter  how  drastic  an  application  may  be  compelled  in  cases  of  actual 
fraud — Hvhether  the  items  fraudulently  withheld  or  misstated  be  large  or  small— the  view 
that  the  section  aims  to  furnish  a rule  of  proof,  to  give  to  the  finding  of  executive  officers 
a status  or  dignity  prima  facie  good,  to  cast  upon  the  citizen  the  burden  of  overthrowing  it, 
thereby  giving  the  section  a distinct  place  and  function  in  the  corrective  and  revisory 
“system”  of  the  revenue  law,  is  far  more  reasonable  and  commendable.  It  furthers  the 
accomplishment,  by  the  government  or  by  the  taxpayer,  of  the  general  purpose  of  enabling 
just  revision  or  recovery;  whereas,  the  view  urged  by  the  defendant  makes  the  statute 
highly  penal,  and,  in  its  application,  one-sided,  resulting,  as  indicated,  in  foreclosure  of 
recovery  in  every  case  where  the  original  return  cannot  be  established.  Item  for  item.  In 
opposition  to  the  government  revision.  (Northwestern  Mut.  Life  Ins.  Co.  vs.  Fink, 
Collector,  District  Court,  E.  D.  Wisconsin,  Nov.  7,  1917 — 248  Fed.  568.) 

2613  Suit  for  Recovery  of  Taxes  Wrongfully  Collected. — No  suit  shall  be  maintained 
in  any  ccurt  for  the  recovery  of  any  internal  tax  alleged  to  have  been  erroneously 

or  illegally  assessed  or  collected,  or  of  any  penalty  claimed  to  have  been  collected  without 
authority,  or  of  any  sum  alleged  to  have  been  excessive  or  in  any  manner  wrongfully  col- 
lected, until  appeal  [^2526]  shall  have  been  duly  made  to  the  Com.missioncr  of  Internal 
Revenue,  according  to  the  provisions  of  law  in  that  regard,  and  the  regulations  of  the  Sec- 
retary of  the  Treasury  established  in  pursuance  thereof,  and  a decision  of  the  Con'imissloner 
has  been  had  therein:  PROVIDED,  That  if  such  decision  is  delayed  more  than  six  months 
from  the  date  of  such  appeal,  then  the  said  suit  may  be  brought,  without  first  having  a 
decision  of  the  Commissioner  at  any  time  wdthin  the  period  limited  in  the  next  section.” 
(Section  3226,  Revised  Statutes.) 

2614  Limitation  as  to  Suits  for  Recovery  of  Taxes  Wrongfully  Collected. — “No  suit  or 
proceeding  for  the  recovery  of  any  internal  tax  alleged  to  have  been  erroneously 

or  illegally  assessed  or  collected,  or  of  any  penalty  alleged  to  have  been  collected  without 

INC.  267  TAX 


ADMINISTRATIVE  PROVISIONS. 


authority,  or  of  any  sum  alleged  to  have  been  excessive  or  in  any  manner  wrongfully 
collected,  shall  be  maintained  in  any  court  unlesss  the  same  is  brought  within  two  years 
next  after  the  cause  of  action  accrued:  PROVIDED,  That  actions  for  such  claims  which 
accrued  prior  to  June  six,  eighteen  hundred  and  seventy-twO;  may  be  brought  within  one 
year  from  said  date;  and  that  where  any  such  claim  was  pending  before  the  Commissioner, 
as  provided  in  the  preceding  section,  an  action  thereon  may  be  brought  within  one  year 
after  such  decision  and  not  after.  But  no  right  of  action  which  was  already  barred  by  any 
statute  on  the  said  date  shall  be  revived  by  this  section.”  (Section  3227,  Revised  Statutes.) 

2615  Limitation  on  Claims  for  Refunding  Other  Than  Those  Based  on  an  Examination 
of  a Return  of  Income. — “All  claims  for  the  refunding  of  any  internal  tax  alleged 

to  have  been  erroneously  or  Illegally  assessed  or  collected,  or  of  any  penalty  alleged  to  have 
been  collected  without  authority,  or  of  any  sum  alleged  to  have  been  excessive  or  in  any 
m.anner  wrongfully  collected,  must  be  presented  to  the  Commissioner  of  Internal  Revenue 
within  two  years  next  after  the  cause  of  action  accrued:  PROVIDED,  That  claims 
which  accrued  prior  to  June  six,  eighteen  hundred  and  seventy-two,  may  be  presented  to 
the  Commissioner  at  any  time  within  one  year  from  said  date.  But  nothin?  in  this  section 
shall  be  construed  to  revive  any  right  of  action  which  was  already  barred  by  any  statute 
on  that  date.”  (Section  3228,  Revised  Statutes.)  [Read  at  ^2488.] 

2616  We  now  come  to  the  taxes  of  1909  and  1910.  The  1909  tax  wms  paid  June  28, 
1910,  but  claim  for  refund  was  not  filed  until  June  10,  1913,  nearly  three  years  there- 
after. The  1910  tax  was  paid  June  8,  1911,  but  claim  for  refund  was  not  filed  until  June 
10,  1913,  two  years  and  one  day  (excluding  Sunday,  June  8,  1913)  thereafter.  The  relevant 
sections  of  the  United  States  Revised  Statutes  are  as  follows:  [^2613,  ^2614  and  ^2615 
above]. 

Sections  3226,  3227  and  3228  of  the  Revised  Statutes  (Comp.  St.  1913,  Sections 
261  7 5949-5951)  must  be  read  together,  and,  when  so  read,  provide  a sim.ple  and  orderly 
system,  where  by  an  aggrieved  taxpayer  may  sue  to  recover  taxes  wrongfully  collected. 
In  the  first  place,  under  section  3226,  no  suit  can  be  maintained  unless  the  taxpayer 

2618  appeals  to  the  Commissioner  of  Internal  Revenue.  This  appeal  under  section 
3228  must  be  presented  to  the  Commissioner  of  Internal  Revenue  within  two  years 

after  the  cause  of  action  accrued.  Under  section  3227  no  suit  can  be  maintained  unless 
brought  within  two  years  next  after  the  cause  of  action  accrued.  Under  section  3228 
the  accrual  of  the  cause  of  action  is  at  the  date  when  the  tax  is  illegally  assessed  or  collected. 
Obviously  the  wrongful  act  was  done  when  the  United  States,  acting  in  this  instance 
through  the  Collector,  received  the  money  in  payment  of  the  tax.  Under  section  3227, 
the  date  of  accrual  is  the  date  when  the  Commissioner  of  Internal  Revenue  decides  adversely 
to  the  taxpayer.  Of  course,  under  that  section  the  taxpayer  need  not  wait  longer  than  six 
months  in  the  event  that  the  Commissioner  delays  his  decision. 

To  illustrate,  therefore,  with  the  precise  facts  in  the  case  at  bar:  On  June  28, 

2619  1910,  the  Mail  Com.pany  paid  the  Collector  the  tax  for  the  year  1909.  The  appeal 
to  the  Commissioner  of  Internal  Revenue  should  have  been  made  on  or  before  June 

28,  1912,  but  was  not  m.ade  until  June  10,  1913.  On  June  8,  1911,  the  Mall  Company  paid 
the  Collector  for  the  tax  for  the  year  1910.  The  appeal  to  the  Commissioner  of  Internal 
Revenue  should  have  been  made  on  or  prior  to  June  8,  1913,  but  was  not  made  until  two 
days  later,  to  wit,  June  10,  1913.  Thus  the  condition  precedent  with  which  it  was  necessary 
to  comply  before  the  Mail  Company  could  maintain  a suit  was  not  complied  with,  and  no 
cause  of  action  ever  accrued  for  the  years  1909  and  1910  in  favor  of  the  Mall  Company 
against  the  Collector. 

If,  to  illustrate,  an  appeal  in  those  cases  had  been  presented  to  the  Commissioner 

2620  of  Internal  Revenue  within  two  years,  say  on  or  before  June  8,  1912,  and  on  or  before 
June  9,  1913  (June  8,  1913,  being  a Sunday)  respectively,  then  the  Mail  Com.pany 

under  section  3227  would  have  been  in  time  if  suit  had  been  commenced  on  or  before  June 
8,  1914,  and  June  8,  1915,  respectively.  Merck  v.  Treat,  174  Fed.  388,  98  C.  C.  A.  606. 
* * * . (Mail  & Newspaper  Transportation  Co.,  et  al.,  v.  Anderson,  Collector,  Cir- 

cuit Court  of  Appeals,  Second  Circuit,  New  York.  April  11,  1916. — 234  Fed.  590.) 

2621  Conditions  Precedent  to  Suit  Which  the  Law  Requires. — [Comment:  The  fol- 
lowing example  of  procedure,  with  the  Court’s  comment  thereon,  is  taken  from 

Gulf  Oil  Corporation  v.  Lewellyn  in  the  lower  court  (242  Fed.  709.)  (Reversed  by  Circuit 
Court  of  Appeals,  245  Fed.  1.  Decision  of  Circuit  Court  reversed  by  U.  S.  Supreme 
Court,  Decem.ber  9,  1918.).] 

2622  From  the  evidence  produced  at  the  trial,  the  Court  has  found  the  following: 


INC. 


268 


TAX 


ADMINISTRATIVE  PROVISIONS. 


FACTS. 

2623  FIRST.  * * * . 

SECOND.  The  Gulf  Oil  Corporation,  on  the  14th  day  of  February,  1914,  in 

2624  compliance  with  the  provisions  of  the  Act  of  Congress  of  October  3,  1913,  made  a 
return  of  its  annual  net  income  for  the  twelve  months  ending  December  31,  1913, 

as  required  by  said  Act.  In  making  said  return  the  Gulf  Oil  Corporation  certified  that  it 
had  notincluded  in  the  statementof  gross  income  for  the  year  1913  certain  div^idends  amount- 
ing to  $11,424,440  received  by  it  from  subsidiary  companies  out  of  earnings  and  surplus 
of  said  subsidiary  com.panies  accrued  prior  to  January  1,  1913. 

THIRD.  In  said  return  the  Gulf  Oil  Corporation  showed  net  Income  for  the  twelve 

2625  mionths  ending  December  31,  1913,  of  $886,250.44,  but  under  date  of  May  1,  1914, 
the  said  C.  G.  Lewellyn,  Collector,  m.ailed  to  said  corporation  notice  of  an  assess- 
ment of  tax  thereon  amounting  to  $9,072.56.  A claim  for  abatement  of  this  overcharge, 
amounting  to  $210.06  was  filed  with  the  Collector  June  9,  1914,  and  on  June  30,  1914,  the 
Gulf  Oil  Corporation  paid  to  the  said  C.  G.  Lewellyn,  Collector,  the  sum  of  $8,862.50, 
being  the  am.ount  of  said  assessment,  less  the  $210.06  for  which  abatement  was  claimed. 
Said  claim  for  abatement  having  been  disallowed,  said  Gulf  Oil  Corporation,  on  the  5th 
day  of  November,  1914,  paid  the  said  Collector  the  additional  sum  of  $210.06,  with  interest 
amounting  to  $6.30,  m.aking  a total  payment  of  $216.36. 

FOURTH.  On  the  30th  day  of  December,  1914,  the  said  C.  G.  Lewellyn,  Collector, 

2626  acting  under  instructions  from,  the  Commissioner  of  Internal  Revenue  at  Washing- 
ton, D.  C.,  m.ailed  notice  and  demand  for  tax  assessm.ent  against  the  Gulf  Oil 

Corporation  for  the  year  ending  December  31,  1913,  amounting  to  $114,034.34.  In  fact, 
this  additional  assessment  amounted  to  $114,244.40,  being  the  1%  upon  the  entire  amount 
of  the  dividends  received  by  the  Gulf  Oil  Corporation  from  subsidiary  com.panies  out  of 
surplus  accrued  to  such  subsidiaries  prior  to  January  1,  1913,  and  payable  to  the  Gulf 
Oil  Corporation  prior  to  March  1,  1913,  and  said  additional  assessment  was  based  solely 
on  said  dividends.  In  making  the  assessment,  however,  the  Commissioner  of  Internal 
Revenue  reconsidered  and  allowed  the  previous  claim  for  abatement  of  $210.06,  erroneously 
assessed  against  the  corporation  In  the  original  assessment,  and  credited  the  same  as  having 
been  paid  upon  the  assessment  of  December  30,  1913,  leaving  the  net  balance  of  such 
assessment  $114,034.34  as  stated. 

FIFTH.  The  notice  and  demand  of  the  said  C.  G.  Lewellyn,  Collector,  for  the 

2627  payment  of  this  additional  tax  recited  that  If  the  tax  is  not  paid  on  or  before  January 
8,  1915,  it  would  be  the  duty  of  the  Collector  to  collect  said  tax.  together  with 

5%  additional  and  interest  at  the  rate  of  1%  per  month  until  paid. 

SIXTH.  That  subsequently  the  plaintiff  filed  wdth  the  defendant  for  presentation 

2628  to  the  Com.mdssioner  of  Internal  Revenue  a claim  for  the  abatement  of  said  income 
tax  am.ounting  to  $1 14,034.34,  a copy  of  which  claim  is  attached  to  and  made  a part 

of  plaintiff’s  Statem.ent  as  Exhibit  A.  That  after  an  examination  of  said  claim  for  abate- 
ment the  Com.missioner  of  Internal  Revenue  rejected  the  same. 

SEVENTH.  On  February  17,  1915,  the  said  Gfilf  Oil  Corporation  paid  to  the  said 

2629  C.  G.  Lewellyn,  Collector,  said  additional  income  taxes  assessed  for  the  period 
ending  Decem.ber  31,  1913,  in  the  sum  of  $114,034.34,  and  at  the  same  time  filed 

said  C.  G.  Lewelly  a written  protest,  a copy  of  which  protest  Is  attached  to  and  made  a 
part  of  plaintiff’s  Statement  as  Exhibit  B. 

2630  EIGHTH.  That  subsequently  the  plaintiff  filed  with  the  said  C.  G.  Lewellyn 
for  presentation  to  the  Com.missioner  of  Internal  Revenue  a claim  for  the  refund 

of  the  net  am.ount  of  the  assessment  of  said  Income  tax,  to  wit:  $114,034.34,  and  also  the 
amount  of  the  credit  allowed  thereon  of  $210.06,  representing  an  over  assessment  against 
the  corporation  on  the  basis  of  its  return  as  originally  filed,  the  two  amounts  constituting 
the  entire  amount  of  the  assessment  in  the  sum  of  $114,244.40.  A copy  of  the  said  claim 
for  refund  is  attached  to  and  a part  of  plaintiff’s  Statem.ent  as  Exhibit  C. 

NINTH.  That  after  consideration  of  said  claim  for  refund,  the  Commissioner  of 

2631  Internal  Revenue  rejected  the  same,  and  the  said  C.  G.  Lewellyn  was  instructed 
to  notify  the  Gulf  Oil  Corporation,  and  on  or  about  April  13,  1915,  did  so  notify 

said  corporation,  that  said  claim  was  rejected  a copy  of  which  notice  is  attached  to  and  made 
a part  of  plaintiff’s  statement  as  Exhibit  D. 

**♦♦♦♦♦***** 

2632  The  payment  of  all  taxes  hitherto  required  of  the  several  subsidiaries  by  acts  of 
Congress,  and  the  full  disclosure  by  the  plaintiff  In  its  return  for  1913  of  the  dividends 

from  its  subsidiaries  negative  any  suggestion  that  the  conduct  of  the  plaintiff  has  been 
in  any  way  evasive  or  otherwise  improper.  I’he  plaintiff  has  merely  asserted  Its  legal  rights. 
Its  rights  to  bring  this  action  is  clear  because  it  has  performed  all  the  conditions  precedent 
to  suit  which  the  law  requires.  ♦ * * (242  Fed.  709.) 


INC. 


269 


TAX 


ADMINISTRATIVE  PROVISIONS. 


2633  A Suit  for  Recovery  of  Taxes  Erroneously  or  Illegally  Assessed  Can  be  Brought 
Against  the  Collector  only  Who  Collected  the  Taxes,  and  not  His  Successor. — 

The  appended  decision  (236  Fed.  604)  of  the  United  States  District  Court  for  the  Southern 
District  of  New  York,  in  the  case  of  Duncan  I.  Roberts  v.  John  Z.  Lowe,  Jr.,  collector, 'Js 
published  for  the  information  of  internal  revenue  officers  and  others  concerned. 

[Summary:  A suit  to  recover  back  taxes  can  not  be  maintained  against  the  successor 

2634  to  the  collector  to  whom  the  taxes  were  paid,  except  in  his  individual  capacity. 
The  remedy  lies  either  in  an  action  against  the  collector  who  actually  received  the 

taxes  or  in  an  action  against  the  United  States.]  (T.  D.  2394,  Nov.  14,  1916.) 

2635  The  appended  decision  of  the  United  States  Circuit  Court  of  Appeals  for  the  Third 
Circuit  in  the  case  of  Philadelphia,  Harrisburg  & Pittsburgh  Railroad  Company 

to  use,  etc.,  v.  Ephriam  Lederer,  collector  of  internal  revenue,  is  published  for  the  informa- 
tion  of  internal-revenue  officers  and  others  concerned. 

Before  Buffington,  McPherson,  and  Wooley,  Circuit  Judges. 

The  satisfactory  opinion  of  Judge  Thompson  (239  Fed.,  184)  relieves  us  from 

2636  discussing  nearly  all  the  questions  raised  by  this  writ  of  error.  We  concede  the 
force  of  the  company’s  argument  that  in  substance,  and  especially  in  practical 

effect,  suits  such  as  this  are  against  the  collector  as  an  official  rather  than  as  an  individual 
— yhis  personal  liability  is  rarely  if  ever  enforced — and  it  may  be  that  Congress  might 
with  safety  and  propriety  extend  the  existing  law  to  cover  the  situation  now  presented. 
But  until  the  change  be  actually  made  we  are  bound  by  the  law  as  it  stands,  and  we  see 
no  reason  to  doubt  that  the  statutes  and  decisions  now  in  force  prevent  the  company  from 
recovering  in  this  action  for  the  taxes  collected  by  William  McCoach,  the  defendant’s 
predecessor  in  office.  No  suit  to  recover  them  has  been  brought  against  McCoach,  and 
for  this  reason  the  act  of  1899  does  not  apply. 

We  need  hardly  sav  that  without  statutory  permission  no  suit  to  recover  a Federal 

2637  tax  can  be  maintained.  Moreover  the  statutes  on  this  subject  must  be  strictly 
obeyed;  they  lay  down  the  conditions  and  limitations  under  which  the  sovereign 

consents  to  be  sued,  and  this  consent  should  not  be  enlarged  by  construction.  We  turn 
for  a few  moments  to  the  act  of  1899,  since  this  seems  to  be  the  company’s  principal  reliance. 
Some  additional  facts  should  first  be  stated  in  order  to  make  the  position  clear.  The  com- 
pany paid  the  tax  for  1909  in  June,  1910,  the  tax  for  1910  in  June,  1911,  and  the  tax  for 
1911  in  June  1912.  These  taxes  were  paid  under  protest  to  McCoach,  who  remained  in 
office  until  October  7,  1913,  During  his  term,  namely,  in  June,  1912,  January,  1913, 
and  May,  1913,  respectively,  the  company  claimed  the  refund  of  these  three  taxes;  and  in 
June,  1913,  it  also  presented  a petition  to  abate  the  tax  of  1912  apparently  on  the  ground 
that  penalties  had  been  incurred  in  addition  to  the  tax,  although  we  do  not  precisely 
know  what  abatement  was  asked  for.  The  claim  for  the  refund  of  the  tax  for  1909  was 
rejected  by  the  Commissioner  of  Internal  Revenue  on  July  15,  1912,  but  apparently  the 
Bubsequent  claims  for  refund  of  the  taxes  of  1910  and  1911  and  also  the  petition  for  abate- 
ment in  connection  with  the  tax  for  1912  were  not  disposed  of  until  February,  1914. 

On  October  22,  1913,  after  McCoach  had  retired  from  office,  the  company  filed 

2638  a supplemental  affidavit  with  the  commissioner  in  support  of  its  petition  to  abate 
the  tax  of  1912,  and  on  the  same  day  asked  him  to  reopen  and  reconsider  his  refusal 

to  refund  the  tax  of  1909.  On  October  27,  1913,  this  request  to  reopen  was  granted,  and 
at  the  same  time  the  commissioner  asked  for  additional  information  and  affidavits  In  refer- 
ence to  the  claims  for  the  refund  of  the  taxes  for  1909,  1910,  and  1911,  and  also  in  reference 
to  the  petition  to  abate  the  tax  of  1912.  Accordingly,  an  affidavit  was  furnished  on  January 
14,  1914.  In  February,  1914,  the  petition  for  abatement  was  refused,  and  apparently 
at  the  same  time  the  claims  for  the  refund  of  the  taxes  for  1909,  1910,  and  1911  were  also 
refused,  for  on  February  13,  1914,  Lederer  notified  the  company  that  these  claims,  and 
also  the  petition  for  abatement,  had  been  examined  and  rejected  by  the  commissioner. 
In^March,  1914,  a claim  to  refund  the  tax  for  1913  was  presented,  and  was  refused  soon 
afterwards.  The  present  suit  was  brought  on  June  29,  1914,  and  sought  to  recover  from 
Lederer  the  taxes  for  the  four  years. 

From  these  acts  it  seems  clear  to  us  that  the  act  of  1899  does  not  apply.  The 

2639  act  is  as  follows: 

No  suit,  action,  or  other  proceeding,  lawfully  commenced  by  or  against  the  head 
of  any  department  or  Bureau  or  other  officer  of  the  United  States  in  his  official  capacity 
or  in  relation  to  the  discharge  of  his  official  duties,  shall  abate  by  reason  of  his  death, 
or  the  expiration  of  his  term  of  office,  or  his  retirement,  or  resignation  or  removal  from 
office;  but,  in  such  event  the  court,  on  motion  or  supplemental  petition  filed,  at  any 
time  within  twelve  months  thereafter,  showing  a necessity  for  the  survival  thereof, 
to  obtain  a settlement  of  the  questions  involved,  may  allow  the  same  to  be  maintained 
by  or  against  his  successor  in  office,  and  the  court  may  make  such  order  as  shall  be 
equitable  for  the  payment  of  costs. 


INC. 


270  TAX 


ADMINISTRATIVE  PROVISIONS. 


The  only  “suit,  action,  or  other  proceeding”  that  could  have  been  begun  against 

2640  McCoach  while  he  was  in  office  would  have  been  a suit  for  the  taxes  of  1909  and 
1910,  but  no  such  suit  was  brought,  and  it  can  not  be  successfully  contended  that 

a mere  claim  for  refund,  which  is  a matter  wholly  for  the  commissioner  is  a suit  proceeding 
against  the  collector.  The  basis  of  an  action  against  the  collector  Is  his  receipt  of  the 
tax,  and  if  he  has  not  received  it  we  do  not  see  how  he  can  be  called  on  to  pay  it  back,  i^nd 
the  fact  that  Lederer  was  the  channel  by  which  the  commissioner  transmitted  the  refusal 
to  refund  did  not  impose  liability.  Lederer  was  liable,  if  at  all,  for  the  tax  of  1912,  for 
this  had  come  Into  his  own  hands,  but  no  statute  made  him  liable  for  the  money  that  was 
collected  by  his  predecessor  but  had  never  been  sued  for. 

For  these  reasons,  and  for  those  to  be  found  in  Judge  Thompson’s  opinion,  the 

2641  judgment  is  affirmed.  (242  Fed.  492.)  (T,  D.  2507,  July  2,  1917.) 

2642  Protection  to  Collector  from  Personal  Liability  as  result  of  Suit. — Section  989, 
Revised  Statutes. — When  a recovery  is  had  in  any  suit  or  proceeding  against  a 

collector  or  other  officer  of  the  revenue  for  any  act  done  by  him,  or  for  the  recovery  of  any 
money  exacted  by  or  paid  to  him,  and  by  him  paid  into  the  Treasury,  in  the  performance 
of  his  official  duty,  and  the  court  certifies  that  there  was  probable  cause  for  the  act  done 
by  the  collector  or  other  officer,  or  that  he  acted  under  the  directions  of  the  Secretary  of 
the  Treasury,  or  other  proper  officer  of  the  Government,  no  execution  shall  issue  against 
such  collector  or  other  officer;  but  the  amount  so  recovered  shall,  upon  final  judgment, 
be  provided  for  and  paid  out  of  the  proper  appropriation  from  the  Treasury. 

In  view  of  the  foregoing  provisions  protecting  the  collector  from  personal  liability 

2643  in  case  the  court  rertifies  that  there  was  probable  cause  for  the  act  done  by  him, 
it  will  be  observed  that  it  Is  for  the  interest  of  the  collector  to  see  that  in  all  cases 

where  judgment  is  rendered  against  him  the  court  shall  be  asked  to  give  the  certificate 
of  probable  cause. 

If  the  judgment  debtor  shall  have  already  paid  the  amount  recovered  against  him, 

2644  the  claim  should  be  made  in  his  name,  and  the  affidavit  should  state  the  exact 
amount  paid  by  him.  There  should  also  be  a certificate  of  the  clerk  of  the  court  in 

which  the  judgment  was  recovered  (or  other  satisfactory  evidence),  showing  that  the 
judgment  has  been  satisfied,  and  specifying  the  exact  sum  paid  In  its  satisfaction,  with 
a detail  of  all  items  of  cost  paid,  or  for  which  the  judgment  debtor  is  liable.  (Act.  275, 
1f773-775,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2645  Law  ^441.  Specific  Information  Relative  to  Taxpayers’  Affairs,  Disclosed  by 
Returns  or  Otherwise,  not  to  be  Divulged. — [Sec.  1317  of  the  Revenue  Act  of  1918 

amends  Sec.  3167,  Revised  Statutes,  to  read  as  follows]: 

“Sec.  3167.  It  shall  be  unlawful  for  any  collector,  deputy  collector,  agent,  clerk,  or 
other  officer  or  employee  of  the  United  States  to  divulge  or  to  make  known  in  any  manner 
whatever  not  provided  by  law  to  any  person  the  operations,  style  of  work,  or  apparatus 
of  any  manufacturer  or  producer  visited  by  him  in  the  discharge  of  his  official  duties,  or 
the  amount  or  source  of  income,  profits,  losses,  expenditures,  or  any  particular  thereof, 
set  forth  or  disclosed  in  any  income  return,  or  to  permit  any  income  return  or  copy  thereof 
or  any  book  ccntaining  any  abstract  or  particulars  thereof  to  be  seen  or  examined  by 
any  person  except  as  provided  by  law;  and  it  shall  be  unlawful  for  any  person  to 
print  or  publish  in  any  manner  whatever  not  provided  by  law  any  income  return, 
or  any  part  thereof  or  source  of  income,  profits,  losses,  or  expenditures  appearing 
in  any  income  return;  and  any  offense  against  the  foregoing  provision  shall  be  a mis- 
demeanor and  be  punished  by  a fine  not  exceeding  $1,000  or  by  imprisonment  not  exceeding 
one  year,  or  both,  at  the  discretion  of  the  court;  and  if  the  offender  be  an  officer  or  employee 
of  the  United  States  he  shall  be  dismissed  from  office  or  discharged  from  employment.” 

2646  The  attention  of  collectors  of  internal  revenue,  internal-revenue  agents,  and  other 
officers  concerned  is  invited  to  section  3167  of  the  United  States  Revised  Statutes, 

which  prohibits  the  disclosure  of  information  contained  in  income  and  other  returns 
of  internal-revenue  taxpayers. 

All  internal-revenue  officers  will  preserve  as  inviolablv  confidential  all  Income 

2647  tax  returns,  as  the  slightest  infraction  of  law  upon  this  subject  will  be  severely 
punished.  (T.  D.  1962,  March  20,  1914.) 

2648  Disclosure  of  Return — Penalty. — The  disclosure  by  a collector,  deputy  collector^ 
agent,  clerk,  or  other  officer  or  employee  of  the  United  States,  to  any  person  not 

legally  authorized  to  receive  the  same,  of  any  information  whatever  contained  in  or  set 
forth  by  any  return  of  annual  net  income  made  pursuant  to  this  act,  Is,  by  the  act,  made 
a misdemeanor,  and  is  punishable  by  a fine  not  exceeding  $1,000,  or  by  Imprisonment 
not  exceeding  one  year,  or  both,  in  the  discretion  of  the  court,  and  If  the  offender  is  an  officer 
or  employee  of  the  United  States  he  shall  be  dismissed  and  be  incapable  thereafter  of  hold- 
ing any  office  under  the  United  States  Government.  (Art.  229,  1[651,  Reg.  33,  Rev., 
Jan.  2,  1918.) 


INC. 


271 


TAX 


ADMINISTRATIVE  PROVISIONS. 


2649  Secrecy  Applies  Equally  to  Information  on  Returns  of  Income  Withheld  at  the 
Source. — The  income-tax  law  is  specific  and  mandatory  in  the  matter  of  safe 

guarding  from  publicity  the  information  acquired  by  reason  of  its  requirements  relative 
to  annual  returns  of  income.  * * * 

2650  The  law  does  not  provide  for  supplying  corporations,  with  a list  of  their  bondholders 
drawn  from  withholding  returns  of  income.  (T.  D.  2135,  Jan.  23,  1915.) 

Annual  Return  of  Corporation  May  be  Examined  by  Stockholders  of  Record  Owning 
One  per  Centum  or  More  of  Outstanding  Stock. — [Read  at  1[1639.] 

2651  Law  11439.  Duty  of  Collector  to  Report  Violations  of  Law. — [Sec.  1317  of  the 
Revenue  Act  of  1918  amends  Sec.  3164,  Revised  Statutes,  to  read  as  follows]: 

“Sec.  3164.  It  shall  be  the  duty  of  every  collector  of  internal  revenue  having  knowledge 
of  any  willful  violation  of  any  law  of  the  United  States  relating  to  the  revenue,  within 
thirty  days  after  coming  into  possession  of  such  knowledge,  to  file  with  the  district  attorney 
of  the  district  in  which  any  fine,  penalty,  or  forfeiture  may  be  incurred,  a statement  of  all 
the  facts  and  circumstances  of  the  case  within  his  knowledge,  together  with  the  names  of 
the  witnesses,  setting  forth  the  provisions  of  law  believed  to  be  so  violated  on  which  reliance 
may  be  had  for  condemnation  or  conviction.” 

2652  Law  11423.  The  “Advisory  Tax  Board.” — “Sec.  1301.  (a)  * * (b)  * * (c)  * * 
(d)  (!)■  There  is  hereby  created  a board  to  be  known  as  the  “Advisory  Tax  Board,” 

hereinafter  called  the  Board,  and  to  be  composed  of  not  to  exceed  six  members  to  be  ap- 
pointed by  the  Commissioner  with  the  approval  of  the  Secretary..  The  Board  shall  cease 
to  exist  at  the  expiration  of  two  years  after  the  passage  of  this  Act,  or  at  such  earlier  time 
as  the  Commissioner  with  the  approval  of  the  Secretary  may  designate.” 

2653  Law  1[424.  “Vacancies  in  the  membership  of  the  Board  shall  be  filled  in  the  same 
manner  as  an  original  appointment.  Any  meuiber  shall  be  subject  to  removal  by 

the  Commissioner  with  the  approval  of  the  Secretary.  The  Commissioner  with  the  approval 
of  the  Secretary  shall  designate  the  chairman  of  the  Board.  Each  member  shall  receive 
an  annual  salary  of  $9,000,  payable  monthly,  together  with  actual  necessary  expenses 
when  absent  from  the  District  of  Columbia  on  official  business.” 

2654  Law  1[425.  “(2)  The  Commissioner  may,  and  on  the  request  of  any  taxpayer 

directly  interested  shall,  submit  to  the  Board  any  question  relating  to  the  interpre- 
tation or  administration  of  the  income,  war-profits  or  excess-profits  tax  laws,  and  the  Board 
shall  report  its  findings  and  recommendations  to  the  Commissioner.” 

2655  Law  1[426.  “(3)  The  Board  shall  have  its  office  in  the  Bureau  of  Internal  Revenue 
in  the  District  of  Columbia.  The  expenses  and  salaries  of  members  of  the  Board 

shall  be  audited,  allowed,  and  paid  out  of  appropriations  for  collecting  internal  revenue, 
in  the  sam.e  manner  as  expenses  and  salaries  of  employees  of  the  Bureau  of  Internal 
Revenue  are  audited,  allowed,  and  paid.” 

2656  Law  1[427.  “(4)  The  Board  shall  have  the  power  to  summon  witnesses,  take  testi- 
mony, adm.inister  oaths,  and  to  require  any  person  to  produce  books,  papers,  docu- 
ments, or  other  data  relating  to  any  matter  under  investigation  by  the  Board.  Any  member 
of  the  Board  may  sign  subpoenas  and  members  and  employees  of  the  Bureau  of  Internal 
Revenue  designated  to  assist  the  Board,  when  authorized  by  the  Board,  may  administer 
oaths,  examine  witnesses,  take  testimony  and  receive  evidence.”  [Effective  on  the  day 
after  “the  passage”  of  the  Revenue  Act  of  1918,  1[2823.] 

[In  connection  with  the  above  read  at  1|3124.] 

2657  Law  1[428.  Leaves  of  Absence  for  Internal-Revenue  Officers. — “Sec.  1302.  That 

all  internal-revenue  agents  and  inspectors  shall  be  granted  leave  of  absence  with 
pay,  which  shall  not  be  cumulative,  not  to  exceed  thirty  days  in  any  calendar  year,  under 
such  regulations  as  the  Commissioner,  with  the  approval  of  the  Secretary,  may  prescribe.” 

2658  Under  the  provisions  of  section  413  [1[2657  above]  the  following  regulations  are 
prescribed: 

2659  (1)  Applications  for  leave  of  absence  should  be  in  writing,  or  by  telegraph  or 
telephone  if  the  emergency  of  the  case  so  requires,  and  such  applications  should 

be  approved  by  the  revenue  agent  under  whom  the  agent  or  inspector  is  assigned  to  duty. 
Agents  in  charge  of  divisions  will  make  application  for  leave  of  absence  direct  to  this  office. 
(2)  All  leave  of  absence  is  subject  to  the  approval  of  the  Commissioner  of  Internal 

2660  Revenue. 


INC. 


272  TAX 


SUPREME  COURT  DECISIONS. 


(3)  Charges  incurred  on  account  of  telegrams  or  telephone  messages  incident 

2661  to  procuring  leave  will  be  at  the  expense  of  the  officer  desiring  the  leave. 

(4)  Leave  of  absence  is  reckoned  by  the  calendar  year  and  is  not  cumulative;  that 

2662  is,  the  leave  applying  to  one  calendar  year  can  not  accrue  and  be  taken  in  a sub- 
sequent calendar  year. 

2663  (5)  An  agent  or  inspector  in  the  service  on  January  1 and  serving  under  a permanent 
appointment  may  be  granted  leave  of  absence  not  to  exceed  30  days  any  time 

thereafter  in  the  calendar  year  if  the  application  is  approved  by  the  Commissioner  of 
Internal  Revenue. 

(6)  Leave  is  reckoned  at  the  rate  of  2)^  days  per  month,  and  if  an  agent  or  inspector 

2664  entered  the  service  under  permanent  appointment  on  March  1,  he  would  be  entitled 
to  only  25  days’  leave  for  the  balance  of  the  calendar  year,  or  if  service  began  on 

November  1,  he  would  be  entitled  to  only  5 days’  leave  of  absence. 

(7)  Sundays  and  legal  holidays  occurring  within  the  period  leave  is  taken  should  be 

2665  considered  and  counted  as  days  on  leave. 

(8)  Leave  taken  in  this  calendar  year,  under  the  provisions  of  section  413,  must 

2666  be  subsequent  to  September  8,  1916,  the  date  of  approval  of  the  act.  (T.  D.  2369, 
Sept.  12,  1916.) 

2667  Law  ^465.  Invalidating  Clause. — “Sec.  1402.  That  if  any  clause,  sentence,  para- 
graph, or  part  of  this  Act  shall  for  any  reason  be  adjudged  by  any  court  of  competent 

jurisdiction  to  be  invalid,  such  judgment  shall  not  affect,  impair,  or  invalidate  the  remain- 
der of  this  Act,  but  shall  be  confined  in  its  operation  to  the  clause,  sentence,  paragraph, 
or  part  thereof  directly  involved  in  the  controversy  in  which  such  judgment  has  been 
rendered.” 

2668  Cases  Involving  the  Constitutionality  of  the  Revenue  Acts  of  1916,  1917,  and 

1918. — [No  suit  brought  under  any  one  of  these  three  Acts  has  been  decided  by  the 
Supreme  Court,  February  24,  1919.] 

2669  Cases  Involving  the  Constitutionality  of  the  Act  of  October  3,  1913. — The  following 
cases  arising  under  the  income  Tax  Law  of  October  3,  1913,  have  been  decided  in 

the  Supreme  Court  of  the  United  States. 

2670  Frank  R.  Brushaber,  Appellent,  v.  Union  Pacific  Railroad  Company.  (240  U.  S.  1.) 
Appeal  from  the  District  Court  of  the  Southern  District  of  New  York. 

[For  the  opinion  see  ^2685.] 

2671  John  F.  Dodge  and  Horace  E.  Dodge,  Appellants,  v.  James  J.  Brady,  Collector  of 

Internal  Revenue.  (240  U.  S.  122.) 

Appeal  from  U.  S.  District  Court  E.  D.  Michigan. 

[For  the  opinion  see  ^2719.] 

2672  John  R.  Stanton,  Appellant,  v.  Baltic  Mining  Company  ei  al.  (240  U.  S.  103.) 
Appeal  from  U.  S.  District  Court  District  of  Massachusetts. 

[For  the  opinion  see  ^2722.) 

2673  Tyee  Realty  Company,  Plaintiff  in  Error,  v.  Charles  W.  Anderson,  Collector  of 

of  Internal  Revenue.  (240  U.  S.  115.) 

In  Error  to  U.  S.  District  Court  S.  D,  New  York. 

[For  the  opinion  see  ^2715.) 

2674  Edwin  Thorne,  Plaintiff  in  Error,  v.  Charles  W.  Anderson,  Collector  of  Internal 

Revenue.  (240  U.  S.  115.) 

In  Error  to  U.  S.  District  Court  S.  D.  New  York. 

[For  the  opinion  see  ^2715.] 

2675  John  F.  Dodge  and  Horace  Dodge,  Appellants,  v.  William  H.  Osborn,  Commissioner 

of  Internal  Revenue.  (240  U.  S.  118.) 

Appeal  from  the  Court  of  Appeals  of  the  District  of  Columbia. 

267  6 [Comment:  The  appellants  here  [1[2675],  sought  in  the  lower  courts  to  enjoin 
the  asse;ssinent  and  collection  of  the  additional  tax.  The  Court  of  Appeals  of  the 
District  of  Columbia  affirmed  the  decree  of  the  Supreme  Court  of  the  District  of  Columbia 
dismissing  the  bill  and  held  that  the  constitutional  questions  could  not  be  considered  in  a 
proceeding  to  enjoin  collection.  The  U.  S.  Supreme  Court  affirmed.  For  the  opinion 
see  paragraph  2580.] 


INC. 


273  TAX 


SUPREME  COURT  DECISIONS. 


2.^11  Howard  Gould,  Plaintiff  in  Error  v.  Katherine  C.  Gould.  (245  U.  S.  151). 

In  error  to  the  Supreme  Court  of  the  State  of  New  York. 

[For  opinion  see  1[2732.] 

2678  Henry  R.  Towne,  Plaintiff  in  Error  v.  Mark  Eisner,  Collector  of  Internal  Revenue 

(245  U.  S.  418.) 

In  error  to  the  U.  S.  District  Court  for  the  Southern  District  of  New  York. 

[For  opinion  see  ^2738.] 

2679  William  E.  Peck  & Co.,  Inc.,  Plaintiff  in  Error  v.  John  Z.  Lowe,  Jr.,  Collector  of 

Internal  Revenue.  247  U.  S.  165. 

In  error  to  the  U.  S.  District  Court  for  the  Southern  District  of  New  York. 

[For  opinion  see  ^2754.] 

2680  E.  J.  Lynch,  Collector  of  Internal  Revenue,  Petitioner,  v.  H.  C.  Hornby.  (247 

U.  S.  339) 

On  writ  of  certiorari  to  the  U.  S.  Circuit  Court  of  Appeals  for  the  Eighth  Circuit. 
[For  opinion  see  ^2763.] 

2681  E.  J.  Lynch,  Collector  of  Internal  Revenue,  petitioner  v.  Henry  Turrish.  (247 

U.  S.  221.) 

On  writ  of  certiorari  to  the  U.  S.  Circuit  Court  of  Appeals  for  the  Eighth  Circuit. 
[For  opinion  see  ^2776.] 

2682  Charles  A.  Peabody,  Plaintiff  in  Error  v.  Mark  Eisner,  Collector  of  Internal  Revenue* 

(247  U.  S.  347.) 

In  error  to  the  U.  S.  District  Court  for  the  Southern  District  of  New  York. 

[For  opinion  see  ^[2802.] 

2683  Southern  Pacific  Company,  Plaintiff  in  Error  v.  John  Z.  Lowe,  Jr.,  Collector  of 

Internal  Revenue.  (247  U.  S.  330.) 

In  error  to  the  U.  S.  District  Court  for  the  Southern  District  of  New  York. 

[For  opinion  see  ^2804.] 

2684  Gulf  Oil  Corporation,  Petitioner  v.  C.  J.  Lewellyn,  Collector  of  Internal  Revenue. 

(December  9,  1918.) 

On  writ  of  certiorari  to  the  U.  S.  Circuit  Court  of  Appeals  for  the  Third  Circuit. 
[For  opinion  see  ^2820.] 

Brushaber  v.  U.  P.  Railroad  Company. 

(240  U.  S.  1.) 

2685  The  appended  decision  of  the  Supreme  Court  of  the  United  States  In  the  case  of 
Frank  R.  Brushaber  v.  Union  Pacific  Railroad  Co.  is  published  for  the  information 

of  internal-revenue  officers  and  others  concerned.  (T.  D.  2290,  Jan.  31,  1916.) 

(January  24,  1916.) 

Mr.  Chief  Justice  White  delivered  the  opinion  of  the  Court. 

As  a stockholder  of  the  Union  Pacific  Railroad  Company  the  appellant  filed  his 

2686  bill  to  enjoin  the  corporation  from  complying  with  the  income  tax  provisions  of  the 
Tariff  Act  of  October  3,  1913,  (Section  II,  ch.  16,  38  Statutes  166).  Because  of 

constitutional  questions  duly  arising  the  case  is  here  on  direct  appeal  from  a decree  sus- 
taining a motion  to  dismiss  because  no  ground  for  relief  was  stated. 

The  right  to  prevent  the  corporation  from  returning  and  paying  the  tax  was  based 

2687  upon  many  averments  as  to  the  repugnancy  of  the  statute  to  the  Constitution 
of  the  United  States,  of  the  peculiar  relation  of  the  corporation  to  the  stockholders 

and  their  particular  interests  resulting  from  many  of  the  administrative  provisions  of  the 
assailed  act,  of  the  confusion,  wrong  and  multiplicity  of  suits  and  the  absence  of  all  means 
of  redress  which  would  result  If  the  corporation  paid  the  tax  and  complied  with  the  act  in 
other  respects  without  protest,  as  It  was  alleged  it  was  its  intention  to  do.  .To  put  out  of 
the  way  a question  of  jurisdiction  we  at  once  say  that  in  view  of  these  averments  and  the 
ruling  in  Pollock  v.  Farmers’  Loan  & Trust  Co.,  157  U.  S.  429,  sustaining  the  right  of  a 
stockholder  to  sue  to  restrain  a corporation  under  proper  av'erments  fro.m  voluntarily 


% 


IXC. 


274  TAX 


SUPREME  COURT  DECISIONS. 


paying  a tax  charged  to  be  unconstitutional  on  the  ground  that  to  permit  such  a suit  did 
not  violate  the  prohibitions  of  Section  3224,  Revised  Statutes,  against  enjoining  the  en- 
forcement of  taxes,  we  are  of  opinion  that  the  contention  here  made  that  there  was  no  juris- 
diction of  the  cause  since  to  entertain  it  would  violate  the  provisions  of  the  Revised  Statutes 
referred  to  is  without  merit.  Before  coming  to  dispose  of  the  case  on  the  merits,  however, 
we  observe  that  the  defendant  Corporation  having  called  the  attention  of  the  government 
to  the  pendency  of  the  cause  and  the  nature  of  the  controversy  and  its  unwillingness  to 
voluntarily  refuse  to  comply  with  the  act  assailed,  the  United  States  as  amicus  curiae  has 
at  bar  been  heard  both  orally  and  by  brief  for  the  purpose  of  sustaining  the  decree. 

Aside  from  the  averments  as  to  citizenship  and  residence,  recitals  as  to  the  pro'/Isions 

2688  of  the  statute  and  statements  as  to  the  business  of  the  corporation  contained  in 
the  first  ten  paragraphs  of  the  bill  advanced  to  sustain  jurisdiction,  the  bill  alleged 

twenty-one  constitutional  objections  specified  in  that  number  of  paragraphs  or  subdivisions. 
As  all  the  grounds  assert  a violation  of  the  Constitution,  it  follows  that  In  a v/ide  sense 
they  all  charge  a repugnancy  of  the  statute  to  the  Sixteenth  Amendment  under  the  more 
immediate  sanction  of  which  the  statute  was  adopted. 

The  various  propositions  are  so  intermingled  as  to  cause  it  to  be  difficult  to  classify 

2689  them.  We  are  of  opinion,  however,  that  the  confusion  is  not  inherent,  but  rather 
arises  from  the  conclusion  that  the  Sixteenth  Amendment  provides  for  a hitherto 

unknown  power  of  taxation,  that  is,  a power  to  levy  an  income  tax  which  although  direct 
should  not  be  subject  to  the  regulation  of  apportionment  applicable  to  all  other  direct 
taxes.  And  the  far-reaching  effect  of  this  erroneous  assumption  will  be  made  clear  by  gen- 
eralizing the  many  contentions  advanced  in  argument  to  support  it,  as  follows:  (a)  The 
Amendment  authorizes  only  a particular  character  of  direct  tax  without  apportionment, 
and  therefore  if  a tax  is  levied  under  its  assumed  authority  which  does  not  partake  of  the 
characteristics  exacted  by  the  Amendment,  it  is  outside  of  the  Amendment  and  is  void 
as  a direct  tax  in  the  general  constitutional  sense  because  not  apportioned,  (b)  As  the 
Am.cndment  authorizes  a tax  only  upon  incomes  “from  whatever  source  derived,”  the 
exclusion  from  taxation  of  some  income  of  designated  persons  and  classes  is  not  authorized 
and  hence  the  constitutionality  of  the  law  must  be  tested  by  the  general  provisions  of  the 
Constitution  as  to  taxation,  and  thus  again  the  tax  is  void  for  want  of  apportionment, 
(c)  As  the  right  to  tax  “incomes  from  whatever  source  derived”  for  which  the  Amendment 
provides  must  be  considered  as  exacting  intrinsic  uniform.ity,  therefore  no  tax  comes  under 
the  authority  of  the  Am.endment  not  conforming  to  such  standard,  and  hence  all  the 
provisions  of  the  assailed  statute  must  once  more  be  tested  solely  under  the  general  and 
pre-existing  provisions  of  the  Constitution,  causing  the  statute  again  to  be  void  in  the 
absence  of  apportionment,  (d)  As  the  power  conferred  by  the  Amendment  Is  new  and 
prospective,  the  attempt  in  the  statute  to  make  its  provisions  retroactively  apply  is^  void 
because  so  far  as  the  retroactive  period  is  concerned,  it  is  governed  by  the  pre-existing 
constitutional  requirement  as  to  apportionment. 

But  it  clearly  results  that  the  proposition  and  the  contentions  under  it,  if  acceded 

2690  to,  would  cause  one  provision  of  the  Constitution  to  destroy  another;  that  is,  they 
would  result  In  bringing  the  provisions  of  the  Amendm.ent  exempting  a direct  tax 

from  apportionm.ent  into  Irreconcilable  conflict  with  the  general  requirement  that  all  direct 
taxes  be  apportioned.  Moreover,  the  tax  authorized  by  the  Am.endment,  being  direct, 
would  not  come  under  the  rule  of  uniformity  applicable  under  the  Constitution  to  other  than 
direct  taxes,  and  thus  It  would  come  to  pass  that  the  result  of  the  Amendment  would  be 
to  authorize  a particular  direct  tax  not  subject  either  to  apportionment  or  to  the  rule  of 
geographical  uniformity,  thus  giving  power  to  im.pose  a different  tax  in  one  state  or  states 
than  was  levied  in  another  state  or  states.  This  result  instead  of  simplifying  the  situation 
and  m.aking  clear  the  lim.itations  on  the  taxing  power,  which  obviously  the  Amendment 
must  have  been  intended  to  accomplish,  would  create  radical  and  destructive  changes  in 
our  constitutional  system  and  multiply  confusion. 

But  let  us  by  a demonstration  of  the  error  of  the  fundamental  proposition  as  to  the 

2691  significance  of  the  Amendment  dispel  the  confusion  necessarily  arising  from  the 
arguments  deduced  from  it.  Before  coming,  however,  to  the  text  of  the  Amendment, 

to  the  end  that  Its  significance  may  be  determined  in  the  light  of  the  previous  legislative 
and  judicial  history  of  the  subject  with  which  the  Amendment  is  concerned  and  with  a 
knowledge  of  the  conditions  which  presumptively  led  up  to  its  adoption  and  hence  of  the 
purpose  it  was  intended  to  accomplish,  we  make  a brief  statement  on  those  subjects. 

That  the  authority  conferred  upon  Congress  by  section  8 of  Article  I “to  lay  and 

2692  collect  taxes,  duties,  imposts  and  excises”  is  exhaustive  and  embraces  every  conceiv- 
able power  of  taxation  has  never  been  questioned,  or.  If  it  has,  has  been  so  often  au- 
thoritatively declared  as  to  render  it  necessary  only  to  state  the  doctrine.  And  it  has  ajso 
never  been  questioned  from  the  foundation,  without  stopping  presently  to  determine 
under  which  of  the  separate  headings  the  power  was  properly  to  be  classed,  that  there 


INC. 


275 


TAX 


SUPREME  COURT  DECISIONS. 


was  authority  given  as  the  part  was  included  in  the  whole,  to  lay  and  collect  income  taxes. 
Again,  it  has  never  moreover  been  questioned  that  the  conceded  complete  and  all-embracing 
taxing  power  was  subject,  so  far  as  they  were  respectively  applicable,  to  limitations  result- 
ing from,  the  requirem.ents  of  Art.  I,  sec.  8,  cl.  1,  that  ‘‘all  duties,  im.posts  and  excises 
shall  be  uniform  throughout  the  United  States,”  and  to  the  limitations  of  Art.  I,  sec.  2, 
cl.  3,  that  ‘‘direct  taxes  shall  be  apportioned  among  the  several  states”  and  of  Art.  1,  sec.  9, 
cl.  4,  that  “no  capitation,  or  other  direct,  tax  shall  be  laid,  unless  in  proportion  to  the  census 
or  enumeration  hereinbefore  directed  to  be  taken.”  In  fact  the  two  great  subdivision 
embracing  the  complete  and  perfect  delegation  of  the  power  to  tax  and  the  two  correlated 
limitations  as  to  such  power  were  thus  aptly  stated  by  Mr.  Chief  Justice  Fuller  in  Pollock 
V.  Farmers’  Loan  & Trust  Com.pany,  supra,  at  page  557:  “In  the  matter  of  taxation, 
the  Constitution  recognizes  the  two  great  classes  of  direct  and  indirect  taxes,  and  lays 
down  two  rules  by  which  their  imposition  must  be  governed,  namely:  The  rule  of  appor- 
tionment as  to  direct  taxes,  and  the  rule  of  uniformity  as  to  duties,  imposts  and  excises.” 
It  is  to  be  observ'ed,  however,  as  long  ago  pointed  out  in  Veazie  Bank  v.  Fenno,  8 Wall. 
553,  541,  that  the  requirement  of  apportionment  as  to  one  of  the  great  classes  and  of  uni- 
formity as  to  the  other  class  were  not  so  much  a limitation  upon  the  complete  and  all  em- 
bracing authority  to  tax,  but  in  their  essence  were  simply  regulations  concerning  the  mode 
in  which  the  plenary  power  was  to  be  exerted.  In  the  whole  history  of  the  Government 
down  to  the  time  of  the  adoption  of  the  Sixteenth  Am.endment,  leaving  asicfe  some  conjec- 
tures expressed  to  the  possibility  of  a tax  lying  intermediate  between  the  two  great 
classes  and  em.braced  by  neither,  no  question  has  been  anywhere  made  as  to  the  correct- 
ness of  these  propositions.  At  the  very  beginning,  however,  there  arose  di^erences  of  opinion 
concerning  the  criteria  to  be  applied  in  determining  in  which  of  the  two  great  subdivisions 
a tax  would  fall.  Without  pausing  to  state  at  length  the  basis  of  these  didferences  and  the 
consequences  which  arose  from  them,  as  the  whole  subject  was  elaborately  reviewed  in 
Pollock  V.  Farmers’  Loan  5:  Trust  Company,  157  U.  S.  429;  158  U.  S.  601,  we  make  a con- 
densed statement  which  is  in  substance  taken  from  what  was  said  in  that  case.  Early  the 
differences  were  manifested  in  pressing  on  the  one  hand  and  opposing  on  the  other,  the 
passage  of  an  act  levying  a tax  without  apportionment  on  carriages  “for  the  conveyance 
of  persons,”  and  when  such  a tax  was  enacted  the  question  of  its  repugnancy  to  the  Constitu- 
tion soon  came  to  this  court  for  determination.  (Hylton  v.  United  States,  3 Dali.  171.) 
It  was  held  that  the  tax  came  within  the  class  of  excises,  duties  and  imposts  and  therefore 
did  not  require  apportionment,  and  while  this  conclusion  was  agreed  to  by  all  the  members 
of  the  court  who  took  part  in  the  decision  of  the  case,  there  was  not  an  exact  coincidence 
in  the  reasoning  by  which  the  conclusion  was  sustained.  Without  stating  the  minor  dif- 
ferences, it  may  be  said  with  substantial  accuracy  that  the  divergent  reasoning  was  this: 
On  the  one  hand,  that  the  tax  was  not  in  the  class  of  direct  taxes  requiring  apportionment 
because  it  was  not  lemed  directly  on  property  because  of  its  ownership  but  rather  on  its 
use  and  was  therefore  an  excise,  duty  or  impost;  and  on  the  other,  that  in  any  event  the 
class  of  direct  taxes  included  only  taxes  directly  levied  on  real  estate  because  of  its  owner- 
ing.  Putting  out  of  view  the  difference  of  reasoning  which  led  to  the  concurrent  conclusion 
in  the  Hylton  case,  it  is  undoubted  that  it  came  to  pass  in  legislative  practice  that  the  line 
of  demarcation  between  the  two  great  classes  of  direct  taxes  on  the  one  hand  and  excises, 
duties  and  imposts  on  the  other  which  was  exemplified  by  the  ruling  in  that  case,  was 
accepted  and  acted  upon.  In  the  first  place  this  is  shown  by  the  fact  that  wherever  (and 
there  were  a number  of  cases  of  that  kind)  a tax  was  levied  directly  on  real  estate  or  slaves 
because  of  ownership,  it  was  treated  as  com.ing  within  the  direct  class  and  apportionment 
was  provided  for,  while  no  instance  of  apportionment  as  to  any  other  kind  of  tax  is  afforded. 
Again  the  situation  is  aptly  illustrated  by  the  various  acts  taxing  incomies  derived  from 
property  of  every  kind  and  nature  which  were  enacted  beginning  in  1861  and  lasting 
during  what  m.ay  be  termed  the  Civil  War  period.  It  is  not  disputable  that  these  latter 
taxing  laws  were  classed  under  the  head  of  excises,  duties  and  imposts  because  it  was 
assumed  that  they  were  of  that  character  inasmuch  as,  although  putting  a tax  burden  on 
income  of  every  kind,  including  that  derived  from  property  real  or  personal,  they  were 
not  taxes  directly  on  property  because  of  its  ownership.  And  this  practical  construction 
came  in  theory  to  be  the  accepted  one  since  it  was  adopted  without  dissent  by  the  most 
eminent  of  the  text-writers.  1 Kent.  Com.  254,  256;  1 Story  Const.,  Sect.  955;  Cooley 
Const.  Lim.  (5th  ed.)  480;  Miller  on  the  Constitution,  237;  Pomeroy’s  Constitutional 
Law,  Section  281;  Hare  Const.  Law,  Uol.  1,  249,  250;  Burroughs  on  Taxation,  502; 
Ordronaux,  Constitutional  Legislation,  225. 

Upon  the  lapsing  of  a considerable  period  after  the  repeal  of  the  income  tax  laws 
2693  referred  to,  in  1894  an  act  was  passed  laying  a tax  on  incomes  from  all  classes  of 
property  and  other  sources  of  revenue  which  was  not  apportioned,  and  which  there- 
fore was  of  course  assumed  to  come  within  the  classification  of  excises,  duties  and  imposts 
which  were  subject  to  the  rule  of  uniformity  but  not  to  the  rule  of  apportionment.  The 
constitutional  validity  of  this  law  was  challenged  on  the  ground  that  it  did  not  fall  within 
the  class  of  excises,  duties  and  imposts,  but  was  direct  in  the  constitutional  sense  and  was 


INC. 


276  TAX 


SUPREME  COURT  DECISIONS. 


therefore  void  for  want  of  apportionment,  and  that  question  came  to  this  court  and  was 
passed  upon  in  Pollock  v.  Farmers’  Loan  & Trust  Co.,  157  U.  S.  429;  158  U.  S.  601.  The 
court,  fully  recognizing  in  the  passage  which  we  have  previously  quoted  the  all-embracing 
character  of  the  two  great  classifications  including,  on  the  one  hand,  direct  taxes  subject 
to  apportionm.ent,  and  on  the  other,  excises,  duties  and  im.posts  subject  to  uniformity, 
held  the  law  to  be  unconstitutronal  in  substance  for  these  reasons.  Concluding  that  the 
classification  of  direct  was  adopted  for  the  purpose  of  rendering  it  impossible  to  burden 
by  taxation  accumulations  of  property,  real  or  personal,  except  subject  to  the  regulation 
of  apportionm.ent,  it  wms  held  that  the  duty  existed  to  fix  what  was  a direct  tax  in  the 
constitutional  sense  so  as  to  accom.pllsh  this  purpose  contemplated  by  the  Constitution. 
(157  U.  S.  581.)  Coming  to  consider  the  validity  of  the  tax  from  this  point  of  view,  while 
not  questioning  at  all  that  in  com.m.on  understanding  it  was  direct  merely  on  income  and 
only  indirect  on  property,  it  was  held  that  considering  the  substance  of  things  it  was  direct 
on  property  in  a constitutional  sense  since  to  burden  an  income  by  a tax  was  from  the  point 
of  substance  to  burden  the  property  from  which  the  incomie  was  derived  and  thus  accom- 
plish the  very  thing  which  the  provision  as  to  apportionment  of  direct  taxes  was  adopted 
to  prevent.  As  this  conclusion  but  enforced  a regulation  as  to  the  mode  of  exercising  power 
under  particular  circum.stances,  it  did  not  in  any  way  dispute  the  all  embracing  taxing 
authority  possessed  by  Congress,  including  necessarily  therein  the  power  to  impose  income 
taxes  if  only  they  conformed  to  the  constitutional  regulations  which  were  applicable  to 
them..  Atoreover  in  addition  the  conclusion  reached  in  the  Pollock  case  did  not  in  any 
degree  involve  holding  that  incom.e  taxes  generlcally  and  necessarily  came  within  the  class 
of  direct  taxes  on  property,  but  on  the  contrary  recognized  the  fact  that  taxation  on  income 
was  in  its  nature  an  excise  entitled  to  be  enforced  as  such  unless  and  until  it  was  con- 
cluded that  to  enforce  it  would  amount  to  accom.plishing  the  result  which  the  requirement 
as  to  apportionmient  of  direct  taxation  was  adopted  to  prevent,  in  which  case  the  duty 
would  arise  to  disregard  form  and  consider  substance  alone  and  hence  subject  the  tax  to 
the  regulation  as  to  apportionment  which  otherwise  as  an  excise  would  not  apply  to  it. 
Nothing  could  serve  to  make  this  clearer  than  to  recall  that  in  the  Pollock  case  in  so  far 
as  the  law  taxed  incomes  from  other  classes  of  property  than  real  estate  and  invested  per- 
sonal property,  that  is,  incom.e  from  “professions,  trades,  employments,  or  vocations” 
(158  U.  S.  637),  its  validity  was  recognized;  indeed  it  was  expressly  declared  that  no 
dispute  was  made  upon  that  subject  and  attention  was  called  to  the  fact  that  taxes  on 
such  incom.e  had  been  sustained  as  excise  taxes  in  the  past.  Ib.  p.  635.  The  whole  law 
w'as,  howmver,  declared  unconstitutional  on  the  ground  that  to  permit  it  to  thus  operate 
would  relieve  real  estate  and  invested  personal  property  from  taxation  and  “would  leave 
the  burden  of  the  tax  to  be  borne  by  professions,  trades,  employments,  or  vocations;  and 
in  that  way  what  was  intended  as  a tax  on  capital  would  remain,  in  substance,  a tax  on 
occupations  and  labor,”  (Ib.  p.  637)  a result  which  it  was  held  could  not  have  been  con- 
templated by  Congress. 

This  is  the  text  of  the  Amendment; 

2694  “That  Congress  shall  have  power  to  lay  and  collect  taxes  on  incomes  from  what- 
ever source  derived,  without  apportionment  among  the  several  States,  and  without 

regard  to  any  census  or  enumeration.” 

It  is  clear  on  the  face  of  this  text  that  it  does  not  purport  to  confer  power  to  levy 

2695  income  taxes  in  a generic  sense — an  authority  already  possessed  and  never  ques- 
tioned— or  to  limit  and  distinguish  between  one  kind  of  income  taxes  and  another, 

but  that  the  whole  purpose  of  the  Amendment  was  to  relieve  all  income  taxes  when  imposed 
from  apportionment  from  a consideration  of  the  source  whence  the  income  was  derived. 
Indeed,  in  the  light  of  the  history  which  we  have  given  and  of  the  decision  in  the  Pollock 
case  and  the  ground  upon  which  the  ruling  in  that  case  was  based,  there  is  no  escape  from 
the  conclusion  that  the  Amendment  was  drawn  for  the  purpose  of  doing  away  for  the 
future  with  the  principle  upon  which  the  Pollock  case  was  decided,  that  is,  of  determining 
whether  a tax  on  income  was  direct  not  by  a consideration  of  the  burden  placed  on  the 
taxed  income  upon  which  it  directly  operated,  but  by  taking  into  view  the  burden  which 
resulted  on  the  property  from  which  the  income  was  derived,  since  in  express  terms  the 
Amendment  provides  that  income  taxes,  from  whatever  source  the  income  may  be  derived, 
shall  not  be  subject  to  the  regulations  of  apportionment.  From  this  in  substance  it  indis- 
putably arises,  first,  that  all  the  contentions  which  we  have  previously  noticed  concerning 
the  assumed  limitations  to  be  implied  from  the  language  of  the  Amendment  as  to  the  nature 
and  character  of  the  income  taxes  which  it  authorized  find  no  support  in  the  text  and  are 
in  irreconcilable  conflict  with  the  very  purpose  which  the  Amendment  was  adopted  to 
accomplish.  Second,  that  the  contention  that  the  Amendment  treats  a tax  on  income 
as  a direct  tax  although  it  is  relieved  from  apportionment  and  is  necessarily  therefore 
not  subject  to  the  rule  of  uniformity  as  such  rule  only  applies  to  taxes  which  are  not  direct, 
thus  destroying  the  two  great  classifications  which  have  been  recognized  and  enforced 


INC. 


277  TAX 


SUPREME  COURT  DECISIONS. 


from  the  beginning,  Is  also  wholly  without  foundation  since  the  command  of  the  Amend- 
ment that  all  income  taxes  shall  not  be  subject  to  apportionment  by  a consideration  of 
the  sources  from  which  the  taxed  income  may  be  derived,  forbids  the  application  to  such 
taxes  of  the  rule  applied  in  the  Pollock  case  by  which  alone  such  taxes  were  removed  from 
the  great  class  of  excises,  duties  and  imposts  subject  to  the  rule  of  uniformity  and  were 
placed  under  the  other  or  direct  class.  This  must  be  unless  it  can  be  said  that  although 
the  Constitution  as  a result  of  the  Amendment  in  express  terms  excludes  the  criterion 
of  source  of  income,  that  criterion  yet  remains  for  the  purpose  of  destroying  the  classifica- 
tions of  the  constitution  by  taking  an  excise  out  of  the  class  to  which  it  belongs  and  trans- 
ferring it  to  a class  in  which  it  cannot  be  placed  consistently  with  the  requirements  of 
the  Constitution.  Indeed,  from  another  point  of  view,  the  Amendment  demonstrates 
that  no  such  purpose  was  intended  and  on  the  contrary  shows  that  it  was  drawn  with  the 
object  of  maintaining  the  limitations  of  the  Constitution  and  harmonizing  their  operation. 
We  say  this  because  it  is  to  be  observed  that  although  from  the  date  of  the  Hylton  case 
because  of  statements  made  in  the  opinions  in  that  case  it  had  come  to  be  accepted  that 
direct  taxes  in  the  constitutional  sense  were  confined  to  taxes  levied  directly  on  real  estate 
because  of  its  ownership,  the  Amendment  contains  nothing  repudiating  or  challenging 
the  ruling  in  the  Pollock  case  that  the  word  direct  had  a broader  significance  since  it 
embraced  also  taxes  levied  directly  on  personal  property  because  of  its  ownership,  and 
therefore  the  amendment  at  least  impliedly  makes  such  wider  significance  a part  of  the 
constitution — a condition  which  clearly  demonstrates  that  the  purpose  was  not  to  change 
the  existing  interpretation  except  to  the  extent  necessary  to  accomplish  the  result  intended, 
that  is,  the  prevention  of  the  resort  to  the  sources  from  which  a taxed  income  was  derived 
in  order  to  cause  a direct  tax  on  the  income  to  be  a direct  tax  on  the  source  itself  and 
thereby  to  take  an  income  tax  out  of  the  class  of  excises,  duties  and  imports  and  place 
it  In  the  class  of  direct  taxes. 

We  come  then  to  ascertain  the  merits  of  the  many  contentions  made  in  the  light 

2696  of  the  Constitution  as  it  now  stands  that  is  to  say  including  within  its  terms 
the  provisions  of  the  Sixteenth  Amendment  as  correctly  interpreted.  We  first 

dispose  of  two  propositions  assailing  the  validity  of  the  statute  on  the  one  hand  because 
of  its  repugnancy  to  the  Constitution  in  other  respects,  and  especially  because  its  enactment 
was  not  authorized  by  the  Sixteenth  Amendment. 

The  statute  was  enacted  October  3,  1913,  and  provided  for  a eeneral  yearly  Income 

2697  tax  from  December  to  December  of  each  year.  Exceptionally,  however,  it  fixed 
a first  period  embracing  only  the  time  from  March  1,  to  December  31,  1913,  and 

this  limited  retroactivity  is  assailed  as  repugnant  to  the  due  process  clause  of  the  Fifth 
Amendment  and  as  inconsistent  with  the  Sixteenth  Amendment  itself.  But  the  date  of  the 
retroactivity  did  not  extend  beyond  the  time  when  the  Amendment  was  operative,  and 
there  can  be  no  dispute  that  there  was  power  by  virtue  of  the  Amendment  during  that 
period  to  levy  the  tax,  v.'ithout  apportionment,  and  so  far  as  the  limitations  of  the  Con- 
stitution in  other  respects  are  concerned,  the  contention  is  not  open,  since  in  Stockdale 
vs.  Insurance  Companies,  20  Wall  323,  331,  in  sustaining  a provision  in  a prior  income  tax 
law  which  was  assailed  because  of  its  retroactive  character,  it  was  said: 

“The  right  of  Congress  to  have  imposed  this  tax  by  a new  statute,  although  the  measure 
of  it  was  governed  by  the  income  of  the  past  year,  cannot  be  doubted;  much  less  can  it  be 
doubted  that  it  could  impose  such  a tax  on  the  income  of  the  current  year,  though  part 
of  that  year  had  elapsed  when  the  statute  was  passed.  The  joint  resolution  of  July  4,  1864, 
imposed  a tax  of  five  per  cent  upon  all  incom.e  of  the  previous  year,  although  one  tax  on 
it  had  already  been  paid,  and  no  one  doubted  the  validity  of  the  tax  or  attempted  to 
resist  it.” 

The  statute  provides  that  the  tax  should  not  apply  to  enumerated  organizations 
2692  or  corporations,  such  as  labor,  agricultural  or  horticultural  organizations,  mutual 
savings  banks,  etc.,  and  the  argument  is  that  as  the  Amendment  authorized  a tax 
on  Incomes  “from  whatever  source  derived,”  by  implication  it  excluded  the  power  to  make 
these  exemptions.  But  this  is  only  a form  of  expressing  the  erroneous  contention  as  to 
the  meaning  of  the  Amendment,  which  we  have  already  disposed  of.  And  so  far  as  this 
alleged  illegality  is  based  on  other  provisions  of  the  Constitution,  the  contention  is  also 
not  open,  since  it  was  expressly  considered  and  disposed  of  in  Flint  v.  Stone  Tracy  Co., 
220  U.  S.  108,  173. 

Without  expressly  stating  all  the  other  contentions,  we  summarize  them  to  a 

2699  degree  adequate  to  enable  us  to  typify  and  dispose  of  all  of  them. 

1.  The  statute  levies  one  tax  called  a normal  tax  on  all  incomes  of  individuals 

2700  up  to  $20,000  and  from  that  amount  up  by  gradations,  a progressively  increasing 
tax  called  an  additional  tax,  is  imposed.  No  tax,  however,  is  levied  upon  incomes 

of  unmarried  individuals  amounting  to  $3,000  or  less  nor  upon  incomes  of  married  persons 
amounting  to  $4,000  or  less.  The  progressive  tax  and  the  exempted  amounts,  it  is  said, 
are  based  on  wealth  alone  and  the  tax  is  therefore  repugnant  to  the  due  process  clause  of 
the  Fifth  Amendment. 


INC. 


278 


TAX 


SUPREME  COURT  DECISIONS. 


2.  The  act  provides  for  collecting  the  tax  at  the  source,  that  is,  makes  it  the  duty 

2701  of  corporations,  etc.,  to  retain  and  pay  the  sum  of  the  tax  on  interest  due  on  bonds 
and  mortgages,  unless  the  owner  to  whom  the  interest  is  payable  gives  a notice  that 

he  claims  an  exemption.  This  duty  cast  upon  corporations,  because  of  the  cost  to  which 
they  are  subjected,  is  asserted  to  be  repugnant  to  due  process  of  law  as  a taking  of  their 
property  without  compensation,  and  we  recapitulate  various  contentions  as  to  discrim- 
ination against  corporations  and  against  individuals  predicated  on  provisions  of  the  act 
dealing  with  the  subject: 

(rt)  Corporations  indebted  upon  coupon  and  registered  bonds  are  discriminated 

2702  against,  since  corporations  not  so  indebted  are  relieved  of  any  labor  or  expense 
involved  in  deducting  and  paying  the  taxes  of  individuals  on  the  income  derived 

from  bonds. 

{b)  Of  the  class  of  corporations  indebted  as  above  stated,  the  law  further  dis- 

2703  criminates  against  those  w'hich  have  assumed  the  payment  of  taxes  on  their  bonds, 
since,  although  some  or  all  of  their  bondholders  may  be  exempt  from  taxation, 

the  corporations  have  no  means  of  ascertaining  such  fact,  and  it  would  therefore  result 
that  taxes  would  often  be  paid  by  such  corporations  when  no  taxes  were  owing  by  the  indi- 
viduals to  the  Government. 

(c)  The  law  discriminates  against  owners  of  corporate  bonds  in  favor  of  individuals 

2704  none  of  whose  income  is  derived  from  such  property,  since  bondholders  are,  during 
the  interval  benveen  the  deducting  and  the  paying  of  the  tax  on  their  bonds,  de- 
prived of  the  use  of  the  money  so  wdthheld. 

{d)  Again  corporate  bondholders  are  discriminated  against  because  the  law  does 

2705  not  release  them  from  payment  of  taxes  on  their  bonds  even  after  the  taxes  have 
been  deducted  by  the  corporation,  and  therefore  if  after  deduction  the  corporation 

should  fail,  the  bondholders  would  be  compelled  to  pay  the  tax  a second  time. 

((f)  Owners  of  bonds  the  taxes  on  which  have  been  assumed  by  the  corporation  are 

2706  discriminated  against  because  the  payment  of  the  taxes  by  the  corporation  does 
not  relieve  the  bondholders  of  their  duty  to  include  the  income  from  such  bonds 

in’making  a return  of  all  income,  the  result  being  a double  payment  of  the  taxes,  labor 
and  expense  in  applying  for  a refund,  and  a deprivation  of  the  use  of  the  sum  of  the  taxes 
during  the  interval  which  elapses  before  they  are  refunded. 

3.  The  provision  limiting  the  amount  of  interest  paid  which  may  be  deducted  from 

2707  gross  income  of  corporations  for  the  purpose  of  fixing  the  taxable  income  to  interest 
on  indebtedness  not  exceeding  one-half  the  sum  of  bonded  indebtedness  and  paid- 

up”'capita!  stock,  is  also  charged  to  be  wanting  in  due  process  because  discriminating 
between  different  classes  of  corporations  and  individuals. 

4.  It  is  urged  that  want  of  due  process  results  from  the  provision  allowing  indi- 

2708  viduals  to  deduct  from  their  gross  income  dividends  paid  them  by  corporations 
whose  incomes  are  taxed  and  not  giving  such  rights  of  deduction  to  corporations. 

5.  Want  of  due  process  is  also  asserted  to  result  from  the  fact  that  the  act  allows 

2709  a deduction  of  $3,000  or  $4,000  to  those  who  pay  the  normal  tax,  that  is,  whose 
incomes  are  $20,000  or  less,  and  does  not  allow  the  deduction  to  those  whose  incomes 

are  greater  than  $20,000;  that  is,  such  persons  are  not  allowed  for  the  purpose  of  the 
additional  or  progressive  tax  a second  right  to  deduct  the  $3,000  or  $4,000  which  they  have 
already  enjoyed.  And  a further  violation  of  due  process  is  based  on  the  fact  that  for  the 
purpose  of  the  additional  tax  no  second  right  to  deduct  dividends  received  from  corporations 
is  permitted. 

6.  In  various  forms  of  statement,  want  of  due  process,  it  is  moreover  insisted, 

27  1 0 arises  from  the  provisions  of  the  act  allowing  a deduction  for  the  purpose  of  ascer- 

taining the  taxable  income  of  stated  amounts  on  the  ground  that  the  provisions 

discriminate  between  married  and  single  people  and  discriminate  between  husbands  and 
wives  who  are  living  together  and  those  who  are  not. 

7.  Discrimination  and  want  of  due  process  results,  It  Is  said,  from  the  fact  that 

271  1 the  owners  of  houses  in  which  they  live  are  not  compelled  to  estimate  the  rental 

value  In  making  up  their  incomes,  while  those  who  are  living  in  rented  houses 

and  pay  rent  are  not  allowed,  in  making  up  their  taxable  income,  to  deduct  rent  which 
they  have  paid,  and  that  want  of  due  process  also  results  from  the  fact  that  although 
family  expenses  are  not  as  a rule  permitted  to  be  deducted  from  gross  to  arrive  at  taxable, 
income,  farmers  are  permitted  to  omit  from  their  income  return,  certain  products  of  the 
farm  which  are  susceptible  of  use  by  them  for  sustaining  their  families  during  the  year. 

So  far  as  these  numerous  and  minute,  not  to  say  in  many  respects  hypercritical 
2712  contentions,  are  based  upon  an  assumed  violation  of  the  uniformity  clause,  their 
want  of  legal  merit  is  at  once  apparent,  since  it  is  settled  that  that  clause  exacts 
only  a geographical  uniformity  and  there  is  not  a semblance  of  ground  in  any  of  the  pro- 
positions for  assuming  that  a violation  of  such  uniformity  is  complained  of.  Knowlton 
v.  Moore,  178  U.  S.  41;  Patton  v.  Brady,  184  U.  S.  608,  622;  Flint  v.  Stone  Tracy  Co. 
220  U.  S.  107,  158;  Billings  v.  United  States,  232  U.  S.  608,  622. 


INC. 


279  TAX 


SUPREME  COURT  DECISIONS. 


So  far  as  the  due  process  clause  of  the  Fifth  Amendment  Is  relied  upon,  it  suffices 

2713  to  say  that  there  is  no  basis  for  such  reliance  since  it  is  equally  well  settled  that 
such  clause  is  not  a limitation  upon  the  taxing  power  conferred  upon  Congress 

by  the  Constitution;  in  other  words,  that  the  Constitution  does  not  conflict  with  itself 
by  conferring  upon  the  one  hand  a taxing  power  and  taking  the  same  power  away  on  the 
other  by  the  limitations  of  the  due  process  clause.  Treat  v.  White,  181  U.  S.  264;  Patton 
V.  Brady,  184  U.  S.,  608;  McCray  v.  United  States,  195  U.  S.  27,  61;  Flint  v.  Stone  Tracy 
Co.,  supra;  Billings  v.  United  States,  232  U.  S.  261,  282.  And  no  change  in  the  situation 
here  would  arise  even  if  it  be  conceded,  as  we  think  it  must  be,  that  this  doctrine  would 
have  no  application  in  a case  where  although  there  was  a seeming  exercise  of  the  taxing 
power,  the  act  complained  of  was  so  arbitrary  as  to  constrain  to  the  conclusion  that  it  was 
not  the  exertion  of  taxation  but  a confiscation  of  property,  that  is,  a taking  of  the  same  in 
violation  of  the  Fifth  Amendment,  or,  what  is  equivalent  thereto,  was  so  wanting  in  basis 
for  classification  as  to  produce  such  a gross  and  patent  inequality  as  to  inevitably  lead 
to  the  same  conclusion.  We  say  this  because  none  of  the  propositions  relied  upon  in  the 
remotest  degree  present  such  questions.  It  is  true  that  it  is  elaborately  insisted  that 
although  there  be  no  express  constitutional  provision  prohibiting  it,  the  progressive  feature 
of  the  tax  causes  it  to  transcend  the  conception  of  all  taxation  and  to  be  a mere  arbitrary 
abuse  of  power  which  must  be  treated  as  wanting  in  due  process.  But  the  propostion  dis- 
regards the  fact  that  in  the  very  early  history  of  the  Government  a progressive  tax  was 
imposed  by  Congress  and  that  such  authority  was  exerted  in  some  if  not  all  of  the  various 
income  taxes  enacted  prior  to  1894  to  which  we  have  previously  adverted.  And  over 
and  above  all  this  the  contention  but  disregards  the  further  fact  that  its  absolute  want  of 
foundation  in  reason  was  plainly  pointed  out  in  Knowlton  v.  Moore,  supra,  and  the  right 
to  urge  it  was  necessarily  foreclosed  by  the  ruling  in  that  case  made.  In  this  situation,  it 
is,  of  course,  superfluous  to  say  that  arguments  as  to  the  expediency  of  levying  such  taxes 
or  of  the  economic  mistake  or  wrong  involved  in  their  imposition  are  beyond  judicial  cog- 
nizance. Besides  this  demonstration  of  the  want  of  merit  in  the  contention  based  upon  the 
progressive  feature  of  the  tax,  the  error  in  the  others  is  equally  well  established  either  by 
prior  decisions  or  by  the  adequate  bases  for  classification  which  are  apparent  on  the  face 
of  the  assailed  provisions,  that  is,  the  distinction  between  individuals  and  corporations, 
the  difference  between  various  kinds  of  corporations,  etc.,  etc.,  Knowlton  v.  Moore,  supra 
Flint  V.  Stone  Tracy  Co.,  supra;  Billings  v.  United  States  , supra;  National  Bank  v. 
Commonwealth,  9 Wall  353;  National  Safe  Deposit  Co.  v.  Illinois,  232  U.  S.  58,  70.  In 
fact,  com.prehensively  surveying  all  the  contentions  relied  upon,  aside  from  the  erroneous 
construction  of  the  Amendm.ent  which  we  have  previously  disposed  of,  we  cannot  escape 
the  conclusion  that  they  all  rest  upon  the  m.istaken  theory  that  although  there  be  difter- 
ences  between  the  subjects  taxed,  to  differently  tax  them  transcends  the  limit  of  taxation 
and  amiounts  to  a want  of  due  process,  and  that  where  a tax  levied  is  believed  by  one  who 
resists  it  enforcement  to  be  wanting  in  wisdom  and  to  operate  injustice,  from  that  fact 
in  the  nature  of  things  there  arises  a want  of  due  process  of  law  and  a resulting  authority 
in  the  judiciary  to  exceed  its  powers  and  correct  what  is  assumed  to  be  m.istaken  or  unwise 
exertions  by  the  legislative  authority  of  its  lawful  powers,  even  although  there  be  no  sem- 
blance of  warrant  in  the  Constitution  for  so  doing. 

We  have  not  referred  to  a contention  that  because  certain  administrative  powers 

2714  to  enforce  the  act  were  conferred  by  the  statute  upon  the  Secretary  of  the  Treasury, 
therefore  it  was  void  as  unwarrantedly  delegating  legislative  authority,  because 

we  think  to  state  the  proposition  is  to  answer  it.  Field  v.  Clark,  143  U.  S.  649;  Buttfield 
V.  Stranahan,  192  U.  S.  470,  496;  Oceanic  Steam  Navigation  Co.  v.  Stranahan,  214  U.  S. 
320. 

Affirmed. 

Mr.  Justice  McReynolds  took  no  part  in  the  consideration  and  decision  of  this  case. 

Tyee  Realty  Company  vs.  Anderson 
and 

Edwin  Thorne  vs.  Anderson. 

(240  U.  S.  115.) 

27  15  T he  appended  decision  of  the  Supreme  Court  of  the  United  States  in  the  case 
of  Tyee  Realty  Co.  v.  Anderson,  collector,  and  Edwin  Thorne  v.  Anderson,  collector, 
is  published  for  the  inform.ation  of  internal-revenue  officers  and  others  concerned.  (T.  D. 
2300,  March  3,  1916.) 

(February  21,  1916.) 

Mr.  Chief  Justice  White  delivered  the  opinion  of  the  Court. 

Both  the  plaintiffs  in  error,  the  one  in  393  a corporation  and  the  other  in  394  an 
2716  individual,  paid  under  protest  to  the  Collector  of  Internal  Revenue,  taxes  assessed 
under  the  Incom.e  Tax  section  of  the  Tariff  Act  of  October  3,  1913  (Sec.  II,  ch.  16, 
38  Stat.  166).  After  an  adverse  ruling  by  the  Commissioner  of  Internal  Revenue  on 


INC. 


280  TAX 


SUPREME  COURT  DECISIONS. 


appeals  which  were  prosecuted  conformably  to  the  statute  (Rev.  Stat.  Sections  3220,  3226) 
by  both  the  parties  for  a refunding  to  them  of  the  taxes  paid,  these  suits  were  commenced 
to  recover  the  amounts  paid  on  the  ground  of  the  repugnance  to  the  Constitution  of  the 
Section  of  the  Statute  under  which  the  taxes  had  been  collected,  and  the  cases  are  here  on 
direct  writs  of  error  to  the  judgments  of  the  court  below  sustaining  demurrers  to  both  com- 
plaints on  the  ground  that  they  stated  no  cause  of  action. 

Every  contention  relied  upon  for  reversal  in  the  two  cases  is  embraced  within  the 

2717  following  propositions:  (a)  that  the  tax  imposed  by  the  statute  was  not  sanctioned 
by  the  Sixteenth  Amendment  because  the  statute  exceeded  the  exceptional  and 

lim.ited  power  of  direct  Income  taxation  for  the  first  time  conferred  upon  Congress  by  that 
Amendment  and,  being  outside  of  the  Amendment  and  governed  solely  therefore  by  the 
general  taxing  authority  conferred  upon  Congress  by  the  Constitution,  the  tax  was  void 
as  an  attempt  to  levy  a direct  tax  without  apportionment  under  the  rule  established  by 
Pollock  V.  Farmers’  Loan  & Trust  Company,  157  U.  S.  429;  158  U.  S.  601.  (b)  That 

the  statute  is  m.oreover  repugnant  to  the  Constitution  because  of  the  provision  therein 
contained  for  its  retroactive  operation  for  a designated  time  and  because  of  the  illegal 
discrimination  and  inequalities  which  it  creates,  including  the  provision  for  a progressive 
tax  on  the  income  of  individuals  and  the  method  provided  in  the  statute  for  computing 
the  taxable  income  of  corporations. 

But  we  need  not  now  enter  Into  an  original  consideration  of  the  merits  of  these 

2718  contentions,  because  each  and  all  of  them  were  considered  and  adversely  disposed 
of  in  Brushaber  v.  Union  Pacific  Railroad  Com.pany  [*[[2685].  That  case,  therefore, 

is  here  absolutely  controlling  and  decisive.  If  follows  that  for  the  reasons  stated  in  the 
opinion  in  the  Brushaber  case  the  judgments  in  these  cases  must  be  and  they  are 

AFFIRMED. 

Dodge  vs.  Brady, 

(240  U.  S.  122.) 

2719  The  appended  decision  of  the  Supreme  Court  of  the  United  States  in  the  case  of 
Dodge  V.  Brady,  collector,  is  published  for  the  information  of  internal-revenue 

officers  and  others  concerned.  (T.  D.  2302,  March  3,  1916.) 

(February  21,  1916.) 

Mr.  Chief  Justice  White  delivered  the  opinion  of  the  Court. 

The  appellants  are  the  same  persons  who  sued  in  Dodge  v.  Osborn,  just  decided 

2720  [112580].  After  the  dismissal  of  that  suit  by  the  Supreme  Court  of  the  District 
of  Columbia  for  want  of  jurisdiction  the  parties,  on  June  10,  1914,  filed  their  bill 

in  the  court  below  against  the  Collector  of  Internal  Revenue  to  enjoin  the  collection  of 
the  surtaxes  assessed  against  them  which  were  disputed  in  the  previous  case  on  substan- 
tially the  same  grounds  alleged  in  the  complaint  in  that  case.  The  bill  alleged,  however, 
that  plaintiffs  had  filed  with  the  Collector  “an  appeal  or  claim  for  the  remission  and  abate- 
ment of  the  surtaxes”  because  of  the  unconstitutionality  of  the  statute  imposing  them  and 
that  the  Commissioner  of  Internal  Revenue  to  whom  the  claim  had  been  forwarded  by 
the  Collector  had  such  protest  under  advisement.  Upon  the  filing  of  the  bill  the  plaintiffs 
moved  for  a preliminary  injunction  which  was  denied  July  29,  1914.  On  the  same  day 
by  leave  of  court  a supplemental  bill  was  filed  which  alleged  that  since  the  filing  of  the 
original  bill  the  Commissioner  of  Internal  Revenue  had  ruled  adversely  upon  plaintiffs* 
protest  and  that  thereupon  they  had  paid  the  surtaxes  to  the  Collector  under  protest,  and 
they  prayed  a recovery  of  the  amount  paid  to  the  Collector  and  for  the  other  relief  asked 
in  the  original  bill.  The  defendant  moved  to  dismiss  the  bill  for  want  of  jurisdiction 
because  the  suit  was  brought  to  enjoin  the  collection  of  a tax  contrary  to  the  provisions 
of  Section  3224  Revised  Statutes  and  for  want  of  equity  because  the  Income  Tax  Law 
was  constitutional  and  valid.  The  court  sustained  the  motion  on  the  latter  ground  and 
dismissed  the  bill  on  the  merits  and  the  case  is  here  on  direct  appeal  because  of  the  con- 
stitutional questions. 

The  government  Insists  that  the  court  below  was  without  jurisdiction  to  decide 

2721  the  merits  and  we  come  first  to  that  question.  It  is  apparent  if  the  original  bill 
alone  is  taken  into  view  that  the  suit  was  brought  to  enjoin  the  collection  of  a tax 

and  the  court  was  without  jurisdiction  by  the  reasons  stated  in  the  previous  case.  And 
it  Is  argued  by  the  Government  that  there  was  no  jurisdiction  under  the  supplemental 
bill  since  it  fails  to  allege  that  an  appeal  was  taken  to  the  Commissioner  of  Internal  Revenue 
after  the  payment  of  the  taxes  and  that  he  refused  to  refund  them  and  therefore  fails  to 
allege  a compliance  with  the  conditions  imposed  by  sections  3220  and  3226  of  the  Revised 
Statutes  as  prerequisites  to  a suit  to  recover  taxes  wrongfully  collected.  But  broadly 
considering  the  whole  situation  and  taking  into  view  the  peculiar  facts  of  the  case,  the 
protest  to  the  Commissioner  and  his  exertion  of  authority  over  it  and  his  adverse  ruling 
upon  the  merits  of  the  tax,  thereby  passing  upon  every  question  which  he  would  be  called 
upon  to  decide  on  an  appeal  for  a refunding  of  the  taxes  paid,  we  think  that  this  case 
is  80  exceptional  in  character  as  not  to  justify  us  in  holding  that  reversible  error  was  com- 
mitted by  the  court  below  in  passing  upon  the  case  upon  its  merits,  thus  putting  an  end 

281 


INC. 


TAX 


SUPREME  COURT  DECISIONS. 


to  further  absolutely  useless  and  unnecessary  controversy.  We  say  useless  and  unneces- 
sary because  on  the  merits  all  the  contentions  urged  by  the  appellants  concerning  the  uncon- 
stitutionality of  the  la'w  and  of  the  surtaxes  which  it  imposes  have  been  considered  and 
adversely  disposed  of  in  Brushaber  v.  Union  Pacific  Railroad  Company  [^26851. 

JUDGMENT  AFFIRMED. 

Stanton  v.  Baltic  Mining  Co. 

(240  U.  S.  103.) 

2722  The  appended  decision  of  the  Supreme  Court  of  the  United  States  in  the  case  of 
Stanton  v.  Baltic  Mining  Co.  is  published  for  the  information  of  internal-revenue 
officers  and  others  concerned.  (T.  D.  2303,  March  3,  1916.) 

(February  21,  1916.) 

Mr.  Chief  Justice  White  delivered  the  opinion  of  the  Court. 

As  in  Brushaber  v.  Union  Pacific  Railroad  Company,  [^2685]  this  case  was  cora- 
27  23  menced  by  the  appellant  as  a stockholder  of  the  Baltic  Mining  Company,  the 
appellee,  to  enjoin  the  voluntary  payment  by  the  corporation  and  its  officers  of  the 
tax  assessed  against  it  under  the  Income  Tax  section  of  the  Tariff  Act  of  October  3,  1913 
(38  Stat.  166,  181)  As  the  grounds  for  the  equitable  relief  sought  in  this  case  so  far 
as  the  question  of  jurisdiction  is  concerned  are  substantially  the  same  as  those  which 
were  relied  upon  in  the  Brushaber  case,  it  follows  that  the  ruling  in  that  case  upholding 
the  power  to  dispose  of  the  controversy  in  controlling  here  and  we  put  that  subject  out 
of  view. 

Further  also  like  the  Brushaber  case  this  is  before  us  on  a direct  appeal  prosecuted 
27  24  for  the  purpose  of  reviewing  the  action  of  the  court  below  in  dismissing  on  motion 
the  bill  for  want  of  equity. 

The  bill  averred:  “That  under  and  by  virtue  of  the  alleged  authority  contained 

2725  in  said  Income  Tax  Law,  if  valid  and  constitutional,  the  respondent  company  is 
taxable  at  the  rate  of  I per  cent  upon  its  gross  receipts  from  all  sources,  during 

the  calendar  year  ending  December  31,  1914,  after  deducting  (1)  its  ordinary  and  necessary 
expenses  paid  within  the  year  in  the  maintenance  and  operation  of  its  business  and  proper- 
ties and  (2)  all  losses  actually  sustained  within  the  year  and  not  compensated  by  insurance 
or  otherwise,  including  depreciation  arising  from  depletion  of  its  ore  deposits  to  the  limited 
extent  of  5 per  cent  of  the  ‘gross  value  at  the  mine  of  the  output’  during  said  year.”  It 
was  further  alleged  that  the  company  would  if  not  restrained  make  a return  for  taxation 
conformably  to  the  statute  and  would  pay  the  tax  upon  the  basis  stated  without  protest 
and  that  to  do  so  would  result  in  depriving  the  complainant  as  a stockholder  of  rights 
secured  by  the  Constitution  of  the  United  States  as  the  tax  which  it  was  proposed  to 
pay  without  protest  was  void  for  repugnancy  to  that  Constitution.  The  bill  contained 
man}’-  averments  on  the  following  subjects  which  may  be  divided  into  two  generic  classes: 
(A)  Those  concerning  the  operation  of  the  law  in  question  upon  individuals  generally 
and  upon  other  minine  corporations  and  the  discrimination  against  mining  corporations 
which  arose  in  favor  of  such  other  corporations  and  individuals  by  the  legislation,  as  well 
as*'discriminatlon  which  the  provisions  of  the  act  operated  against  mining  corporatons 
because  of  the  separate  and  more  unfavorable  burden  cast  upon  them  by  the  statute 
than  was  placed  upon  other  corporations  and  individuals, — averments  all  of  which  were 
obviously  made  to  support  the  subsequent  charges  which  the  bill  contained  as  to  the 
repugnancy  of  the  law  Imposing  the  tax  to  the  equal  protection,  due  process  and  uniformity 
clauses  of  the  Constitution.  And  (B)  those  dealing  with  the  practical  results  on  the 
company  of  the  operation  of  the  tax  in  question  evidently  alleged  for  the  purpose  of  sus- 
taining the  charge  which  the  bill  made  that  the  tax  levied  was  not  what  was  deemed  to 
be  the  peculiar  direct  tax  which  the  Sixteenth  Amendment  exceptionally  authorized  to 
be  levied  without  apportionment  and  of  the  resulting  repugnancy  of  the  tax  to  the  Con- 
stitution as  a direct  tax  on  property  because  of  its  ownership  levied  without  conforming 
to  the  regulation  of  apportionment  generally  required  by  the  Constitution  as  to  such 
taxation. 

We  need  not  more  particularly  state  the  averments  as  to  the  various  contentions 

2726  in  class  (A),  as  their  character  will  necessarily  be  made  manifest  by  the  statement 
of  the  legal  propositions  based  on  them  which  we  shall  hereafter  have  occasion  to 

make.  As  to  the  averments  concerning  class  (B),it  suffices  to  say  that  it  resulted  from 
copious  allegations  in  the  bill  as  to  the  value  of  the  ore  body  contained  in  the  mine  which 
the  company  worked  and  the  total  output  for  the  year  of  the  product  of  the  mine  after 
deducting  the  expenses  as  previously  stated,  that  the  five  per  cent  deduction  permitted 
by  the  statute  was  inadequate  to  allow  for  the  depletion  of  the  ore  body  and  therefore 
the  law  to  a large  extent  taxes  not  the  mere  profit  arising  from  the  operation  of  the  m.lne, 
but  taxes  as  income  the  yearly  product  which  represented  to  a large  extent  the  yearly 
depletion  or  exhaustion  of  the  ore  body  from  which  during  the  year  ore  was  taken.  Indeed, 

282 


IXC. 


TAX 


SUPREME  COURT  DECISIONS. 


the  following  alleged  facts  concerning  the  relation  which  the  annual  production  bore 
to  the  exhaustion  or  diminution  of  the  property  in  the  ore  bed  must  be  taken  as  true  for 
the  purpose  of  reviewing  the  judgment  sustaining  the  motion  to  dismiss  the  bill. 

“That  the  real  or  actual  yearly  income  derived  by  the  respondent  company  from  its 
businsss  or  property,  does  not  exceed  $550,000.  That,  under  the  Income  Tax,  the  said 
company  is  held  taxable  in  an  average  year,  to  the  amount  of  approximately  $1,150,000, 
the  same  being  ascertained  by  deducting  from  its  net  receipts  of  $1,400,000  only  a deprecia- 
tion of  $100,000  on  its  plant  and  a depletion.of  its  ore  supply  limited  by  law  to  5 per  cent 
of  the  value  of  its  annual  gross  receipts  and  amounting  to  $150,000;  whereas,  in  order 
properly  to  ascertain  its  actual  income  $750,000  per  annum  should  be  allowed  to  be 
deducted  for  such  depletion,  or  five  times  the  amount  actually  allowed.” 

Without  attem.pting  minutely  to  state  every  possible  ground  of  attack  which 

2727  m.ight  be  deducted  from  the  averments  of  the  bill,  but  in  substance  embracing 
every  m.aterial  grievance  therein  asserted  and  pressed  in  argument  upon  our  atten- 
tion in  the  elaborate  briefs  which  have  been  submitted,  we  come  to  separately  dispose 
of  the  legal  propositions  advanced  in  the  bill  and  arguments  concerning  the  two  classes. 

Class  A.  Under  this  the  bill  charged  that  the  provisions  of  the  statute  are  “un- 

2728  constitutional  and  void  under  the  Fifth  Amendment,  in  that  they  deny  to  m.lning 
companies  and  their  stockholders  equal  protection  of  the  laws  and  deprive  them  of 

their  property  without  due  process  of  law,”  for  the  following  reasons: 

(1)  Because  all  other  individuals  or  corporations  were  given  a right  to  deduct 
a fair  and  reasonable  percentage  for  losses  and  depreciation  of  their  capital  and  they 
were  therefore  not  confined  to  the  arbitrary  5%  fixed  as  the  basis  for  deductions  by 
mining  corporations. 

(2)  Because  by  reason  of  the  difference  in  the  allow'ances  which  the  statute  per- 
mitted the  tax  levied  was  virtually  a net  income  tax  on  other  corporations  and  indivi- 
duals and  a gross  tax  on  rndnlng  corporations. 

(3)  Because  the  statute  established  a discriminating  rule  as  to  individuals  and  other 
corporations  as  against  mining  corporations  on  the  subject  of  the  m.ethod  of  the  allow- 
ance for  depreciations. 

(4)  Because  the  law  permitted  all  Individuals  to  deduct  from  their  net  income 
dividends  received  from  corporations  which  had  paid  the  tax  on  their  incomes,  and 
did  not  give  the  right  to  corporations  to  make  such  deductions  from  their  income  of 
dividends  received  from  other  corporations  which  had  paid  their  Income  tax.  This 
was  illustrated  by  the  averment  that  99  per  cent  of  the  stock  of  the  defendant  company 
was  owned  by  a holding  company  and  that  under  the  statute  only  not  was  the  cor- 
poration obliged  to  pay  the  tax  on  its  incom.e,  but  so  also  was  the  holding  company 
obliged  to  pay  on  the  dividends  paid  it  by  the  defendant  company. 

(5)  Because  of  the  discrimination  resulting  from  the  provision  of  the  statute  pro- 
viding for  a progressive  increase  of  taxation  or  surtaxes  to  individuals  and  not  as  to 
corporations. 

(6)  Because  of  the  exemptions  which  the  statute  made  of  individual  Incomes 
below  $4,000  and  of  incom.es  of  labor  organizations  and  various  other  exemptions 
which  were  set  forth. 

But  it  is  apparent  from  the  mere  statement  of  these  contentions  that  each  and 
all  of  them  were  adversely  disposed  of  by  the  decision  in  the  Brushaber  case  and  they 
all  therefore  may  be  put  out  of  view. 

Class  B.  Under  this  class  these  propositions  are  relied  upon: 

2729  (1)  That  as  the  Sixteenth  Amendment  authorized  only  an  exceptional  direct 
income  tax  without  apportionment,  to  which  the  tax  in  question  does  not  conform, 

it  is  therefore  not  within  the  authority  of  that  amendment. 

(2)  Not  being  within  the  authority  of  the  Sixteenth  Amendment  the  tax  is  there- 
fore, within  the  ruling  of  Pollock  v.  Farmer’s  Loan  & Trust  Company,  157  U.  S.  429; 
158  U.  S.  601,  a direct  tax  and  void  for  want  of  com.pliance  with  the  regulation  of  appor- 
tionment. 

As  the  first  proposition  is  plainly  in  conflict  with  the  meaning  of  the  Sixteenth 

2730  Amendment  as  interpreted  in  the  Brushaber  case  it  may  also  be  put  out  of  view. 
As  to  the  second,  while  indeed  it  is  distinct  from  the  subjects  considered  in  the 

Brushaber  case  to  the  extent  that  the  particular  tax  which  the  statute  levies  on  mining 
corporations  here  under  consideration  is  distinct  from  the  tax  on  corporations  other  than 
mining  and  on  individuals  which  was  disposed  of  in  the  Brushaber  case,  a brief  analysis 
will  serve  to  demonstrate  that  the  distinction  is  one  without  a difference  and  therefore 
that  the  proposition  is  also  foreclosed  by  the  previous  ruling.  The  contention  is  that 
as  the  tax  here  imposed  is  not  on  the  net  product  but  in  a sense  somewhat  equivalent  to 
a tax  on  the  gross  product  of  the  working  of  the  mine  by  the  corporation,  therefore  the 
tax  is  not  within  the  purview  of  the  Sixteenth  Amendment  and  consequently  it  must  be 


INC. 


283  TAX 


SUPREME  COURT  DECISIONS. 


treated  as  a direct  tax  on  property  because  of  its  ownership  and  as  such  void  for  wariii  0/ 
apportionment.  But  aside  from  the  obvious  error  of  the  proposition  intrinsically  considered, 
it  m.anifestly  disregards  the  fact  that  by  the  previous  ruling  it  was  settled  that  the  pro- 
visions of  the  Sixteenth  Amendment  conferred  no  new  power  of  taxation  but  simply  pro- 
hibited the  previous  com.plete  and  plenary  power  of  income  taxation  possessed  by  Congress 
from  the  beginning  from  being  taken  out  of  the  category  of  indirect  taxation  to  which  it 
inherently  belonged  and  being  placed  in  the  category  of  direct  taxation  subject  to  appor- 
tionm.ent  by  a consideration  of  the  sources  from  which  the  income  was  derived,  that  is  by 
testing  the  tax  not  by  what  it  was — a tax  on  income,  but  by  a mistaken  theory  deduced 
from  the  origin  or  source  of  the  income  taxed.  Mark,  of  course,  in  saying  this  v/e  are  not 
here  considering  a tax  not  within  the  provisions  of  the  Sixteenth  Amendm.ent,  that  is,  one 
in  which  the  regulation  of  apportionment  or  the  rule  of  uniformity  is  wholly  negligible 
because  the  tax  is  one  entirely  beyond  the  scope  of  the  taxing  power  of  Congress  and  where 
consequently  no  authority  to  impose  a burden  either  direct  or  indirect  exists.  In  other 
words,  we  are  here  dealing  solely  with  the  restriction  imposed  by  the  Sixteenth  Amendment 
on  the  right  to  resort  to  the  source  whence  an  incom.e  is  derived  in  a case  where  there  is 
power  to  tax  for  the  purpose  of  taking  the  incom.e  tax  out  of  the  class  of  indirect  to  which 
it  generically  belongs  and  putting  it  in  the  class  of  direct  to  which  it  would  not  otherwise 
belong  in  order  to  subject  it  to  the  regulation  of  apportionment.  But  it  is  said  that 
although  this  be  undoubtedly  true  as  a general  rule,  the  peculiarity  of  mining  pro- 
perty and  the  exhaustion  of  the  ore  body  which  miust  result  from  working  the  mine, 
causes  the  tax  in  a case  like  this  where  an  Inadequate  allowance  by  way  of  de- 
duction is  m.ade  for  the  exhaustion  of  the  ore  body  to  be  in  the  nature  of  things  a tax  on 
property  because  of  its  ownership  and  therefore  subject  to  apportionment.  Not  to  so 
hold,  it  is  urged  is  as  to  m.ining  property  but  to  say,  that  m.ere  form  controls,  thus  rendering 
in  substance  the  command  of  the  Constitution  that  taxation  directly  on  property  because 
of  its  ownership  be  apportioned,  wholly  illusory  or  futile.  But  this  merely  asserts  a right 
to  take  the  taxation  of  mining  corporations  out  of  the  rule  established  by  the  Sixteenth 
Am.endment  when  there  is  no  authority  for  so  doing.  It,  m.oreover,  rests  upon  the  wholly 
fallacious  assum.ption  that  looked  at  from  the  point  of  view  of  substance  a tax  on  the 
product  of  a mine  is  necessarily  in  its  essence  and  nature  in  every  case  a direct  tax  on 
property  because  of  its  ownership  unless  adequate  allowance  be  made  for  the  exhaustion 
of  the  ore  body  to  result  from  working  the  mine.  We  say  wholly  fallacious  assumption 
because  independently  of  the  effect  of  the  operation  of  the  Sixteenth  Amendment  it  was  i 

settled  in  Stratton’s  Independence  v.  Howbert  231  U.  S.  399  that  such  a tax  is  not  a tax  * 

upon  property  as  such  because  of  its  ownership,  but  a true  excise  levied  on  the  results  of 
the  business  of  carrying  on  mining  operations.  (Pp.  413  et  seq.) 

As  it  follows  from  what  we  have  said  that  the  contentions  are  in  substance  and 

2731  effect  controlled  by  the  Brushaber  case  and  in  so  far  as  this  may  not  be  the  case 
are  without  merit,  it  results  that  for  the  reasons  stated  in  the  opinion  in  that  case 

and  those  expressed  in  this,  the  judgment  must  be  and  it  is 

AFFIRMED. 

Gould  vs.  Gould. 

(245  U.  S.  151.) 

November  19,  1917. 

Mr.  Justice  McReynolds  delivered  the  opinion  of  the  Court.  i 

2732  Adecreeof  the  Supreme  Court  for  New  York  County  entered  in  1909  forever  separa-  ’ 

ted  the  parties  to  this  proceeding,  then  and  now  citizens  of  the  United  States,  from 

bed  and  board;  and  further  ordered  that  plaintiff  in  error  pay  to  Katherine  C.  Gould 
during  her  life  the  sum  of  three  thousand  dollars  ($3,000.00)  every  month  for  her  support 
and  maintenance.  The  question  presented  is  whether  such  monthly  payments  during 
the  years  1913  and  1914  constituted  parts  of  Mrs.  Gould’s  income  within  the  intendment 
of  the  Act  of  Congress  approved  October  3,  1913  (38  Stat.  114,  166),  and  were  subject 
as  such  to  the  tax  prescribed  therein.^  The  court  below  answered  in  the  negative;  and  . 
we  think  it  reached  the  proper  conclusion.  i 

Pertinent  portions  of  the  Act  follow:  , . , , „ , 

2733  “Section  II,  A.  Subdivision  1.  That  there  shall  be  levied,  assessed,  collected 
and  paid  annually  upon  the  entire  net  income  arising  or  accruing  from  all  sources 

in  the  preceding  calendar  year  to  every  citizen  of  the  United  States,  whether  residing 
at  home  or  abroad,  and  to  every  person  residing  in  the  United  States,  though  not  a citizen 
thereof,  a tax  of  1 per  centum  per  annum  upon  such  income,  except  as  hereinafter  provided; 

♦ * ♦ 

“B.  That,  subject  only  to  such  exemptions  and  deductions  as  are  hereinafter  allowed, 
the  net  income  of  a taxable  person  shall  include  gains,  profits,  and  income  derived  from  ^ 

salaries,  wages,  or  compensation  for  personal  service  of  whatever  kind  and  in  whatever 
form  paid,  or  from  professions,  vocations,  businesses,  trade,  commerce,  or  sales,  or  dealings 
in  property,  whether  real  or  personal,  growing  out  of  the  ownership  or  use  of  or  interest  in 


INC. 


284  TAX 


SUPREME  COURT  DECISIONS. 


real  or  personal  property,  also  from  interest,  rent,  dividends,  securities,  or  the  transaction 
of  any  lawful  business  carried  on  for  gain  or  profit,  or  gains  or  profits  and  income  derived 
from  any  source  whatever,  including  the  income  from  but  not  the  value  of  property  ac- 
quired by  gift,  bequest,  devise,  or  descent:  * * * ” 

In  the  interpretation  of  statutes  levying  taxes  it  is  the  established  rule  not  to 

2734  extend  their  provisions,  by  im.plication,  beyond  the  clear  import  of  the  language 
used  or  to  enlarge  their  operations  as  so  to  embrace  matters  not  specifically  pointed 

out.  In  case  of  doubt  they  are  construed  most  strongly  against  the  Government,  and  in 
favor  of  the  citizen.  United  States  v.  Wiggle sworth^  2 Story  369;  American  Net  and  Twine 
Company  v.  Worthington,  141  U.  S.  468,  474;  Benziger  v.  United  States,  192  U.  S.  38,  55. 
As  appears  from  the  above  quotations,  the  net  income  upon  which  subdivision  1 

2735  directs  an  annual  tax  shall  be  assessed,  levied,  collected  and  paid  is  defined  in 
division  B.  The  use  of  the  word  itself  in  the  definition  of  “income”  causes  some 

obscurity,  but  we  are  unable  to  assert  that  alimony  paid  to  a divorced  wife  under  a decree 
of  court  falls  fairly  within  any  of  the  terms  employed. 

In  Audubon  v,  Shufeldt,  181  U.  S.  575,  577,  578,  we  said:  “Alimony  does  not  arise 

2736  from  any  business  transaction,  but  from  the  relation  of  marriage.  It  is  not  founded 
on  a contract,  express  or  implied,  but  on  the  natural  and  legal  duty  of  the  husband 

to  support  the  wife.  The  general  obligation  to  support  is  made  specific  by  the  decree  of 
the  court  of  appropriate  jurisdiction.  * * * Permanent  alimony  is  regarded  rather 

as  a portion  of  the  husband’s  estate  to  which  the  wife  is  equitably  entitled,  than  as  strictly 
a debt;  alimony  from  time  to  time  may  be  regarded  as  a portion  of  his  current  income 
or  earnings;  * * *” 

The  net  income  of  the  divorced  husband  subject  to  taxation  was  not  decreased 

2737  by  payment  of  alimony  under  the  court’s  order;  and,  on  the  other  hand,  the  sum 
received  by  the  wife  on  account  thereof  cannot  be  regarded  as  income  arising  or 

accruing  to  her  within  the  enactment. 

The  judgment  of  the  court  below  is  Affirmed.  (245  U.  S.  151.) 

Towne  v.  Eisner. 

(245  U.  S.  418.) 

2738  The  appended  decision  of  the  Supreme  Court  of  the  United  States  in  the  case  of 
Henry  R.  Towne  v.  Mark  Eisner,  collector,  is  published  for  the  information  of 

internal-revenue  officers  and  others  concerned.  (T.  D.  2634,  Jan.  21,  1918.) 

(January  7,  1918.) 

Mr.  Justice  Holmes  delivered  the  opinion  of  the  Court. 

This  is  a suit  to  recover  the  amount  of  a tax  paid  under  duress  in  respect  of  a 

2739  stock  dividend  alleged  by  the  Government  to  be  income.  A demurrer  to  the  declara- 
tion was  sustained  by  the  District  Court  and  judgment  was  entered  for  the  defend- 
ant, 242  Fed.  Rep.  702.  The  facts  alleged  are  that  the  corporation  voted  on  December  17, 
1913  to  transfer  $1,500,000  surplus,  being  profits  earned  before  January  1,  1913,  to  its  capital 
account,  and  to  issue  fifteen  thousand  shares  of  stock  representing  the  same  to  its  stock- 
holders of  record  on  December  26;  that  the  distribution  took  place  on  January  2,  1914, 
and  that  the  plaintiff  received  as  his  due  proportion  four  thousand  and  one  hundred  and 
seventy-four  and  a half  shares.  The  defendant  compelled  the  plaintiff  to  pay  an  income 
tax  upon  his  stock  as  equivalent  to  $417,450  income  in  cash.  The  District  Court  held  that 
the  stock  was  income  within  the  meaning  of  the  Income  Tax  Act  of  October  3,  1913,  c. 
16,  Section  II;  A,  subdivision  1 and  2;  and  B.  38  Stat.  114,  166,  167.  It  also  held  that 
the  Act  so  constructed  was  constitutional,  whereas  the  declaration  set  up  that  so  far  as 
the  Act  purported  to  confer  power  to  make  this  levy  it  was  unconstitutional  and  void. 

The  Government  in  the  first  place  moved  to  dismiss  the  case  for  want  of  jurisdiction, 

2740  on  the  ground  that  the  only  question  here  is  the  construction  of  the  statute,  not 
its  constitutionality.  It  argues  that  if  such  a stock  dividend  is  not  income  within 

the  meaning  of  the  constitution,  it  is  not  income  within  the  intent  of  the  statute,  and 
hence  that  the  meaning  of  the  Sixteenth  amendment  is  not  an  immediate  issue,  and  is 
important  only  as  throwing  light  on  the  construction  of  the  Act.  But  is  is  not  necessarily 
true  that  income  means  the  same  thing  in  the  Constitution  and  the  Act.  A word  is  not  a 
crystal,  transparent  and  unchanged;  it  is  the  skin  of  a living  thought  and  may  vary  greatly 
in  color  and  content  according  to  the  circumstances  and  the  time  in  which  it  is  used. 
Lamar  v.  United  States,  240  U.  S.  60,  65.  Whatever  the  meaning  of  the  Constitution, 
the  Government  had  applied  its  force  to  the  plaintiff  on  the  assertion  that  the  statute 
authorized  it  to  do  so,  before  the  suit  was  brought,  and  the  Court  below  has  sanctioned 
its  course.  The  plaintiff  says  that  the  statute  as  it  is  construed  and  administered  is 
unconstitutional.  He  is  not  to  be  defeated  by  the  reply  that  the  Government  does  not 
adhere  to  the  construction  by  virtue  of  which  alone  it  has  taken  and  keeps  the  plaintiff’s 


INC. 


285  TAX 


SUPREME  COURT  DECISIONS. 


money,  if  this  Court  should  think  that  the  construction  would  make  the  Act  unconstitu- 
ional.  While  it  keeps  the  money  it  opens  the  question  w’hether  the  Act  construed  as 
it  has  contrued  it  can  be  maintained.  The  motion  to  dismiss  is  overruled.  Billings 
V.  United  States  232  U.  S.  261,  276.  B.  Altman-Company  v.  United  States  224  U.  S. 
583,  596,  597. 

The  case  being  properly  here,  however,  the  construction  of  the  Act  is  open,  as 

2741  well  as  its  constitutionality  if  construed  as  the  Government  has  construed  it  by 

its  conduct.  Billings  v.  United  States  ubi  supra.  Notwithstanding  the  thought- 
ful discussion  that  the  case  received  below  we  can  not  doubt  that  the  dividend  was 
capital  as  well  for  the  purposes  of  the  Income  Tax  Law  as  for  distribution  between  tenant 
for  life  and  remainderman.  What  was  said  by  this  Court  upon  the  latter  question  is 
equally  true  for  the  former.  “A  stock  dividend  really  takes  nothing  from  the  property 
of  the  corporation,  and  adds  nothing  to  the  interest  of  the  shareholders.  Its  property 
is  not  diminished  and  their  interests  are  not  increased.  * * * proportional 

interest  of  each  shareholder  remains  the  same.  The  only  change  is  in  the  evidence  which 
represents  that  interest,  the  new  shares  and  the  original  shares  together  representing 
the  same  proportional  interest  that  the  original  shares  represented  before  the  issue  of 
the  new  ones.”  Gibbons  v.  Mahon,  136  U.  S.  549,  559,  560.  In  short,  the  corporation 
is  no  poorer  and  the  stockholder  is  no  richer  than  they  were  before.  Logan  County  v. 
United  States,  169  U.  S.  255,  261.  If  the  plaintiff  gained  any  small  advantage  by  the 
change  it  certainly  was  not  an  advantage  of  $417,450,  the  sum  upon  which  he  was  taxed. 
It  is  alleged  and  admitted  that  he  received  no  more  In  the  way  of  dividends  and  that  his 
old  and  new  certificates  together  are  worth  only  Avhat  the  old  ones  were  worth  before.  If 
the  sum  had  been  carried  from  surplus  to  capital  account  without  a corresponding  issue 
of  stock  certificates,  which  there  was  nothing  in  the  nature  of  things  to  prevent,  we  do 
not  suppose  that  any  one  would  contend  that  the  plaintiff  had  received  an  accession  to 
his  income.  Presumably  his  certificate  would  have  the  same  value  as  before.  Again 
if  certificates  for  $1,000  par  were  split  up  in  ten  certificates,  each  for  $100,  we  presume 
that  no  one  would  call  the  new  certificates  income.  What  has  happened  is  that  the 
plaintiff’s  old  certificates  have  been  split  up  in  effect  and  have  diminished  in  value  to  the 
extent  of  the  value  of  the  new. 

Judgment  reversed. 

Mr.  Justice  McKenna  concurs  In  the  result. 

[For  refund,  because  of  above  decision,  of  taxes  paid,  see  ^2492.] 

[For  the  bearing  of  the  above  on  the  question  of  the  taxing  of  stock  dividends  as  income 
under  the  Revenue  Acts  of  1916,  1917  and  1918,  see  ^812]. 

[For  U.  S.  District  Court  decision  on  “stock  dividends”  under  Revenue  Act  of  1916 
see  ^815.] 

2742  Digest  Recent  Decisions  of  the  Supreme  Court. — [Comment:  Of  the  cases 
referred  to  those  brought  under  the  Act  of  October  3,  1913  only,  are  reproduced,. 

in  full,  as  indicated  by  the  paragraph  references.  The  other  cases  digested  were  brought 
under  the  Excise  Tax  Act  of  August  5,  1909.) 

The  following  propositions  of  law,  stated  for  the  Information  and  guidance  of  internal 
revenue  officers  and  others  concerned,  are  expressed  or  implied  in  the  recent  decisions  of 
the  Supreme  Court  of  the  United  States  in  United  States  v.  Biwabik  Mining  Company 
(T.  D.  2721)  (247  U.  S.  116),  Goldfield  Consolidated  Mines  Company  v.  Scott  (T.  D.  2722) 
(247  U.  S.  126)  Doyle  v.  Mitchell  Bros.  Co.  (T.  D.  2723)  (247  U.  S.  179),  Hays  v.  Gauley 
Mountain  Coal  Company  (T.  D.  2724)  (247  U.  S.  189),  United  States  v.  Cleveland,  Cin- 
cinnati, Chicago  & St.  Louis  Railway  Company  (T.  D.  2725)  (247  U.  S.  195),  William  E. 
Peck  & Co.  (Inc.)  v.  Lowe  (T.  D.  2726)  [^2754],  Lynch  v.  Turrish  (T.  D.  2729)  (2776 
Southern  Pacific  v.  Lowe  (T.  D.  2739)  [^2891]  Lynch  v.  Hornby  (T.  D.  2731)  [^2763], 
and  Peabody  v.  Eisner  (T.  D.  2732)  [^2802]: 

1.  In  the  determination  of  net  income  the  Excise  Tax  Act  of  August  5,  1909,  per- 

2743  mitted  the  deduction  from  gross  income  of  “a  reasonable  allowance  for  deprecia- 
tion of  property,  if  any”;  the  Income  Tax  Act  of  October  3,  1913,  permitted  “a 

reasonable  allowance,  for  the  exhaustion,  wear  and  tear  of  property  arising  out  of  its  use 
or  employment  in  the  business,  not  to  exceed,  in  the  case  of  mines,  5 per  centum  of  the 
gross  value  at  the  mine  of  the  output  for  the  year  for  which  the  computation  is  made”; 
and  the  Income  Tax  Act  of  September  8,  1916,  as  amended  permits,  in  the  case  of  mines- 
a reasonable  allowance  for  depletion  thereof  not  to  exceed  the  market  value  in  the  mine, 
of  the  product  thereof  which  has  been  mined  and  sold  during  the  year  for  which  the  retura 
and  computation  are  made.” 


INC. 


286  TAX 


SUPREME  COURT  DECISIONS. 


(a)  As  mining  leases  are  not  conveyances  of  the  ore  in  place,  but  are  grants  of  the 

2744  privilege  of  entering  upon  the  premises  and  mining  and  removing  the  ore,  under 
none  of  the  Acts  of  1909,  1913  or  1916,  may  a lessee  of  mining  property  deduct 

as  so  much  depletion  of  capital  aSsets  the  proportionate  value  in  place  on  January  1,  1909, 
or  any  other  date,  of  each  ton  of  ore  mined  during  the  taxable  year.  See  T.  D.  1606  (75); 
Article  145  of  Regulations  No.  33;  and  Article  8,  171  and  172  of  Regulations  No.  33 
(revised).  (United  States  v.  Biwabik  Mining  Company.  See  Von  Baumbach  v.  Sargent 
Land  Company,  242  U.  S.  503.) 

(b)  Under  the  Act  of  1909  a mining  corporation  owning  its  mine  Is  not  entitled 

2745  to  a deduction  from  its  gross  income  of  any  amount  whatever  on  account  of  deple- 
tion or  exhaustion  of  the  ore  bodies  caused  by  Its  operations  for  the  year  for  which 

the  tax  is  assessed,  nor  to  a deduction  against  the  gross  proceeds  from  the  mining  and 
treatment  of  ores  to  the  extent  of  the  cost  value  of  the  ore  in  the  ground  before  it  was 
mined.  T.  D.  1675  (80-89)  and  T.  D.  1742  (96-105)  are  modified  accordingly.  In  view 
of  their  different  provisions  this  rule  is  Inapplicable  to  situations  arising  under  the  Acts 
of  1913  and  1916.  See  Articles  141  and  142  of  Regulations  No.  33;  and  Articles  8,  171 
and  172  of  Regulations  No.  33  (revised).  (Goldfield  Consolidated  Mines  Company 
v.  Scott.  See  Stratton’s  Independence  v.  Howbert,  231  U.  S.  399;  Stanton  v.  Baltic 
Mining  Company,  240  U.  S.  103'.) 

2.  The  Excise  Tax  .A.ct  of  August  5,  1909,  measured  the  tax  by  the  net  income  of  a 

2746  corporation  “received”  by  it  from  all  sources  during  the  taxable  year;  the  Income 
Tax  Act  of  October  3,  1913,  imposed  the  tax  upon  the  net  income  “arising  or  ac- 
cruing” from  all  sources  during  the  taxable  year;  and  the  Income  Tax  Act  of  September 
8,  1916,  as  amended  upon  the  net  income  “received”  from  all  sources  during  the  taxable 
year. 

(a)  Where  property  is  acquired  by  a corporation  and  subsequently  sold  for  a higher 

2747  price,  under  all  three  Acts  the  gain  on  the  sale  is  income  to  the  corporation.  If, 
however,  the  property  was  acquired  before  January  1,  1909,  only  such  portion  of 

the  gain  as  ac.rued  subsequent  to  December  31,  1908,  was  taxable  under  the  Act  of  1909, 
and  if  it  was  acquired  before  March  1,  1913,  only  such  portion  of  the  gain  as  accrued  sub- 
sequent to  February  28,  1913,  was  taxable  under  the  Act  of  1913,  or  is  taxable  under  the 
Act  of  1916.  See  Regulations  No.  31,  T.  D.  1606  (40,  50,  76),  T.  D.  1675  (37,  48,  75) 
T.  D.  1742  (43,  55,  91);  and  Articles  88,  101  and  116  of  Regulations  No'.  33  (revised) 
(Doyle  V.  Mitchell  Bros.  Co.;  Hays  v.  Gauley  Mountain  Coal  Company;  United  States  v. 
Cleveland,  Cincinnati,  Chicago  & St.  Louis  Railway  Company.) 

(b)  In  order  to  determine  whether  there  has  been  gain  or  loss  on  a sale,  and  the 

2748  amount  of  the  gain,  if  any,  in  general  under  all  three  Acts  an  amount  mfist  be  with- 
drawn from  the  gross  proceeds  sufficient  to  restore  the  cost  of  the  property  or  the 

capital  value  that  existed  at  the  commencement  of  the  period  under  consideration  (either 
Jan'uary  1,  1909,  or  March  1,  1913).  Interest  should  not  be  added  to  the  purchase  price 
in  order  to  ascertain  the  cost  of  the  property.  In  apportioning  the  profits  derived  from  a 
disposition  of  property  acquired  before  and  sold  after  January  1,  1909,  for  the  purpose  of 
the  Act  of  1909,  or  acquired  before  and  sold  after  March  1,  1913,  for  the  purpose  of  the  Act 
of  1913,  the  division  may  be  pro  rata  according  to  the  time  elapsed  or  may  be  based  on  an 
appraisal  or  inventory  taken  as  of  December  31,  1908,  or  February  28,  1913.  This  is  a 
matter  of  detail,  to  be  settled  according  to  the  best  evidence  obtainable  and  in  accordance 
with  valid  departmental  regulations.  For  the  purpose  of  the  Act  of  1916,  however,  the 
fair  market  price  or  value  as  of  March  1,  1913,  to  be  ascertained  in  any  practicable  manner, 
is  the  statutory  basis  for  determining  the  amount  of  gain  on  a sale  of  property  acquired 
before  that  date.  See  Regulations  No.  31,  T.  D.  1578,  T.  D.  1588,  T.  D.  1606  (37,  71), 
T.  D.  1675  (36,  55,  69),  T.  D.  1742  (42,  62,  86);  Articles 4,  90,  91,  92,  93,  101,  1 09,  111,  112 
and  116  of  Regulations  No.  33  (revised),  and  T.  D.  2649.  (Doyle  v.  Mitchell  Bros.  Co.; 
Hays  V.  Gauley  Mountain  Coal  Company;  United  States  v.  Cleveland,  Cincinnati,  Chicago 
& St.  Louis  Railway  Company.) 

(c)  The  Act  of  1913  is  valid  and  constitutional  In  taxing  net  income  derived  from 

2749  sales  in  foreign  commerce.  The  same  principle  applies  to  the  Acts  of  1909  and  1916. 
(William  E.  Peck  & Co.,  (Inc.)  v.  Lowe). 

2750  (d)  Where  a stockholder  in  a corporation  receives  as  a liquidation  dividend,  repre- 
senting his  share  in  the  distribution  of  the  proceeds  of  the  sale  of  the  property  of 

the  corporation  upon  dissolution,  a sum  greater  than  the  cost  of  his  stock,  under  the  Acts 
of  both  1913  and  1916  the  gain  is  income  to  the  stockholder.  If,  however,  he  acquired 
the  stock  before  March  1,  1913,  only  such  portion  of  the  gain  as  accrued  subsequent  to 
February  28,  1913,  was  taxable  under  the  Act  of  1913  or  is  taxable  under  the  Act  of  1916. 
Compare  the  case  of  a dividend  in  ordinary  course  in  paragraph  (f)  below.  See  the  citations 
in  paragraphs  (a)  and  (b)  above.  (Lynch  v.  Turrish). 


INC. 


287  TAX 


SUPREME  COURT  DECISIONS. 


(e)  Where  a corporation  owns  all  the  stock  and  operates  under  a lease  all  the 

2751  property  and  business  of  another  corporation,  acting  as  banker  for  it  and  the  two 
corporations  being  in  substance  identical  and  merged  for  all  practical  purposes, 

under  the  Acts  of  both  1913  and  1916  surplus  of  the  lessor  corporation  accrues  as  income 
to  the  lessee  corporation  as  and  when  accumulated  by  the  lessor  corporation,  notwithstand- 
ing the  formal  distribution  of  such  surplus  in  dividends  to  the  lessee  corporation  may  not 
occur  during  the  taxable  year.  This  special  situation  forms  an  exception  to  the  general 
rule  stated  in  paragraph  (f)  below.  See  Articles  125,  207  and  208  of  Regulations  No.  33 
(revised).  (Southern  Pacific  Company  v.  Lowe.) 

(f)  Where  a stockholder  of  a corporation  receives  dividends  paid  in  the  ordinary 

2752  course  of  business,  even  though  extraordinary  in  amount,  under  the  Acts  of  both 
1913  and  1916  such  dividends  are  income  in  the  year  in  which  they  are  received  by 

the  stockholder.  If  paid  out  of  surplus  accrued  to  the  corporation  prior  to  March  1,  1913, 
they  were  subject  to  tax  under  the  Act  of  1913,  although  expressly  exempt  from  tax  under 
the  Act  of  1916.  A dividend  paid  by  a going  corporation  out  of  current  earnings  or  accumu- 
lated surplus  when  declared  by  the  directors  in  their  discretion,  being  in  the  nature  of  a 
recurrent  return  upon  the  stock,  is  distinguishable  from  a so-called  dividend  in  liquidation 
of  the  entire  assets  and  business  of  the  corporation,  which  is  a return  to  the  stockholder 
of  the  value  of  his  stock  upon  the  surrender  of  his  entire  interest  in  the  corporation.  Com- 
pare the  case  of  a liquidation  dividend  in  paragraph'  (d)  above.  See  Articles  105,  106 
and  107  of  Regulations  No.  33  (revised),  T.  D.  2659  and  T.  D.  2678.  (Lynch  v.  Hornby; 
Peabody  v.  Eisner.) 

(g)  A dividend  in  ordinary  course  paid  on  stock  of  a corporation  in  property  or 

2753  stock  other  than  its  own  is  income  to  the  stockholders  to  the  amount  of  its  cash  value 
when  received  under  the  Acts  of  both  1913  and  1916.  A dividend  paid  in  stock  of 

another  corporation  is  not  a stock  dividend.  See  Articles  4 and  106  of  Regulations  No.  33 
(revised).  (Peabody  v.  Eisner.  Compare  Towhe  v.  Eisner,  (245  U.  S.  418).)  [^[2738.] 
(T.  D.  2740,  June  24,  1918.) 

Peck  vs.  Lowe. 

(247  U.  S.  165.) 

2754  The  appended  decision  of  the  United  States  Supreme  Court  in  the  case  of  William 
E.  Peck  & Company  (Inc.)  v.  John  7.  Lowe,  Jr.,  collector  of  internal  revenue 

is  published  for  the  information  of  internal-revenue  officers  and  others  concerned.  (T.  D. 
2726,  June  4,  1918.) 

(May  20,  1918.)^ 

Mr.  Justice  Van  Devanter  delivered  the  opinion  of  the  Court. 

2755  This  was  an  action  to  recover  a tax  paid  under  protest  and  alleged  to  have  been 
imposed  contrary  to  the  constitutional  provision  (Art.  1,  sec.  9,  cl.  5)  thaP*"  No 

tax  or  duty  shall  be  laid  on  articles  exported  from  any  State.”  The  judgment  below  was 
for  the  defendant.  234  Fed.  125. 

The  plaintiff  is  a domestic  corporation  chiefly  engaged  in  buying  goods  in  the 

2756  several  States,  shipping  them  to  foreign  countries  and  there  selling  them.  In  1914 
its  net  income  from  this  business  was  $30,173.66,  and  from  other  sources  $12,436.24. 

An  income  tax  for  that  year,  computed  on  the  aggregate  of  these  sums,  was  assessed  against 
it  and  paid  under  compulsion.  It  is  conceded  that  so  much  of  the  tax  as  was  based  on  the 
income  from  other  sources  was  valid,  and  the  controversy  is  over  so  much  of  it  as  was  at- 
tributable to  the  income  from  shipping  goods  to  foreign  countries  and  there  selling  them. 
The  tax  was  levied  under  the  Act  of  October  3,  1913,  c.  16,  sec.  11,  38  Stat.  166,  172, 

2757  which  provided  for  annually  subjecting  every  domestic  corporation  to  the  payment 
of  a tax  of  a specified  per  centum  of  its  “entire  net  income  arising  or  accruing  from 

all  sources  during  the  preceding  calendar  year.”  Certain  fraternal  and  other  corporations, 
as  also  income  from  certain  enumerated  sources,  were  specifically  excepted,  but  none  of 
the  exceptions  included  the  plaintiflF  or  any  part  of  its  Income.  So,  tested  merely  by  the- 
tcrms  of  the  act,  the  tax  collected  from  the  plaintiff  was  rightly  computed  on  its  total  net 
income.  But  as  the  act  obviously  could  not  impose  a tax  forbidden  by  the  Constitution, 
we  proceed  to  consider  whether  the  tax,  or  rather  the  part  in  question,  was  forbidden  by  the 
constitutional  provision  on  which  the  plaintiff  relies. 

The  Sixteenth  Amendment,  although  referred  to  in  argument,  has  no  real  bearing 

2758  and  may  be  put  out  of  view.  As  pointed  out  in  recent  decisions,  it  does  not  extend 
the  taxing  power  to  new  or  excepted  subjects,  but  merely  removes  all  occasion 

which  otherwise  might  exist,  for  an  apportionment  among  the  States  of  taxes  laid  on  In- 
come, whether  to  be  derived  from  one  source  or  another.  Brushaber  v.  Union  Pacific 
A.  .*.  Co.,  240  U.  S.  1,  17-19:  Stanton  v.  Baltic  Mining  Co.,  240  U.  S.  103,  112-113. 


INC. 


288  TAX 


SUPREME  COURT  DECISIONS. 


The  Constitution  broadly  empowers  Congress  not  only  “to  lay  and  collect  taxes, 
k 2759  duties,  imposts  and  excises,”  but  also  “to  regulate  commerce  with  foreign  nations.” 

^ So,  if  the  prohibitory  clause  invoked  by  the  plaintiff  be  not  in  the  way.  Congress 

undoubtedly  has  power  to  lay  and  collect  such  a tax  as  is  here  in  question.  That  clause 
says,  “No  tax  or  duty  shall  be  laid  on  articles  exported  from  any  State.”  Of  course  it 
qualifies  and  restricts  the  power  to  tax  as  broadly  conferred.  But  to  what  extent?  The 
decisions  of  this  court  answer  that  it  excepts  from  the  range  of  that  power  articles  in  course 
of  exportation,  Turpin  v.  Burgess,  117  U.  S.  504,  507;  the  act  or  occupation  of  exporting. 
Brown  v.  Maryland,  12  Wheat.  419,  445;  bills  of  lading  for  articles  being  exported.  Fair- 
bank  V.  United  States,  181  U.  S.  283;  charter  parties  for  the  carriage  of  cargoes  fro.T  state 
to  foreign  ports.  United  States  v.  Hvoslef,  237  U.  S.  1;  and  policies  of  marine  insurance  on 
articles  being  exported, — such  insurance  being  uniformly  regarded  as  “an  integral  part  of 
the  exportation”  and  the  policy  as  “one  of  the  ordinary  shipping  documents,”  Thames 
and  Mersey  Ins.  Co.  v.  United  States,  237  U.  S.  19.  In  short,  the  court  has  interpreted 
the  clause  as  m.eaning  that  exportation  must  be  free  from  taxation,  and  therefore  as  requiring 
“not  sim.ply  an  omJssion  of  a tax  upon  the  articles  exported,  but  also  a freedom  from  any 
tax  which  directly  burdens  the  exportation.”  Fairbank  v.  United  States,  supra,  pp.  292- 
293.  And  the  court  has  indicated  that  where  the  tax  is  not  laid  on  the  articles  themselves 
while  in  course  of  exportation  the  true  test  of  its  validity  is  whether  it  “so  directly  and 
I closely”  bears  on  the  “process  of  exporting”  as  to  be  in  substance  a tax  on  the  exportation. 

Thames  and  Mersey  Ins.  Co.  v.  United  States,  supra,  p.  25.  In  this  view  it  has  been  held  that 
the  clause  does  not  condemn  or  invalidate  charges  or  taxes,  not  laid  on  property  while  being 
exported,  merely  because  they  affect  exportation  indirectly  or  remotely;  thus  a charge 
for  stamips  which  each  package  of  manufactured  tobacco  intended  for  export  v/as  required 
to  bear  before  rem.oval  from,  the  factory  was  upheld  in  Pace  v.  Burgess,  92  U.  S.  372,  and 
Turpin  v.  Burgess,  117  U.  S.  504;  and  the  application  of  a manufacturing  tax  on  all  filled 
cheese  to  cheese  manufactured  under  contract  for  export,  and  actually  exported,  was  upheld 
in  Cornell  v.  Coyne,  192  U.  S.  418.  In  that  case  it  was  said,  p.  427:  “The  true  construction 
of  the  constitutional  provision  is  that  no  burden  by  way  of  tax  or  duty  can  be  cast  upon  the 
exportation  of  articles,  and  does  not  mean  that  articles  exported  are  relieved  from  the  prior 
ordinary  burdens  of  taxation  which  rest  upon  all  property  similarly  situated.  The  exemp- 
tion attaches  to  the  export  and  not  to  the  article  before  its  exportation.” 

While  fully  assenting  and  adhering  to  the  interpretation  which  has  been  put  on 
1 2760  the  clause  in  giving  effect  to  its  spirit  as  well  as  its  letter,  we  are  of  opinion  that  to 

broaden  that  interpretation  would  be  to  depart  from  both  the  spirit  and  letter. 
27  61  The  tax  in  question  is  unlike  any  of  those  heretofore  condemned.  It  is  not  laid  on 
articles  in  course  of  exportation  or  on  anything  which  inherently  or  by  the  usages 
of  commerce  is  embraced  in  exportation  or  any  of  its  processes.  On  the  contrary,  it  is 
an  income  tax  laid  generally  on  net  incomes.  And  while  it  cannot  be  applied  to  any  income 
which  Congress  has  no  power  to  tax  (see  Stanton  v.  Baltic  Mining  Co.,  supra,  p.  113),  it  is 
both  nominally  and  actually  a general  tax.  It  is  not  laid  on  income  from  exportation  be- 
cause of  its  source,  or  in  a discriminative  way,  but  just  as  it  is  laid  on  other  income.  The 
words  of  the  Act  are  “net  income  arising  or  accruing  from  all  sources.”  There  is  no  dis- 
crimination. At  most,  exportation  is  affected  only  indirectly  and  remotely.  The  tax  is 
levied  after  exportation  is  completed,  after  all  expenses  are  paid  and  losses  adjusted,  and 
after  the  recipient  of  the  Income  is  free  to  use  it  as  he  chooses.  Thus  what  Is  taxed — the  net 
. income  — is  as  far  removed  from  exportation  as  are  articles  intended  for  export  before 

} the  exportation  begins.  If  articles  manufactured  and  intended  for  export  are  subject  to 

taxation  under  general  laws  up  to  the  time  they  are  put  in  course  of  exportation,  as  we  have 
seen  they  are,  the  conclusion  is  unavoidable  that  the  net  income  from  the  venture  when 
completed,  that  is  to  say,  after  the  exportation  and  sale  are  fully  consummated,  is  like- 
wise subject  to  taxation  under  general  laws.  In  that  respect  the  status  of  the  income  Is 
not  different  ^’•om  that  of  the  exported  articles  prior  to  the  exportation. 

For  these  reasons  we  hold  that  the  objection  urged  against  the  tax  Is  not  well 
27  62  grounded. 

Judgrnent  Affirmed. 

Lynch  vs.  Hornby 

(247  U.  S.  339.) 

The  appended  decision  of  the  United  States  Supreme  Court  in  the  case  of  E.  J. 
27  63  Lyn  ch,  as  collector  of  internal  revenue,  v.  H.  C.  Hornby  is  published  for  the  infor- 
mation of  internal-revenue  officers  and  others  concerned.  (T.  D.  2731,  June  11, 

1918.) 

i ...  (June  3,  1918.) 

^ Mr.  Justice  Pitney  delivered  the  opinion  of  the  Court. 

Hornby,  the  respondent,  recovered  a judgment  in  the  United  States  District  Court 
2764  against  Lynch,  as  Collector  of  Internal  Revenue,  for  the  return  of  $171,  assessed 
as  an  additional  income  tax  under  the  Act  of  October  3,  1913  (Ch.  16,  38  Stat.  114, 


INC. 


289  TAX 


SUPREME  COURT  DECISIONS. 


166),  and  paid  under  protest.  The  Circuit  Court  of  Appeals  affirmed  the  judgment,. 
236  Fed.  Rep.  661,  and  the  case  comes  here  on  certiorari.  It  was  submitted  at  the  same 
time  with  Lynch,  Collector  v.  Turrish,  ante,  ^2776,  Southern  Pacific  Co.  v.  Lowe,  Collector, 
ante,  ^2804,  and  Peabody  v.  Eisner,  Collector,  -post,  ^2802,  arising  under  the  same  Act, 
and  this  day  decided. 

The  facts,  in  brief,  are  as  follows;  Hornby,  from  1906  to  1915,  was  the  owner  of 
2 7 6 5 434  (out  of  10,000)  shares  of  the  capital  stock  of  the  Cloquet  Lumber  Company, 
an  Iowa  corporation,  which  for  more  than  a quarter  of  a century  had  been  engaged 
in  purchasing  timber  lands,  m.anufacturing  the  tim.ber  into  lumber  and  selling  it.  Its 
shares  had  a par  value  of  $100  each,  making  the  entire  capital  stock  $1,000,000.  On  and 
prior  to  March  1,  1913,  by  the  increase  of  the  value  of  its  timber  lands  and  through  its 
business  operations,  the  total  property  of  the  company  had  come  to  be  worth  $4-, 000,000, 
and  Hornby’s  stock,  the  par  value  of  which  was  $43,400,  had  become  worth  at  least  $150,000. 
In  the  year  1914  the  company  was  engaged  in  cutting  its  standing  timber,  manufacturing 
it  into  lum.ber,  selling  the  lum.ber,  and  distributing  the  proceeds  among  its  stockholders. 
In  that  year  it  thus  distributed  dividends  aggregating  $650,000,  of  which  $240,000,  or  24 
per  cent,  of  the  par  value  of  the  capital  stock,  was  derived  from  current  earnings,  and 
$410,000  from  conversion  into  money  of  property  that  it  owned  or  in  which  it  had  an  interest 
on  March  1,  1913.  Hornby’s  share  of  the  latter  amount  was  $17,794,  and  this  not  having 
been  included  in  his  incom.e  tax  return,  the  Commissioner  of  Internal  Revenue  levied 
and  additional  tax  of  $171  on  account  of  it,  and  this  forms  the  subject  of  the  present  suit. 
The  case  was  tried  in  the  District  Court  and  argued  in  the  Circuit  Court  of  Appeals 

2766  together  with  Lynch,  Collector  v.  Turrish  (236  Fed.  Rep.  653),  and  was  treated  as 
presenting  substantially  the  same  question  upon  the  merits.  In  our  opinion  it 

is  distinguishable  from  the  Turrish  case,  where  the  distribution  in  question  was  a single 
and  final  dividend  received  by  Turrish  from  the  Payette  Company  in  liquidation  of  the 
entire  assets  and  business  of  the  company  and  a return  to  him  of  the  value  of  his  stock 
upon  the  surrender  of  his  entire  interest  in  the  company,  at  a price  that  represented  its 
intrinsic  value  at  and  before  March  1,  1913,  when  the  Income  Tax  Act  took  effect. 

In  the  present  case  there  was  no  winding  up  or  liquidation  of  the  Cloquet  Lumber 

2767  Company,  nor  any  surrender  of  Hornby’s  stock.  He  was  but  one  of  many  stock- 
holders, and  had  but  the  ordinary  stockholder’s  interest  in  the  capital  and  surplus 

of  the  com.pany,  that  is,  a right  to  have  them  devoted  to  the  proper  business  of  the  cor- 
poration and  to  receive  from  the  current  earnings  or  accumulated  surplus  such  dividends 
as  the  directors  in  their  discretion  might  declare.  Gibbons  v.  Mahon,  136  U.  S.  549,  557. 
The  operations  of  this  company  in  the  year  1914  were,  according  to  the  facts  pleaded^ 
of  a nature  essentially  like  those  in  which  it  had  been  engaged  for  more  than  a quarter  of 
a century.  The  fact  that  they  resulted  in  converting  into  money,  and  thus  setting  free 
for  distribution  as  dividends,  a part  of  its  surplus  assets  accumulated  prior  to  March  1, 
1913,  does  not  render  Hornby’s  share  of  those  dividends  any  the  less  a part  of  his  income 
within  the  true  intent  and  meaning  of  the  Act,  the  pertinent  language  of  which  is  as  follows 
(38  Stat.  166,  167): 

“A.  Subdivision  1.  That  there  shall  be  levied,  assessed,  collected  and  paid  annually 
upon  the  entire  net  income  arising  or  accruing  from  all  sources  in  the  preceding  calendar 
)’^ear  to  every  citizen  of  the  United  States,  * * * ^nd  to  every  person  residing  in  the 

United  States,  * * * ^ ^^x  of  1 per  centum  per  annum  upon  such  income,  except 

as  hereinafter  provided;  * * * 

“B.  That,  subject  only  to  such  exemptions  and  deductions  as  are  hereinafter  allowed,, 
the  net  income  of  a taxable  person  shall  include  gains,  profits,  and  income  derived  from 
salaries,  wages,  or  com.pensation  for  personal  service  * * * ^ ^|so  from  interest,  rent, 
dividends,  securities  or  the  transaction  of  any  lawful  business  carried  on  for  gain  or  profit, 
or  gains  or  profits  and  income  derived  from  any  source  whatever.” 

Among  the  deductions  allowed  for  the  purpose  of  the  normal  tax  is,  “seventh, 

2768  the  amount  received  as  dividends  upon  the  stock  or  from  the  net  earnings  of  any 

corporation,  * * * which  is  taxable  upon  its  net  income  as  hereinafter  provided.” 

There  is  a graduated  additional  tax,  commonly  known  as  a “surtax,”  upon  net  income 
in  excess  of  $20,000,  including  incom.e  from  dividends,  and  for  the  purpose  of  this  additional 
tax  “the  taxable  incom.e  of  any  individual  shall  embrace  the  share  to  which  he  would  be 
entitled  of  the  gains  and  profits,  if  divided  or  distributed,  whether  divided  or  distributed 
or  not,  of  all  corporations  * * * form.ed  or  fraudulently  availed  of  for  the  purpose 

of  preventing  the  imposition  of  such  tax  through  the  medium  of  permitting  such  gains 
and  profits  to  accum.ulate  instead  of  being  divided  or  distributed.” 

It  is  evident  that  Congress  intended  to  draw  and  did  draw  a distinction  between 

2769  a stockholder’s  undivided  share  or  interest  in  the  gains  and  profits  of  a corporation, 
prior  to  the  declaration  of  a dividend,  and  his  participation  in  the  dividends 

declared  and  paid;  treating  the  latter,  in  ordinary  circumstances,  as  a part  of  his  income 
for  the  purposes  of  the  surtax,  and  not  regarding  the  former  as  taxable  income  unless 
fraudulently  accumulated  for  the  purpose  of  evading  the  tax. 


INC. 


290  TAX 


SUPREME  COURT  DECISIONS. 


This  treatment  of  undivided  profits  applies  only  to  profits  permitted  to  accumulate 
27  70  after  the  taking  effect  of  the  Act,  since  only  with  respect  to  these  is  a fraudulent 
purpose  of  evading  the  tax  predicable.  Corporate  profits  that  accumulated  before 
the  Act  took  effect  stand  on  a different  footing.  As  to  these,  however,  just  as  we  deem  the 
legislative  intent  m.anifest  to  tax  the  stockholder  with  respect  to  such  accumulations  only 
if  and  when,  and  to  the  extent  that,  his  interest  in  them,  comes  to  fruition  as  incom.e,  that 
is,  in  dividends  declared,  so  we  can  perceive  no  constitutional  obstacle  that  stands  in  the  way 
of  carrying  out  this  intent  when  dividends  are  declared  out  of  a pre-existing  surplus.  The 
Act  took  effect  on  March  1,  1913,  a few  days  after  the  requisite  num.ber  of  States  had 
given  approval  to  the  Sixteenth  Amendment,  under  which  for  the  first  time  Congress  was 
em.pow|ered  to  tax  income  from  property  without  apportioning  the  tax  among  the  States 
according  to  population.  Southern  Pacific  Co.  v.  Lotve,  supra.  That  the  retroactivity 
of  the  Act  from  the  date  of  its  passage  (October  3,  1913)  to  a date  not  prior  to  the  adoption 
of  the  Amiendm.ent  was  perm.issible  is  settled  by  Brushaber  v.  Union  Pacific  R.  R.,  240 
U.  S.  1,  20.  And  we  deem  it  equally  clear  that  Congress  was  at  liberty  under  the  Amend- 
ment to  tax  as  incom.e,  without  apportionment,  everything  that  became  income,  in  the 
ordinary  ^sense  of  the  word,  after  the  adoption  of  the  Amendment,  including  dividends 
received  in  the  ordinary  course  by  a stockholder  from  a corporation,  even  though  they 
were  extraordinary  in  amount  and  m.ight  appear  upon  analysis  to  be  a mere  realization  in 
possession  of  an  inchoate  and  contingent  interest  that  the  stockholder  had  in  a surplus 
of  corporate  assets  previously  existing.  Dividends  are  the  appropriate  fruit  of  stock 
ownership,  are  comm.only  reckoned  as  income,  and  are  expended  as  such  by  the  stockholder 
without  regard  to  whether  they  are  declared  from  the  m.ost  recent  earnings,  or  from  a sur- 
plus accumulated  from  the  earnings  of  the  past,  or  are  based  upon  the  increased  value 
of  the  property  of  the  corporation.  The  stockholder  is,  in  the  ordinary  case,  a different 
entity  from  the  corporation,  and  Congress  was  at  liberty  to  treat  the  dividends  as  coming 
to  him  ab  extra,  and  as  constituting  a part  of  his  income  when  they  came  to  hand. 

Hence  we  construe  the  provision  of  the  Act  that  “the  net  income  of  a taxable 

2771  person  shall  include  gains,  profits,  and  income  derived  from  * * * interest, 

rent,  dividends,  * * * or  gains  or  profits  and  income  derived  from  any  source 

whatever”  as  including  (for  the  purposes  of  the  additional  tax)  all  dividends  declared 
and  paid  In  the  ordinary  course  of  business  by  a corporation  to  its  stockholders  after  the 
taking  effect  of  the  Act  (March  1,  1913),  whether  from  current  earnings,  or  from  the 
accumulated  surplus  made  up  of  past  earnings  or  increase  in  value  of  corporate  assets, 
notwithstanding  it  accrued  to  the  corporation  in  whole  or  in  part  prior  to  March  1,  1913. 
In  short,  the  word  “dividend”  was  employed  in  the  Act  as  descriptive  of  one  kind  of  gain 
to  the  individual  stockholder;  dividends  being  treated  as  the  tangible  and  recurrent 
returns  upon  his  stock,  analogous  to  the  interest  and  rent  received  upon  other  forms  of 
invested  capital. 

In  the  more  recent  Income  Tax  Acts,  provisions  have  been  Inserted  for  the  pur- 

2772  pose  of  excluding  from  the  effect  of  the  tax  any  dividends  declared  out  of  earnings 
or  profits  that  accrued  prior  to  March  1,  1913.  This  originated  with  the  Act  of 

September  8,  1916,  and  has  been  continued  in  the  Act  of  October  3,  1917.*  We  are  re- 
ferred to 


*In  Act  of  September  8,  1916  (Ch.  463,  39  Stat.  756,  757),  which  took  the  place  of  the 
Act  of  1913,  the  substance  of  what  we  have  quoted  from  Paragraph  B of  the  1913  Act 
was  embodied  in  Sec.  2 (a),  but  with  this  proviso:  Provided,  that  the  term  ‘dividends* 

as  used  in  this  title  shall  be  held  to  mean  any  distribution  made  or  ordered  to  be  made 
by  a corporation  ♦ * * nf  its  earnings  or  profits  accrued  since  March  first,  nineteen 

hundred  and  thirteen,  and  payable  to  its  shareholders,  whether  in  cash  or  in  stock  of  the 
corporation,”  etc.  And  by  the  Act  of  October  3,  1917  (Ch.  63,  40  Stat.  300,  329,  337-8), 
Sec.  2 (a)  of  the  1916  Act  was  amended  by  being  repeated  without  the  proviso  (p.  329), 
while  the  proviso  was  inserted  as  a new  section — 31  (a) — and  to  it  was  added  a subsection, 
(b),  as  follows: 

“(b)  Any  distribution  made  to  the  shareholders  or  members  of  a corporation  * ♦ ♦ 

in  the  year  nineteen  hundred  and  seventeen,  or  subsequent  tax  years,  shall  be  deemed 
to  have  been  made  from  the  most  recently  accumulated  undivided  profits  or  surplus, 
and  shall  constitute  a part  of  the  annual  income  of  the  distributee  for  the  year  in  which 
received,  and  shall  be  taxed  to  the  distributee  at  the  rates  prescribed  by  law  for  the  years 
in  which  such  profits  or  surplus  were  accumulated  by  the  corporation,  * ♦ ♦ but 

nothing  herein  shall  be  construed  as  taxing  any  earnings  or  profits  accrued  prior  to  March 
first,  nineteen  hundred  and  thirteen,  but  such  earnings  or  profits  may  be  distributed  in 
stock  dividends  or  otherwise,  exempt  from  the  tax,  after  the  distribution  of  earnings 
and  profits  accrued  since  March  first,  nineteen  hundred  and  thirteen,  has  been^  made. 
The  subdivision  shall  not  apply  to  any  distribution  made  prior  to  August  sixth,  nineteen 
hundred  and  seventeen,  out  of  the  earnings  or  profits  accrued  prior  to  March  first,  nine- 
teen hundred  and  thirteen.” 


INC. 


291  TAX 


SUPREME  COURT  DECISIONS. 


the  legislative  history  of  the  Act  of  1916,  which  it  is  contended  indicates  that  the  new 
definition  of  the  term  “dividends”  was  intended  to  be  declaratory  of  the  meaning  of  the 
term  as  used  in  the  1913  Act.  We  cannot  accept  this  suggestion,  deeming  it  more  rea- 
sonable to  regard  the  change  as  a concession  to  the  equity  of  stockholders  granted  in  the 
1916  Act,  in  view  of  constitutional  questions  that  had  been  raised  in  this  case,  in  the 
companion  case  of  Lynch,  Collector  v.  Turrish,  and  perhaps  in  other  cases.  These  two 
cases  were  commenced  in  October,  1915;  and  decisions  adverse  to  the  tax  w'ere  rendered 
in  the  District  Court  in  January,  1916,  and  in  the  Circuit  Court  of  Appeals  September 
4,  1916. 

We  repeat  that  under  the  1913  Act  dividends  declared  and  paid  in  the  ordinary 
2773  course  by  a corporation  to  its  stockholders  after  March  1,  1913,  whether  from 
current  earnings  or  from  a surplus  accumulated  prior  to  that  date,  were  taxable 
as  income  to  the  stockholder. 

We  do  not  overlook  the  fact  that  every  dividend  distribution  diminishes  by  just 
27  74  so  much  the  assets  of  the  corporation,  and  in  a theoretical  sense  reduces  the  intrinsic 
value  of  the  stock.  But,  at  the  same  time,  it  demonstrates  the  capacity  of  the  corporation 
to  pay  dividends,  holds  out  a promise  of  further  dividends  in  the  future,  and  quite  prob- 
ably increases  the  market  value  of  the  shares.  In  our  opinion.  Congress  laid  hold  of 
dividends  paid  in  the  ordinary  course  as  de  facto  income  of  the  stockholder,  without  regard 
to  the  ultimate  effect  upon  the  corporation  resulting  from  their  payment. 

Of  course  we  are  dealing  here  with  the  ordinary  stockholder  receiving  dividends 
27  75  declared  in  the  ordinary  way  of  business.  Lynch,  Collector  v.  Turrish  and  Southern 
Pacfiic  Co.  V.  Lowe,  Collector,  this  day  decided,  rest  upon  their  special  facts  and  are 
plainly  distinguishable. 

It  results  from  what  we  have  said  that  it  was  erroneous  to  award  a return  of  the 
tax  collected  from  the  respondent,  and  that  the  judgment  should  be 

Reversed,  and  the  cause  remanded  to 
the  District  Court  for  further  -proceed- 
ings in  conformity  with  this  opinion. 

Lynch  vs.  Turrish. 

(247  U.  S.  221.) 

27  7 6 The  appended  decision  of  the  United  States  Supreme  Court  in  the  case  of  E.  J. 

Lynch,  as  collector  of  internal  revenue,  v.  Henry  Turrish,  is  published  for  the 
information  of  internal-revenue  officers  and  others  concerned.  (T.  D.  2929,  June  11,  1918.) 

(June  3,  1918.) 

Mr.  Justice  McKenna  delivered  the  opinion  of  the  Court. 

Suit  to  recover  an  income  tax,  paid  under  protest,  assessed  under  the  Act  of  Oct- 
2777  ober  3,  1913,  38  Stat.  166. 

The  facts,  as  admitted  by  demurrer,  are  these:  Respondent,  Turrish,  who  wa» 
27  78  plaintiff  in  the  trial  court,  made  a return  of  his  income  for  the  calendar  year  1914 
which  showed  that  he  had  no  net  income  for  that  year;  afterwards  the  Commissioner 
of  Internal  Revenue  made  a supplemental  assessment  showing  that  he  had  received  a net 
income  of  $32,712.08,  which,  because  of  specific  deductions  and  exemptions,  resulted 
in  no  normal  tax,  but  as  the  net  income  exceeded  the  sum  of  $20,000  the  Commissioner 
assessed  an  additional  or  super-tax  of  one  per  cent  upon  the  excess,  resulting  in  a tax  of 
$127.12,  which  was  sought  to  be  recovered.  The  reassessment  was  based  upon  certain 
sums  received  by  the  plaintiff  in  the  year  1914  as  distributions  from  corporations  subject 
to  the  Income  Tax  Law  and  held  by  the  Commissioner  to  be  income  derived  from  divi- 
dends received  by  the  plaintiff  on  stock  of  domestic  corporations;  of  which  the  sum  of 
$79,975,  received  as  a distribution  from  the  Payette  Lumber  & Manufacturing  Company, 
and  without  which  no  tax  could  have  been  levied  against  the  plaintiff,  is  here  in  dispute. 

Prior  to  March  1,  1913,  and  continuously  thereafter  until  the  surrender  of  his 
27  79  stock  as  hereinafter  mentioned,  plaintiff  was  a stockholder  in  the  Payette  Com- 
pany, which  was  organized  in  the  year  1903  with  power  to  buy,  hold,  and  sell 
timber  lands,  and  in  fact  never  engaged  in  any  other  business  than  this  except  minor 
businesses  incidental  to  it.  Immediately  after  its  organization  this  company  began  to 
invest  in  timber  lands,  and  prior  to  March  1,  1913,  had  thus  invested  approximately 
$1,375,000. 

On  March  1,  1913,  the  value  of  its  assets  was  not  less  than  $3,000,000,  of  which 
2780  sum  the  value  of  the  timber  lands  was  notless  than  $2,875,000.  The  increase  was 
due  to  the  gradual  rise  in  the  market  value  of  the  lands.  At  that  date  the  value  of 
Turrish’s  stock  was  twice  its  par  value,  or  $159,950,  and  about  that  time  he  and  all 
the  other  stockholders  gave  an  option  to  sell  their  stock  for  twice  its  par  value.  The 
holders  of  the  option  formed  another  company,  called  the  Boise-Payette  Lumber  Com- 


INC. 


292 


TAX 


SUPREME  .COURT  DECISIONS. 


pany,  and  transferred  the  options  to  it.  The  options  having  been  extended  to  December 
31,  1913,  the  new  company  informed  the  Payette  Company  and  its  stockholders  shortly 
before  this  date  that  instead  of  exercising  the  option  it  preferred  and  proposed  to  purchase 
all  of  the  assets  of  the  Payette  Company,  paying  to  that  company  such  a purchase  price 
that  there  would  be  available  for  distribution  to  its  stockholders  twice  the  par  value  of 
their  stock.  The  stockholders  by  resolution  authorized  this  sale,  and,  pursuant  to  this  and 
a resolution  of  the  directors,  the  Payette  Company  transferred  to  the  new  company  all  of 
its  assets,  property,  and  franchises,  and  upon  the  completion  of  the  transaction  found 
itself  with  no  assets  or  property,  except  cash  to  the  amount  of  double  the  par  value  of 
its  stock  which  had  been  paid  to  it  by  the  new  company,  and  with  no  debts,  liabilities,  or 
obligations  except  those  which  the  new  company  had  assumed.  The  cash  was  distributed 
to  the  stockholders  on  the  surrender  of  their  certificates  of  stock,  and  the  company  went 
out  of  business.  In  this  way,  upon  the  surrender  of  his  shares,  Turrish  received  $159,950, 
being  double  their  par  value. 

The  Commissioner  of  Internal  Revenue  considered  that  of  this  sum  one-half  was 

2781  not  taxable,  being  the  liquidation  of  the  par  value  of  Turrish’s  stock,  but  that 
the  other  half  was  income  for  the  year  1914  and  taxable  under  the  Act  of  1913. 

The  question  in  the  case  is  thus  indicated.  The  District  Court  took  a different 

2782  view  from  that  of  the  Com.missioner  of  Internal  Revenue  and  therefore  overruled 
the  demurrer  to  Turrish’s  corr.plaint  and  entered  judgment  for  him  for  the  sum 

prayed,  which  judgment  was  affirmed  by  the  Circuit  Court  of  Appeals  for  the  Eighth 
Circuit.  236  Fed.  653. 

The  point  in  the  case  seems  a short  one.  It,  however,  has  provoked  m.uch  discus- 

2783  sion  on  not  only  the  legal  but  the  econom.ic  distinction  between  capital  and  income 
and  by  what  processes  and  at  what  point  of  time  the  form.er  produces  or  becomes 

the  latter.  And  this  in  resolution  of  a statute  which  concerns  the  activities  of  men  and  in- 
tended, it  might  be  supposed,  to  be  without  perplexities  and  readily  solvable  by  the  off- 
hand conceptions  of  those  to  whom  it  was  addressed. 

The  provisions  of  the  Act,  so  far  as  material  to  be  noticed,  are  the  following:  That 

2784  there  is  assessed  “upon  the  entire  net  incom.e  arising  or  accruing  from  all  sources 

in  the  preceding  calendar  year  to  every  * * * person  residing  in  the  United 

States  * * * a tax  of  one  per  centum  per  annum  upon  such  income  * * * »» 

Par.  A,  Subdlv.  1. 

In  addition  to  that  tax,  which  is  denominated  the  normal  income  tax,  it  is  provided 
27  85  that  there  shall  be  levied  “upon  the  net  income  of  every  Individual  an  additional  tax 
* * * of  one  per  centum  per  annum  upon  the  amount  by  which  the  total  net 

Incom.e  exceeds”  certain  amounts,  and  the  person  subject  to  the  tax  is  required  to  make 
a personal  return  of  his  total  net  incom.e  from  all  sources  under  rules  and  regulations  to 
be  prescribed  by  the  Commissioner  of  Internal  Revenue.  Subdiv.  2. 

By  Paragraph  B it  is  provided  that,  subject  to  certain  exemptions  and  deductions, 

2786  “the  net  income  of  a taxable  person  shall  include  gains,  profits,  and  income  derived 

from  salaries,  wages,  or  compensation  for  personal  service  * * * also  from  in- 

terest, rent,  dividends,  securities,  or  the  transaction  of  any  lawful  business  carried  on  for 
gain  or  profit,  or  gains  or  profits  and  income  derived  from  any  source  whatever.” 

2787  After  specifying  the  exemptions  and  deductions  allowed,  the  law  declares  as  follows: 
“The  said  tax  shall  be  computed  upon  the  remainder  of  said  net  income  of  each  person 

subject  thereto,  accruing  during  each  preceding  calendar  year  ending  December  thirty- 
first:  Provided,  however.  That  for  the  year  ending  Decem.ber  thirty-first,  nineteen  hundred 
and  thirteen,  said  tax  shall  be  computed  on  the  net  incom.e  accruing  from  l\'farch  first  to 
Decem.ber  thirty-first,  nineteen  hundred  and  thirteen,  both  dates  inclusive  * * * >» 

Par.  D. 

It  will  be  observed,  therefore,  that  the  statute  levies  a normal  tax  and  an  additional 

2788  tax  upon  net  incom.es,  derived  from  whatever  source,  “arising  or  accruing”  each 
preceding  calendar  year  ending  Decem.ber  31,  except  that  for  the  year  ending 

December  31,  1913,  the  tax  shall  be  coinputed  on  the  net  income  accruing  from  Afarch 
1,  1913,  to  December  31,  1913. 

And  in  determining  the  application  of  the  statute  to  Turrish  we  must  keep  in  mind 
27  89  that  on  the  adm.Itted  facts  the  distribution  received  by  him  from  the  Payette 
Com.pany  m.anifestly  was  a single  and  final  dividend  In  liquidation  of  the  entire 
assets  and  business  of  the  com.pany,  a return  to  him  of  the  value  of  his  stock  upon  the  sur- 
render of  his  entire  interest  in  the  com.pany,  and  at  a price  that  represented  its  intrinsic 
value  at  and  before  March  1,  1913,  when  the  act  took  effect. 

ff’he  District  Court  and  the  Circuit  Court  of  Appeals  decided  that  the  amount  so 
2790  distributed  to  'hurrlsh  was  not  income  within  the  meaning  of  the  statute,  basing 
the  decision  on  two  propositions  as  expressed  in  the  opinion  of  tlie  Circuit  Court 
of  Appeals,  by  Sanborn,  Circuit  Judge — (a)  'I’he  amount  was  the  realization  of  an  invest- 
ment m.ade  som.e  years  before,  representing  its  gradual  increase  during  those  years,  and 
which  reached  its  height  before  the  effective  date  of  the  law,  that  Is,  before  March  1,  1913, 
and  the  m.ere  change  of  form  of  the  property  “as  from  real  to  personal  property,  or  from  stock 

293  TAX 


INC. 


SUPRERIE  COURT  DECISIONS. 


to  cash”  was  not  income  to  its  holders  because  the  value  of  the  property  was  the  same  after 
as  before  the  change;  ^(b)  The  timber  lands  were  the  property,  capital  and  capital  assets 
of  their  legal  and  equitable  owner  and  the  enhancement  of  their  value  during  a series  of 
years  “prior  to  the  effective  date  of  the  income  tax  law,  although  divided  or  distributed  by  ^ 

dividend  or  otherwise  subsequent  to  that  date,  does  not  become  income,  gains,  or  profits  \ 

taxable  under  such  an  act.” 

For  proposition  “a”  the  court  cited  Collector  v.  Hubhardy  12  Wall.  1;  Bailey  v. 

Railroad  Company,  22  Wall.  604,  and  the  same  case  in  105  U.  S.  109.  For  proposition  “b” 

Gray  v.  Darlington,  15  Wall.  63,  was  relied  on. 

The  Government  opposes  both  contentions  by  an  elaborate  argument  containing 

2791  definitions  of  capital  and  income  drawn  from  legal  and  economic  sources  and  given 
breadth  to  cover  a number  of  other  cases  submitted  with  this.  The  argument, 

m effect,  miakes  any  increase  of  value  of  property  income,  emerging  as  such  and  taxable 

at  the  moment  of  realization  by  sale  or  some  act  of  separation,  as  by  dividend  declared  ' 

or  by  distribution,  as  in  the  instant  case. 

To  sustain  the  argument  these  definitions  are  presented:  “1.  Capital  is  anything, 

2792  material  or  otherwise,  capable  of  ownership,  viewed  in  its  static  condition  at  a 
m.oment  of  time,  or  the  right  of  ownership  therein.  2.  Income  is  the  service  or 

return  rendered  by  capital  during  a period  of  time.  * * * 4_  income  (‘profits’) 

is^  the  difference  between  income  and  outgo.  * * * 7.  In  the  actual  production  and 

distribution  of  capital  there  is  a constant  conversion  of  capital  into  income,  and  vice  versa. 

8.  The  attempt  to  conceal  this  conversion  by  treating  ‘income’  as  the  standard  return  , 

from  intact  ‘capital’  only  leads  to  confusion  of  the  value  of  capital  with  capital  itself.”  ^ 

2793  From  these  definitions  are  deduced  the  following  propositions,  which  are  said  to  be 
decisive  of  the  problems  in  the  cases: 

1.  Income  being  derived  from  the  use  of  capital,  the  conversion  or  transfer  of  capital 
always  produces  income.  2.  Mere  appreciation  of  capital  value  does  not  produce  ‘income,’ 
nor  mere  depreciation  ‘outgo.’  3.  Net  income  is  the  difference  between  actual  ‘income’ 
and  actual  ‘outgo.’  4.  Income  is  not  confined  to  money  income,  but  includes  anything 
capable  of  easy  valuation  in  money.” 

It  will  be  observed  that  the  breadth  of  definition  and  the  breadth  of  application  are 

2794  necessary  to  the  refutation  of  the  reasoning  of  the  Circuit  Court  of  Appeals.  There 
is  direct  antagonism,  the  court  basing  its  reliance,  it  says,  upon  what  it  asserts  is 

the  comm.on  sense  and  understanding  of  the  words  of  the  law,  and  the  exposition  of  like 
laws  by  the  decisions  of  this  court.  The  Government’s  resource  is  the  discussion  of  econ- 
omists and  the  fact,  concrete  and  practical,  of  wealth  not  only  increased  but  come  to  actual  t 

hand.  1 he  instant  case  is  an  example.  Turrish’s  stock  doubled  in  value.  He  paid  for  V 

It  $79,975;  he  received  $159,950.  It  requires  a struggle  to  resist  the  influence  of 
the  fact,  but  we  are  aided  and  fortified  by  our  own  precedents  and  saved  from  much  intricate 
and  subtle  discussion  and  an  elaborate  review  of  other  cases  cited  in  confirmation  or  oppo- 
sition. 

In  Collector  v.  Hubbard,  supra,  the  distinction  between  a corporation  and  its  stock- 

2795  holders  was  recognized  and  that  the  stockholder  had  not  title  for  certain  purposes 
to  the  earnings  of  the  corporation,  net  or  other,  prior  to  a dividend  being  declared, 

but  they  m.ight  become  capital  by  investment  in  permanent  improvements  and  thereby 
increase  the  market  value  of  the  shares,  “whether  held  by  the  original  subscribers  or  by 
assignees.”  In  other  wmrds,  it  was  held  that  the  investments  of  the  corporation  were  the 
investments  of  the  stockholders:  that  is,  the  stockholders  could  have  an  interest,  taxable 
under  the  act  considered,  though  not  identical  wnth  the  corporation.  This  was  repeated 
in  Bailey  v.  Railraod  Company,  22  Wall.  604,  635,  636.  L 

The  latter  case  came  here  again  in  106  U.  S.  109,  and  it  was  then  declared  that  the 

2796  purpose  of  an  incom.e  tax  law  was  to  tax  the  incomie  for  the  year  that  it  accrued; 
in  other  words,  no  tax  in  contem.plation  of  the  law  accrued  upon  something  except 

for  the  year  in  which  that  som.ething — earnings,  profits,  gains  or  income — accrues. 

In  that  case  the  subject  of  the  tax  was  a scrip  dividend,  but  the  certificates  did  not  show  the 
year  of  the  earnings  and  testimony  as  to  the  particular  year  was  admitted.  The  principle 
applies  to  the  case  at  bar.  If  increase  in  value  of  ‘the  lands  was  income,  it  had  Its  par-  . 
ticular  tirne  and  such  time  must  have  been  within  the  time  of  the  law  to  be  subject  to  the 
law,  that  is,  it  m.ust  have  been  after  Afarch  1,  1913,  But,  according  to  the  fact  admitted,  \ 

there  was  no  increase  after  that  date  and  therefore  no  increase  subject  to  the  law.  There 
was  continuity  of  value,  not  gain  or  increase.  In  the  first  proposition  of  the  Court  of 
Appeals  we,  therefore,  concur. 

In  support  of  its  second  proposition  it  adduced,  as  we  hav'e  seen.  Gray  v.  Darlington, 

2797  15  W all.  63.  The  cast  arose  under  the  income  tax  law  of  1867,  which  levied  “upon 

the  gains,  profits,  and  income  of  every  person,  * * * whether  derived  from  any 

kind  of  property  * * * or  from  any  other  source  whatever  * * * a tax  of  five 
per  centum  on  the  amount  so  derived  over  $1,000  * * * for  the  year  ending  the  thirty- 
first  of  Decemibcr  next  preceding  the  lime  for  levying,  collecting  and  paying  said  tax.”  V 


INC. 


294 


TAX 


SUPREME  COURT  DECISIONS. 


Darlington,  in  1865,  being  the  owner  of  certain  United  States  Treasury  notes, 

2798  exchanged  them  for  United  States  bonds.  In  1869  he  sold  the  bonds  at  an  advance 
of  $20,000  over  the  cost  of  the  notes  and  upon  this  amount  was  levied  a tax  of  five 

per  centum  as  gains,  profits  and  income  for  that  year.  He  paid  the  tax  under  protest  and 
sued  to  recover,  and  prevailed.  .This  court,  by  Mr.  Justice  Field,  said:  “The  question  pre- 
sented is  whether  the  advance  in  the  value  of  the  bonds,  during  this  period  of  four  years, 
over  their  cost,  realized  by  their  sale,  was  subject  to  taxation  as  gains,  profits,  or  income 
of  the  plaintiff  for  the  year  in  which  the  bonds  were  sold.  The  answer  which  should  be  given 
to  this  question  does  not,  in  our  judgment,  admit  of  any  doubt.  The  advance  in  the 
value  of  property  during  a series  of  years  can,  in  no  just  sense  be  considered  the  gains, 
profits,  or  incom.e  of  any  one  particular  year  of  the  series,  although  the  entire  amount 
of  the  advance  be  at  one  time  turned  into  money  by  the  sale  of  the  property.  The  statute 
looks,  with  some  exceptions,  for  subjects  of  taxation  only  to  annual  gains,  profits  and 
income.” 

And  again,  “The  mere  fact  that  property  has  advanced  in  Value  between  the  date 

2799  of  its  acquisition  and  sale  does  not  authorize  the  imposition  of  a tax  on  the  mount 
of  the  advance.  Mere  advance  in  value  in  no  sense  constitutes  the  gains,  profits, 

or  income  specified  by  the  statute.  It  constitutes  and  can  be  treated  merely  as  increase 
of  capital.”  This  case  has  not  been  since  questioned  or  modified. 

The  Government  feels  the  impediment  of  the  case  and  attempts  to  confine  its  ruling 

2800  to  the  exact  letter  of  the  Act  of  March  2,  1867,  and  thereby  distinguish  that  act 
from  the  act  of  1913  and  give  to  the  latter  something  of  retrospective  effect.  Opposed 

to  this  there  is  a presumption,  resistless  except  against  an  intention  imperatively  clear. 
The  Government,  however,  m.akes  its  view  depend  upon  disputable  differences  between 
certain  words  of  the  two  acts.  It  urges  that  the  act  of  1913  makes  the  income  taxed  one 
“arising  or  accruing”  in  the  preceding  calendar  year,  while  the  act  of  1867  makes  the 
income  one  “derived.”  Granting  that  there  is  a shade  of  difference  between  the  words, 
it  cannot  be  granted  that  Congress  made  that  shade  a criterion  of  intention  and  committed 
the  construction  of  its  legislation  to  the  disputes  of  purists.  Besides,  the  contention  of  the 
Government  does  not  reach  the  principle  of  Gray  v.  Darlington,  which  is  that  the  gradual 
advance  in  the  value  of  property  during  a series  of  years  in  no  just  sense  can  be  ascribed 
to  a particular  year,  not  therefore  as  “arising  or  accruing,”  to  meet  the  challenge 
of  the  words,  in  the  last  one  of  the  years,  as  the  Government  contends,  and  taxable  as 
income  for  that  year  or  when  turned  into  cash.  Indeed,  the  case  decides  that  such  advance 
in  value  is  not  income  at  all,  but  merely  increase  of^capital  and  not  subject  to  a tax  as  income. 
We  concur,  therefore,  in  the  second  proposition  of  the  Circuit  Court  of  Appeals 

2801  as  well  as  in  the  first  and  affirm  the  judgment. 

Mr.  Justice  Brandeis  and  Mr.  Justice  Clarke  concur  in  the  result. 

Peabody  vs.  Eisner. 

(247  U.  S.  347.) 

2802  The  appended  decision  of  the  United  States  Supreme  Court  in  the  case  of  Charles 
A.  Peabody  v.  Mark  Eisner,  as  collector  of  internal  revenue,  is  published  for  the 

informaion  of  internal-revenue  officers  and  others  concerned.  (T.  D.  2732,  June  11,  1918.) 

• ^ (June  3,  1918.)  5^ 

Mr.  Justice  Pitney  delivered  the  opinion  of  the  Court. 

2803  This  case  arose  under  the  Federal  Income  Tax  Act  of  October  3,  1913  (Ch.  16, 
38  Stat.l  14,  166).  The  controversy  is  over  the  first  cause  of  action  set  up  by  plaintiff 
in  error  in  a suit  against  the  collector  for  the  recovery  of  an  additional  tax  exacted 

in  respect  of  a certain  dividend  received  by  plaintiff  in  the  year  1914,  the  facts  being  as 
follows:  On  and  prior  to  March  1,  1913,  and  thenceforward  until  payment  of  the  dividend 
in  question,  petitioner  was  owner  of  1,100  shares  (out  of  a total  of  2,000,000  shares  outstand- 
ing) of  common  stock  of  the  Union  Pacific  Railroad  Company,  of  the  par  value  of  $100 
each,  and  during  the  same  period  the  company  had  large  holdings  of  the  common  and  pre- 
ferred stocks  of  the  Baltimore  & Ohio  Railroad  Company.  On  March  2,  1914,  the  Union 
Pacific  declared  and  paid  an  extra  dividend  upon  each  share  of  its  common  stock,  amounting 
to  $3  in  cash,  $12  in  par  value  of  preferred  stock  of  the  Baltimore  & Ohio,  and  $22.50  in  par 
value  of  the  common  stock  of  the  same  company;  the  result  being  that  petitioner  received 
as  his  dividend  upon  his  holding  of  Union  Pacific  common  stock  $3,300  in  cash,  132  shares 
of  Baltimore  & Ohio  preferred  and  247  shares  of  Baltimore  & Ohio  common  stock.  In 
his  income  return  for  1914  he  included  as  taxable  income  $4.12  per  share  of  this  dividend, 
or  $4,532  in  all,  and  paid  his  tax  upon  the  basis  of  this  return.  Afterwards  he  was  sub- 
ject to  additional  assessment  upon  a valuation  of  the  balance  of  his  dividend,  and  this, 
having  been  paid  under  protest,  is  the  subject  of  the  present  suit,  the  theory  of  which  is 
that  the  entire  earnings,  income,  gains,  and  profits  from  all  sources  realized  by  the  Union 


INC.  295 


TAX 


SUPREME  COURT  DECISIONS. 


Pacific  Railroad  Company  from  March  1,  1913,  to  March  2,  1914,  remaining  after  the  pay- 
ment of  prior  charges  did  not  exceed  $4.12  per  share  of  the  Union  Pacific  common  stock, 
and  that  the  cash  and  Baltimore  & Ohio  stock  disposed  of  in  the  extra  dividend  (so  far  as 
they  exceeded  the  value  of  $4.12  per  share  of  Union  Pacific)  did  not  constitute  a gain, 
profit,  or  income  of  the  Union  Pacific,  and  therefore  did  not  constitute  a gain,  profit,  or 
incom.e  of  the  plaintiff  arising  or  accruing  either  in  or  for  the  year  1914  or  for  any  period 
subsequent  to  March  1,  1913,  the  date  when  the  Income  Tax  Law  took  effect.  The  District 
Court  overruled  this  contention  upon  the  authority  of  Southern  Pacific  Co.  v.  Lowe,  CoU 
lector,  238  Fed.  Rep.  847,  and  Towne  v.  Eisner,  Colletcor,  242  Fed.  Rep.  702.  The  latter 
case  has  since  been  reversed  (245  U.  S.  418),  but  only  upon  the  ground  that  it  related 
to  a stock  dividend  which  in  fact  took  nothing  from  the  property  of  the  corporation  and 
added  nothing  to  the  interest  of  the  shareholder,  but  merely  changed  the  evidence  which 
represented  that  interest.  Southern  Pacific  Co.  v.  Lowe,  Collector,  has  been  reversed  this 
day,  ante  ^2804,  but  only  upon  the  ground  that  the  Central  Pacific  Railway  Company, 
which  paid  the  dividend,  and  the  Southern  Pacific  Company,  which  received  it,  were  in 
substance  identical  corporations  because  of  the  complete  ownership  and  control  which  the 
latter  possessed  over  the  former  as  stockholder  and  in  other  capacities,  so  that  while  the 
two  companies  were  separate  legal  entities,  yet  in  fact  and  for  all  practical  purposes  the 
former  was  but  a part  of  the  latter,  acting  merely  as  Its  agent  and  subject  In  all  things  to 
its  direction  and  control;  and  for  the  further  reason  that  the  funds  represented  by  the 
dividend  were  in  the  actual  possession  and  control  of  the  Southern  Pacific  Company  as 
well  before  as  after  the  declaration  of  the  dividend.  In  this  case  the  plaintiff  in  error  stands 
in  the  position  of  the  ordinary  stockholder,  whose  Interest  in  the  accumulated  earnings 
and  surplus  of  the  company  are  not  the  same  before  as  after  the  declaration  of  a dividend; 
his  right  being  m.erely  to  have  the  assets  devoted  to  the  proper  business  of  the  corporation 
and  to  receive  from  the  current  earnings  or  accumulated  surplus  such  dividends  as  the 
directors  In  their  discretion  may  declare;  and  without  right  or  power  on  his  part  to  control 
that  discretion.  ^It  hardly  is  necessary  to  say  that  this  case  is  not  ruled  by  our  decision 
in  Towne  v.  Eisner,  since  the  dividend  of  Baltimore  & Ohio  shares  was  not  a stock 
dividend  but  a distribution  in  specie  of  a portion  of  the  assets  of  the  Union  Pacific,  and 
is  to  be  governed  for  all  present  purposes  by  the  same  rule  applicable  to  the  distribution 
of  a like  value  in  money.  It  is  controlled  by  Lynch,  Collector  v.  Hornby,  this  day  decided, 
ante,  ^2763. 

Judgment  A firmed. 

Southern  Pacific  Company  vs.  Lowe. 

(247  U.  S.  330.) 

2804  The  appended  decision  of  the  United  States  Supreme  Court  In  the  case  of  Southern 
Pacific  Co.  V.  John  Z.  Lowe,  Jr.,  as  collector  of  Internal  revenue,  is  published  for  ' 

the  information  of  internal-revenue  officers  and  others  concerned.  (T.  D.  2730,  June  11, 
1918.) 

(June  3,  1918.) 

Fir.  Justice  Pitney  delivered  the  opinion  of  the  Court. 

This  case  presents  a question  arising  under  the  Federal  Income  Tax  Act  of  October  3, 

2805  1913  (Ch.  16,  38  Stat.  114,  166).  Suit  was  brought  by  plaintiff  in  error  against 
the  Collector  to  recover  taxes  assessed  against  it  and  paid  under  protest.  There  were 

two  causes  of  action,  of  which  only  the  second  went  to  trial,  it  having  been  stipulated  that 
the  trial  of  the  other  might  be  postponed  until  the  final  determination  of  this  one.  So  far 
as  it  is  presented  to  us,  the  suit  is  an  effort  to  recover  a tax  imposed  upon  certain  dividends 
upon  stock,  in  form  received  by  the  plaintiff  from  another  corporation  in  the  early  part  of 
the  year  1914,  and  alleged  by  the  plaintiff  to  have  been  paid  out  of  a surplus  accumulated 
not  only  prior  to  the  effective  date  of  the  Act  but  prior  to  the  adoption  of  the  Sixteenth 
Amendment  to  the  Constitution  of  the  United  States.  The  District  Court  directed  a 
verdict  and  judgment  in  favor  of  the  Collector,  238  Fed.  Rep.  847,  and  the  case  comes 
here  by  direct  writ  of  error  under  sec.  238,  Judicial  Code,  because  of  the  constitutional 
question.  That  our  jurisdiction  was  properly  invoked  is  settled  by  Towne  v.  Eisner, 
245  U.  S.  418,  425. 

The  case  was  submitted  at  the  same  time  with  several  other  cases  arising  under  the 

2806  same  Act  and  decided  this  day,  viz..  Lynch,  Collector  v.  Turrish,  ante,  ^[2776,  Lynch, 
Collector  v.  Hornby,  post,  1|2763,  and  Peabody  v.  Eisner,  Collector,  post,  ^[2802. 

The  material  facts  are  as  follows:^  Prior  to  January  1,  1913,  and  at  all  tixues  material 

2807  to  the  case,  plaintiff,  a corporation  organized  under  the  laws  of  the  State  of  Ken- 
^ tucky,  owned  all  the  capital  stock  of  the  Central  Pacific  Railway  Company,  a cor- 
poration of  the  State  of  Utah,  including  the  stock  registered  in  the  names  of  the  directors.* 

*There  was  another  question,  concerning  a dividend  paid  by  the  Reward  Oil  Company, 
whose  stock  likewise  was  owned  by  the  Southern  Pacific  Company,  but  the  contention 
of  plaintiff  in  error  respecting  this  item  has  been  abandoned. 


INC. 


296  TAX 


SUPREME  COURT  DECISIONS. 


This  situation  existed  eontinuously  from  the  Incorporation  of  the  Railway  Company  in 
the  year  1899.  That  company  is  the  successor  of  the  Central  Pacific  Railroad  Company 
and  acquired  all  of  its  properties,  which  constitute  a part  of  a large  system  of  railways 
owned  or  controlled  by  the  Southern  Pacific  Company.  The  latter  company,  besides  being 
sole  stockholder,  was  in  the  actual  physical  possession  of  the  railroads  and  all  other  assets 
of  the  Railway  Company,  and  in  charge  of  Its  operations,  which  were  conducted  in  accord- 
ance W'ith  the  terms  of  a lease  m.ade  by  the  predecessor  company  to  the  Southern  Pacific 
and  assumed  by  the  Railway  Company,  the  effect  of  which  was  that  the  Southern  Pacific 
should  pay  to  the  lessor  company  $10,000  per  annum  for  organl^^atlon  expenses,  should 
operate  the  railroads,  branches,  and  leased  lines  belonging  to  the  lessor,  and  account 
annually  for  the  net  earnings,  and  if  these  exceeded  6 per  cent  on  the  existing  capital  stock 
of  the  lessor  the  lessee  should  retain  to  itself  one-half  of  the  excess;  advances  by  the  lessee 
for  account  of  the  lessor  were  to  bear  lawful  interest  and  the  lessor  was  to  be 
entitled  at  any  time  and  from  time  to  time  to  refund  to  itself  its  advances  and 
interest  out  of  any  net  earnings  which  might  be  in  its  hands.  The  provisions  of  the  lease 
were  observed  by  both  corporations  for  bookkeeping  purposes.  The  Southern  Pacific 
acted  as  cashier  and  banker  for  the  entire  system;  the  Central  Pacific  kept  no  bank  account, 
its  earnings  being  deposited  with  the  bank  account  of  the  Southern  Pacific;  and  if  the 
Central  Pacific  needed  money  for  additions  and  betterments  or  for  making  up  of  a deficit 
of  current  earnings,  the  necessary  funds  were  advanced  by  the  Southern  Pacific.  As  a 
result  of  these  operations  and  of  the  conversion  of  certain  capital  assets  of  the  Central 
Pacific  Company,  that  com.pany  showed  upon  its  books  a large  surplus  accumulated  prior 
to  January  1,  1913,  principally  in  the  form  of  a debit  against  the  Southern  Pacific,  which 
at  the  same  time,  as  sole  stockholder,  was  entitled  to  any  and  all  dividends  that  might 
be  declared,  and  being  in  control  of  the  board  of  directors  was  able  to  and  did  control  the 
dividend  policy.  The  dividends  In  question  were  declared  and  paid  during  the  first  six 
months  of  the  year  1914  out  of  this  surplus  of  the  Central  Pacific  accumulated  prior  to 
January  1,  1913;  but  the  payment  was  only  constructive,  being  carried  into  effect  by 
bookkeeping  entries  which  simply  reduced  the  apparent  surplus  of  the  Central  Pacific  and 
reduced  the  apparent  indebtedness  of  the  Southern  Pacific  to  the  Central  Pacific  by  pre- 
cisely the  amount  of  the  dividends. 

The  question  is  whether  the  dividends  received  under  these  circumstances  and 

2808  in  this  manner  by  the  Southern  Pacific  Company  were  taxable  as  income  of  that 

company  under  the  Income  Tax  Act  of  1913.* 

*In  addition,  a question  was  made  in  the  District  Court  as  to  a special  dividend 
declared  by  the  Central  Pacific  out  of  the  proceeds  of  sale  of  certain  land  on  Long  Island, 
taken  in  satisfaction  of  a debt  and  sold  in  December,  1913.  As  to  this,  however,  no 
argument  is  submitted  by  plaintiff  in  error,  the  facts  are  not  clear,  and  we  pass  it  with- 
out consideration. 

The  Act  provides  in  Section  II,  Paragraph  A,  Subdivision  1 (38  Stat.  166):  “That 

2809  there  shall  be  levied,  assessed,  collected  and  paid  annually  upon  the  entire  net 

income  arising  or  accruing  from  all  sources  in  the  preceding  calendar  year”  to  every 

person  residing  in  the  United  States  a tax  of  1 per  centum  per  annum,  with  exceptions 
not  now  material.  By  Paragraph  G (a)  (p.  172),  it  is  provided:  “That  the  normal  tax 
hereinbefore  imposed  upon  individuals  [1  per  cent.]  likewise  shall  be  levied,  assessed, 
and  paid  annually  upon  the  entire  net  income  arising  or  accruing  from  all  sources  during 
the  preceding  calendar  year  to  every  corporation  * ♦ * organized  in  the  United  States,” 

with  other  provisions  not  now  material. 

2810  It  is  provided  in  Paragraph  G (b),  as  to  domestic  corporations,  that  such  net 

income  shall  be  ascertained  by  deducting  from  the  gross  amount  of  the  income 

of  the  corporation  (1)  ordinary  and  necessary  expenses  paid  within  the  year  in  the  main- 
tenace  and  operation  of  its  business  and  properties,  including  rentals  and  the  like;  (2) 
losses  sustained  within  the  year  and  not  compensated  by  insurance  or  otherwise,  including 
a reasonable  allowance  for  depreciation  by  use,  wear  and  tear  of  property,  if  any,  and  in  the 
case  of  mines  a certain  allowance  for  depletion  of  ores  and  other  natural  deposits;  (3) 
interest  accrued  and  paid  within  the  year  upon  indebtedness  of  the  corporation,  within 
prescribed  limits;  (4)  national  and  state  taxes  paid.  It  will  be  observed  that  moneys 
received  as  dividends  upon  the  stock  of  other  corporations  are  not  deducted,  as  they  are 
in  computing  the  income  of  individuals  for  the  purpose  of  the  normal  tax  under  this  Act 
(p.  167),  and  as  they  were  in  computing  the  income  of  the  corporation  under  the  Excise 
Tax  Act  of  August  5,  1909  (Ch.  6,  36  Stat.  11,  113,  Sec.  38). 

By  Paragraph  G (c),  the  tax  upon  corporations  is  to  be  computed  upon  the  entire 
281  1 net  income  accrued  within  each  calendar  year,  but  for  the  year  1913  only  upon 

the  net  Income  accrued  from  March  1 to  JDccember  31,  to  be  ascertained  by  taking 
five-sixths  of  the  entire  net  income  for  the  calendar  year. 


INC. 


297 


TAX 


SUPREME  COURT  DECISIONS. 


The  purpose  to  refrain  from  taxing  income  that  accrued  prior  to  March  1,  1913, 

2812  and  to  exclude  from  consideration  in  making  the  computation  any  income  that 
accrued  in  a preceding  calendar  year,  is  made  plain  by  the  provision  last  referred 

to;  indeed,  the  Sixteenth  Amendment,  under  which  for  the  first  time  Congress  was 
authorized  to  tax  income  from  property  without  apportioning  the  tax  among  the  States 
according  to  population,  received  the  approval  of  the  requisite  number  of  States  only  in 
February,  1913.  Pollock  v.  Farmers"  Loan  Trust  Co.,  157  U.  S.  429,  581;  158  tJ.  S. 
601,  637;  Brushaher  v.  Union  Pacific  R.  R.,  240  U.  S.  1,  16. 

We  must  reject  in  this  case,  as  we  have  rejected  in  cases  arising  under  the  Corpora- 

2813  tion  Excise  Tax  Act  of  1909  (Doyle^  Collector  v.  Mitchell  Brothers  Co.  and  Hays, 
Collector  v.Gauley  Mountain  Coal  Co.,  decided  May  20,  1918),  the  broad  contention  sub- 
mitted In  behalf  of  the  Government  that  all  receipts — everything  that  comes  in — are 
income  within  the  proper  definition  of  the  term  “gross  Income,”  and  that  the  entire  pro- 
ceeds of  a conversion  of  capital  assets,  in  whatever  form  and  under  whatever  circumstances 
accomplished,  should  be  treated  as  gross  Income.  Certainly  the  term  “income”  has  no 
broader  meaning  In  the  1913  Act  than  in  that  of  1909  (see  Stratton" s Independence  v. 
Howbert,  231  U.  S.  399,  416,  417),  and  for  the  present  purpose  we  assume  there  is  no  dif- 
ference in  Its  meaning  as  used  in  the  two  Acts.  This  being  so,  we  are  bound  to  consider 
accumulations  that  accrued  to  a corporation  prior  to  January  1,  1913,  as  being  capital, 
not  income,  for  the  purposes  of  the  Act.  And  we  perceive  no  adec^uate  ground  for  a 
distinction,  in  this  regard,  between  an  accumulation  of  surplus  earnings,  and  the  incre- 
ment due  to  an  appreciation  in  value  of  the  assets  of  the  taxpayer. 

That  the  dividends  in  question  were  paid  out  of  a surplus  that  accrued  to  the 
281  4 Central  Pacific  prior  to  January  1,  1913,  is  undisputed;  and  we  deem  it  to  be  equally 
clear  that  this  surplus  accrued  to  the  Southern  Pacific  Company  prior  to  that 
date.  In  every  substantial  sense  pertinent  to  the  present  Inquiry,  and  hence  underwent 
nothing  more  than  a change  of  form  when  the  dividends  were  declared. 

We  do  not  rest  this  upon  the  view  that  for  the  purposes  of  the  Act  of  1913  stock- 
28 1 5 holders  in  the  ordinary  case  have  the  same  interest  in  the  accumulated  earnings  of  the 
company  before  as  after  the  declaration  of  dividends.  The  act  is  quite  different 
in  this  respect  from  the  Income  Tax  Act  of  June  30,  1864  (Ch.  173,  13  Stat.  223,  281,  282), 
under  which  this  court  held,  in  Collector  v.  Hubbard,  12  Wall.  1,  16,  that  an  indi\idual 
was  taxable  upon  his  proportion  of  the  earnings  of  the  corporation  although  not  declared 
as  dividends.  That  decision  was  based  upon  the  very  special  language  of  a clause  of  Sec. 
117  of  the  Act  (13  Stat.  282)  that  “the  gains  and  profits  of  all  companies,  whether  Incor- 
porated or  partnership,  other  than  the  companies  specified  in  this  section,  shall  be  included 
in  estimating  the  annual  gains,  profits,  or  income  of  any  person  entitled  to  the  same, 
whether  divided  or  otherwise.”  The  Act  of  1913  contains  no  similar  language,  but  on 
the  contrary  deals  with  dividends  as  a particular  item  of  income,  leaving  them  free  from 
the  normal  tax  imposed  upon  individuals,  subjecting  them  to  the  graduated  surtaxes 
only  when  received  as  dividends  (38  Stat.  167,  Paragraph  B),  and  subjecting  the  interest 
of  any  individual  shareholder  in  the  undivided  gains  and  profits  of  his  corporation  to 
these  taxes  only  in  case  the  company  is  formed  or  fraudulently  availed  of  for  the  purpose 
of  preventing  the  imposition  of  such  tax  by  permitting  gains  and  profits  to  accumulate 
instead  of  being  divided  or  distributed*.  Our  view  of  the  effect  of  this  Act  upon  divi- 
dends received  by  the  ordinary  stockholder  after  it  took  effect  but  paid  out  of  a surplus 
that  accrued  to  the  corporation  before  that  event,  is  set  forth  in  Lynch,  Collector  v. 
Hornby,  post,  ^2763,  decided  this  day. 


* “For  the  purpose  of  this  additional  tax  the  taxable  income  of  any  Individual  shall 
embrace  the  share  to  which  he  would  be  entitled  of  the  gains  and  profits,  if  divided^  or 
distributed,  whether  divided  or  distributed  or  not,  of  all  corporations,  joint-stock  com- 
panies, or  associations  however  created  or  organized,  formed  or  fraudulently  availed  of 
for  the  purpose  of  preventing  the  Imposition  of  such  tax  through  the  medium  of  permitting 
such  gains  and  profits  to  accumulate  instead  of  being  divided  or  distributed;  and  the  fact 
that  any  such  corporation  * * * is  a .uere  holding  company,  or  that  the  gains  and 

profits  are  permitted  to  accumulate  beyond  the  reasonable  needs  of  the  business  shall  be 
prima  facie  evidence  of  a fraudulent  purpose  to  escape  such  tax;  but  the  fact  that  the 
gains  and  profits  are  in  any  case  permitted  to  accumulate  and  become  surplus  shall  not 
be  construed  as  evidence  of  a purpose  to  escape  the  said  tax  in  such  case  unless  the  Secretary 
of  the  Treasury  shall  certify  that  in  his  opinion  such  accumulation  is  unreasonable  for 
the  purposes  of  the  business.”  (38  Stat.  166,  167.) 

We  base  our  conclusion  in  the  present  case  upon  the  view  that  it  was  the  purpose 
2816  and  intent  of  Congress,  while  taxing  “the  entire  net  income  arising  or  accruing 

from  all  sources”  during  each  year  commencing  with  the  first  day  of  March,  1913, 
to  refrain  from  taxing  that  which,  in  mere  form  only,  bore  the  appearance  of  income 


INC. 


298  TAX 


SUPREME  COURT  DECISIONS. 


accruing  after  that  date,  while  in  truth  and  in-substance  it  accrued  before;  and  upon  the 
fact  that  the  Central  Pacific  and  the  Scuthern  Pacific  were  in  substance  identical  because 
of  the  complete  ownership  and  control  which  the  latter  possessed  over  the  former,  as 
stockholder  and  in  r.ther  capacities.  While  the  two  com.panies  were  separate  legal  entities, 
yet  in  fact,  and  for  all  practical  purposes  they  were  merged,  the  former  being  but  a part 
of  the  latter,  acting  merely  as  its  agent  and  subject  in  all  things  to  its  proper  direction 
and  control.  And  besides,  the  funds  represented  by  the  dividends  were  in  the  actual 
possession  and  control  of  the  Southern  Pacific  as  well  before  as  after  the  declaration  of 
the  dividends.  The  fact  that  the  books  were  kept  in  accordance  with  the  provisions 
of  the  lease,  so  that  these  funds  appeared  upon  the  account  as  an  indebtedness  of  the 
lessee  to  the  lessor,  cannot  be  controlling,  in  view  of  the  practical  identity  between  lessor 
and  lessee.  Aside  from  the  interests  of  creditors  and  the  public — and  there  is  nothing 
to  suggest  that  the  interests  of  either  were  concerned  in  the  disposition  of  the  surplus 
of  the  Central  Pacific — the  Southern  Pacific  was  entitled  to  dispose  of  the  matter  as  it 
saw  fit.  There  is  no  question  of  there  being  a surplus  to  warrant  the  di/idends  at  the 
time  they  were  made,  hence  any  speculation  as  to  what  might  have  happened  in  case  of 
financial  reverses  that  did  not  occur  is  beside  the  mark.  ' 

' It  is  true  that  in  ordinary  cases  the  mere  accumulation  of  an  adequate  surplus 

2817  does  not  entitle  a stockholder  to  dividends  until  the  directors  in  their  discretion 
declare  them.  New  York,  etc.,  Railroad  v.  Nickals,  119  U.  S.  296,  306;  Gibbons 

V.  Mahan,  136  U.  S.  549,  558.  And  see  Humphreys  v.  McKissock,  140  U.  S.  304,  312. 
But  this  is  not  the  ordinary  case.  In  fact  the  discretion  of  the  directors  was  affirmatively 
exercised  by  declaring  dividends  out  of  the  surplus  that  was  accumulated  prior  to  January 
1,  1913;  it  does  not  appear  that  any  other  fair  exercise  of  discretion  was  open;  and  the 
com.plete  ownership  and  right  of  control  of  the  Southern  Pacific  at  all  times  material 
makes  it  a m.atter  of  indifference  whether  the  vote  was  at  one  time  or  another.  Under 
the  circumstances,  the  entire  matter  of  the  declaration  and  payment  of  the  dividends 
was  a paper  transaction  to  bring  the  books  into  accord  with  the  acknowledged  rights 
of  the  Southern  Pacific;  and  so  far  as  the  dividends  represented  the  surplus  of  the  Central 
Pacific  that  accumulated  prior  to  January  1,  1913,  they  were  not  taxable  as  income  of 
the  Southern  Pacific  within  the  true  intent  and  meaning  of  the  Act  of  1913. 

The  case  turns  upon  its  very  peculiar  facts,  and  is  distinguishable  from  others 

2818  in  which  the  question  of  the  identity  of  a controlling  stockholder  with  his  cor- 
poration has  been  raised.  Pullman  Car  Co.  v.  Missouri  Pacific  Co.,  115  U.  S. 

587,  596;  Peterson  v.  Chicago,  Rock  Island  Pacific  Ry.,  205  U.  S.  364,  391. 

Judgment  reversed,  and  the  cause 
remanded  for  further  proceedings  in 
conformity  with  this  opinion. 

Mr.  Justice  Clarke  dissents. 

Gulf  Oil  Corporation  vs.  Lewellyn. 

(December  9,  1918.) 

Mr.  Justice  Holmes  delivered  the  opinion  of  the  Court. 

The  appended  decision  of  the  United  States  Supreme  Court  in  the  case  of  the 

2819  Gulf  Oil  Corporation,  petitioner,  v.  C.  G.  Lewellyn,  Collector  of  Internal  Revenue 
for  the  23rd  District  of  Pennsylvania,  is  published  for  the  information  of  Internal 

Revenue  officers  and  others  concerned.  (T.  D.  2783,  Jan.  7,  1919.) 

2820  This  is  a suit  to  recover  a tax  levied  upon  certain  dividends  as  Income,  under  the 
Act  of  October  3,  1913,  c.  16,  Section  II.  38  Stat.  114,  166.  The  District  Court 

gave  judgment  for  the  plaintiff,  242  Fed.  Rep.  709,  but  this  judgment  was  reversed  by 
the  Circuit  Court  of  Appeals.  245  Fed.  Rep.  1.  158  C.  C.  A.  1. 

2821  The  facts  may  be  abridged  from  the  findings  below  as  follows:  The  petitioner 
was  a holding  company  owning  all  the  stock  in  the  other  corporations  concerned 

'except  the  qualifying  shares  held  by  directors.^  These  companies  with  others  constituted 
a single  enterprise,  carried  on  by  the  petitioner,  of  producing,  buying,  transporting, 
refining  and  selling  oil.  I’he  subsidiary  companies  had  retained  their  earnings,  although 
making  some  loans  inter  se,  and  all  their  funds  were  invested  in  properties  or  actually 
required  to  carry  on  the  business,  so  that  the  debtor  companies  had  no  money  available 
to  pay  their  debts.  In  January,  1913,  the  petitioner  decided  to  take  over  the  previously 
accumulated  earnings  and  surplus  and  did  so  in  that  year  by  votes  of  the  companies 
that  it  controlled.  But,  disregarding  the  forms  gone  through,  the  result  was  merely 
that  the  petitioner  became  the  holder  of  the  debts  previously  due  from  one  of  its  com- 
panies to  another.  It  was  no  richer  than  before,  but  its  property  now  was  represented 
by  stock  in  and  debts  due  from  its  subsidiaries,  whereas  formerly  it  was  represented  by 
the  stock  alone,  the  change  being  effected  by  entries  upon  the  respective  companies’  books. 
'Fhe  earnings  thus  transferred  had  been  accumulated  and  had  been  used  as  capital  before 
the  taxing  year.  Lynch  v.  Turrish,  247  U.  S.  221,  228  (^27761. 


INC. 


299  TAX 


SUPREME  COURT  DECISIONS. 


VVe  are  of  opinion  that  the  decision  of  the  District  Court  was  right.  It  is  true 

2822  that  the  petitioner  and  its  subsidiaries  were  distinct  beings  in  contemplation  of  law, 
but  the  facts  that  they  were  related  as  parts  of  one  enterprise,  all  owned  by  the 

petitioner, that  the  debts  were  all  enterprise  debts  due  to  members,  and  that  the  dividend 
represented  earnings  that  had  been  made  in  former  years  and  that  practically  had  been 
converted  into  capital,  unite  to  convince  us  that  the  transaction  should  be  regarded  as 
bookkeeping  rather  than  as  ‘dividends  declared  and  paid  in  the  ordinary  course  by  a 
corporation.’  Lynch  v.  Hornby,  247  U.  S.  339,  346  [1i2763].  The  petitioner  did  not 
Itself  do  the  business  of  its  subsidiaries  and  have  possession  of  their  property  as  in  Southern 
Pacific  Co.  v.  Lowe,  247  U.  S.  330  1112804],  but  the  principle  of  that  case  must  be  taken 
to  cover  this.  By  Section  II,  G,  (c),  38  Stat.  174,  and  S,  id.  202,  the  tax  from  January 
1 to  February  28,  1913,  is  levied  as  a special  excise  tax,  but  in  view  of  our  decision  that 
the  dividends  here  concerned  were  not  income  it  is  unnecessary  to  discuss  the  further 
question  that  has  been  raised  under  the  latter  clause  as  to  the  effect  of  the  fact  that  excise 
taxes  upon  the  subsidiary  corporations  had  been  paid. 

2823  Law  1f469.  General  Effective  Date  of  the  Revenue  Act  of  1918  of  which  Title 
II  Relates  to  “Income  Tax.” — “Sec.  1409.  That  unless  otherwise  herein  specially 

provided,  this  Act  shall  take  effect  on  the  day  following  its  passage  [i.  e.,  approval  by  the 
President].” 

2824  Approved  by  the  President,  February  24,  1919,^  at  6.55  P.  M. 


2825  For  1[2825  see  page  305. 


INC. 


300  TAX 


4-24-19. 


INSERT  THIS  SHEET  TO  FACE  PAGE  3CC. 


Guide  to  Ar^cle  Numbers  and  Law  Section  numbers  referred  to 
in  Regulations  No.  45,  Revised. 


(See  other  side.) 


GUIDE  TO  ARTICLES  OF  REGULATIONS  NO.  45,  REVISED. 


(By  means  of  this  guide  the  reader  may  locate  quickly,  any  article  which  is  referred 
to  by  number  in  the  body  of  Regulations.  There  are  many  such  cross  references.) 


Articles  of 

Beginning  at 

701  to  972  (Part  II-B.  Profits  Tax). 

Regulations  No.  45 

Paragraph 

The  references  below. 

preceded  by  the 

1 to 

4 

13 

2825 

2829 

initials  W.  T.,  are  to  our  War  Tax  Service. 

21  to 

26 

2832 

Articles  of 

Beginning  at 

31  to 

40 

2841 

Regulations  No.  45 

Paragraph 

4 1 to 

49 

2848 

701 

W.  T.  859 

51  to 

54 

2862a 

71 1 to  720 

. . . . W.  T.  860 

71  to 

80 

2863 

731  to  733 

W.  T.  896 

81  to 

88 

2873 

741  to  743 

W.  T.  901 

91  to 

93 

2876 

751  to  753  

W.  T.  912 

101  to 

110 

2878 

761  

W.  T.  915 

1 1 1 

2893 

771  

W.  T.  916 

121  to 

122 

2895 

781  to  785 

. ...  W.  T.  917 

131  to 

134 

2897 

791  

W.  T.  922 

141  to 

145 

2901 

801  to  802 

151  to 

154 

2906 

811  to  818 

W.  T.  925 

161  to 

170 

2910 

831  to  840 

W.  T.  933 

171 

2921 

841  to  850 

W.  T.  947 

181  to 

188 

2922 

851  to  860 

. . . . W.  T.  965 

201  to 

210 

2929 

861  to  870 

W.  T.  978 

211  to 

220 

2939 

871  

W.  T.  987b 

221  to 

230 

2949 

901  

W.  T.  988 

231  to 

233 

2959 

911  to  914 

W.  T.  989 

251 

2962 

931  to  934 

W.  T.  991 

261  to 

268 

2963 

941  

W.  T.  995 

271 

2964 

951  to  955 

W.  T.  996 

291  to 

294 

2965 

961  to  962 

W.  T.  1003 

301  to 

307 

2968 

971  to  972 

. ...  W.  T.  1004 

311  to 

316 

2973 

1001  to  1010 

3031 

321  to 

330 

2978 

1011  to  1013 

3041 

331  to 

335 

2986 

1021  

3044 

341  to 

346 

2991 

1031  to  1038 

3045 

351  to 

353 

2995 

1041  

3051 

361  to 

370 

2996 

1051  

3052 

371  to 

376 

3003 

1061  

3053 

381  to 

384 

3008 

1071  to  1080 

3054 

401  to 

407 

3013 

1091  to  1094 

3063 

411  to 

412 

3018 

1101  

3067 

421  to 

425 

3019 

1111  

3068 

431 

3024 

1121  

3069 

441  to 

448 

3025 

1131  to  1133 

3070 

451 

3030 

1501  to  1510 

3073 

501  to 

504 

3181 

1521  to  1530 

3081 

511  to 

520 

3185 

1531  to  1533 

3091 

521  to 

522 

3198 

1541  to  1549 

3094 

531 

3200 

1561  to  1570 

3102 

541  to 

550 

3201 

1581  to  1585 

561  to 

570 

3209 

1601  to  1603 

3114 

571  to 

573 

3221a 

1621  to  1625 

3117 

581  to 

582 

3223 

1641  to  1642 

3122 

591 

3224 

1701  to  1702 

3124 

601 

3225 

1711  

3126 

611 

3226 

1721  

3127 

621  to 

626 

3227 

1731  to  1734 

3128 

631  to 

638 

3233 

1800  

3137,  3243 

651 

3241 

GUIDE  TO  LAW  SECTIONS  REFERRED  TO  IN  REGULATIONS  NO  45. 


Section 

1 to  261 

Paragraph 

Section 

1317  

Paragraph 

438-453 

300  to  337 

1318  

• • 

454 

1301  

423 

1320  

456 

1302  

428 

1400  

461 

1305  

429 

1402  

465 

1307  

432 

1403  

466 

1309  

433 

1404  

467 

1313  

434 

1405  

468 

1314  

435 

1408  

3136 

1316  

436-437 

1409  

469 

GUIDE  TO 

AMENDED  ARTICLES 
Or  New  Articles  of  Regulations  No.  45,  Revised. 

(Amended  to  November  12,  1919.) 

ARTICLES  OF  REGULATIONS  NO.  45  . PARAGRAPH 

23  (Amended)  345Q 

92a  (New)  3434 

133  (Amended)  3631 

163  (Amended)  3594 

184  (Amended)  3390 

234  (New)  3548 

235  (New)  3549 

307  (Amended)  3495,3517,3568 

312a  (New)  3435 

363a  (New)  3566 

443  (Amended)  3629 

445  (Amended)  3336 

1036  (Amended)  3448 

1506  (Amended)  3634 

1566  (Amended)  3577 

1567  • (Amended)  3432,  3578 

1731  (Amended  and  supplemented) 3518,  3565 

1732  (Amended  and  supplemented) 3518,  3565 

Amended  articles  or  new  articles  referring  exclusively  to  the  excess- 
profits  tax  law  are  not  shown  in  the  above  table.  For  such  see  the 
War  Tax  Service. 


Insert  this  sheet  immediately  following  the  blue  sheet  now  in  the  binder, 

facing  page  300. 


7=.'.,  .... 

h-  , . 

I-'  ' ; 

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4-19-19. 


Stijp  Corporation  ®rnat  Companp’a 

1913-1919 

INCOME  TAX  SERVICE 
PART  II. 

1919. 

PART  I,  PART  II-A,  PART  III,  AND  PART  IV 

of 

REGULATIONS  No.  45,  REVISED 

RELATING  TO  THE 

INCOME  TAX 

under 

THE  REVENUE  ACT  OF  1918. 


Regulations  No.  45. 

Paragraph 


Part  I.  Income  Tax  on  Individuals  210-228) 2825 

n.  Income  Tax  and  War  Profits  and  Excess  Profits  Tax  on  Cor- 
porations 

A.  Income  Tax  {Sections  230-241) 3181 

B.  War  Profits  and  Excess  Profits  Tax  {Sections  300-337) 

{See  \859  War  Tax  Service.) 

m.  Administrative  Provisions  on j 250-261) 3031 

rV.  Definitions  and  General  Provisions  {Sec.  1-206;  1301-1408)  3073 


NOTE. — Differences  between  the  preliminary  edition  and  the  present 
revised  and  enlarged  edition  of  Regulation  No.  45,  Parts  I,  II-A,  III,  and 
IV,  are  shown  by  printing  in  brackets  [ ] those  matters  w'hich  were  in  the  old 

but  are  not  in  the  new  edition,  and  by  putting  in  italics  those  matters  which 
are  new  to  the  revised  edition.  Otherwise  the  two  editions  are  the  same, 
except  that  when  references  in  the  body  of  paragraphs  have  been  changed  the 
old  reference  numbers  are  not  shown.  Added  paragraphs  have  been  desig- 
nated by  sub-paragraph  letters,  as  3079a,  3080a,  etc.,  so  that,  in  the  main, 
the  old  paragraphs,  whether  amended  or  not,  retain  their  original  bold 
face  designations.  Thus,  the  cross  references  to  Regulations  No.  45,  in  other 
parts  of  the  Service,  either  in  print  or  in  pencil  or  ink,  still  apply. 


PART  I. 

INCOME  TAX  ON  INDIVIDUALS. 

CONTENTS. 

[The  section  numbers  refer  to  the  statute  and  the  article  numbers  to  the  regulations.! 


Section  210.  Normal  tax 75 

Article  1.  Income  tax  on  individuals 2825 

2.  Normal  tax 2826 

3.  Persons  liable  to  tax 2827 

4.  Who  is  a citizen 2828 


INC. 


301  TAX 


Reg.  45.  Rev.  See  Note  on  page  301. 


Paragraph 

Section  211.  Surtax 80 

Article  11.  Surtax 2829 

12.  Computation  of  surtax 2830 

13.  Surtax  on  the  sale  of  mineral  deposits 2831 

Section  212.  Net  income  defined •.  83 

Article  21.  Meaning  of  net  income 2832 

22.  Computation  of  net  income 2833 

23.  Bases  of  computation 2834 

24.  Methods  of  accounting 2835 

25.  Accounting  period 2839 

26.  Change  in  accounting  period 2840 

Section  213.  (a).  Gross  Income  defined:  inclusions 88 

Article  31.  What  included  in  gross  income 2841 

32.  Compensation  for  personal  services 2842 

33.  Compensation  paid  other  than  in  cash 2842a 

34.  Compensation  paid  in  notes 2842b 

35.  Gross  income  from  business 2S42c 

36.  Long  term  contracts 2843 

37.  State  contracts 2844 

38.  Gross  income  of  farmers 2845 

39.  Sale  of  stock  and  rights 2846 

40.  Sale  of  patents  and  copyrights 2847 

41.  Sale  of  good  will 2848 

42.  Sale  of  personal  property  on  installment  plan 2849 

43.  Sale  of  real  estate  in  lots 2850 

44.  Sale  of  real  estate  involving  deferred  payments 2851 

45.  Sale  of  real  estate  on  installment  plan . . s 2855 

46.  Deferred  payment  sales  of  real  estate  not  on  the  installment  plan. . . 2856 

47.  Annuities  and  insurance  policies 2357 

48.  Rent  and  royalties 2858 

49.  Compensation  for  loss 2860 

50.  Replacement  fund  for  loss 2861 

51.  Forgiveness  of  indebtedness 2862a 

52.  When  included  in  gross  income 2S62b 

53.  Income  not  reduced  to  possession 2862c 

54.  Examples  of  constructive  receipt 2862d 

Section  213  (b).  Gross  income  defined:  exclusions 94 

Article  71.  What  excluded  from  gross  income 2863 

72.  Proceeds  of  insurance 2864 

73.  Gifts  and  bequests 2864a 

74.  Interest  upon  State  obligations 2865 

75.  Dividends  and  interest  from  Federal  land  bank  and  national  farm 

loan  association 2866 

76.  Dividends  from  Federal  reserve  bank 2867 

77.  Interest  upon  United  States  obligations 2868 

78.  Liberty  bond  exemption  from  normal  tax  in  1918 2869 

79.  Liberty  bond  exemption  from  surtax  and  war-profits  and  excess- 

profits  tax  in  1918 2871 

80.  Liberty  bond  exemption  after  December  31,  1918 2872a 

81.  Liberty  bond  exemption  in  the  case  of  tiusts 2873 

82.  Liberty  bond  exemption  in  the  case  of  partnerships  and  personal 

service  corporations 287 4 

83.  Income  of  foreign  Governments 2875 

S4.  Income  of  states 2875a 

85.  Compensation  of  state  officers 2875b 

86.  Compensation  of  soldiers  and  sailors 2875c 

87.  Income  accruing  prior  to  March  1,  1913 2875d 

88.  Subtraction  for  redemption  of  trading  stamps 2875e 

Section  213  (c).  Gross  income  defined:  nonresident  alien  individual 109 

Article  91.  Gross  income  of  nonresident  alien  individuals. 2876 

92.  Income  of  nonresident  alien  individuals  not  subject  to  tax 2877 

93.  Income  of  nonresident  aliens  from  United  States  bonds  . . . , 2877a 


INC. 


302 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


Paragraph 

Section  214  (a)  (1).  Deductions  allowed:  business  expenses 113 

Article  101.  Business  expenses 2878 

102.  Cost  of  materials 2879 

103.  Repairs 2880 

104.  Professional  expenses 2881a 

105.  Compensation  for  personal  services 2882 

106.  Treatment  of  excessive  compensation 2886 

107.  Bonuses  to  employees 2889 

108.  Pensions 2890 

109.  Rentals 2891 

110.  Expenses  of  farmers 2892 

111.  When  charges  deductible 2893 

Section  214  (a)  (2).  Deductions  allowed:  interest 116 

Article  121.  Interest  2895 

122.  Interest  on  capital 2896 

Section  214  (a)  (3).  Deductions  allowed:  taxes 119 

Article  131.  Taxes 2897 

132.  Federal  duties  and  excise  taxes 2898 

133.  Taxes  for  local  benefits 2899 

134.  Inheritance  taxes.  . 2900 

Section  214  (a)  (4),  (5)  and  (6).  Deductions  allowed:  losses 126,  127,  128 

Article  141.  Losses 2901 

142.  Voluntary  removal  of  buildings 2902 

143.  Loss  of  useful  value. . 2903 

144.  Shrinkage  in  securities  and  stocks. 2904 

145.  Losses  of  farmers 2905 

Section  214  (a)  (7).  Deductions  allowed:  bad  debts 132 

Article  151.  Bad  debts 2906 

152.  Examples  of  bad  debts 2907 

153.  Worthless  mortgage  debt 2908 

154.  Worthless  securities 2909 

Section  214j(a)  (8).  Deductions  allowed:  depreciation 133 

Article  161.  Depreciation 2910 

162.  Depreciable  property 2911 

163.  Depreciation  of  intangible  property 2912 

164.  Capital  sum  recoverable  through  depreciation  allowance 2914 

165.  Method  of  computing  depreciation  allowance 2915 

166.  Modification  of  method  of  computing  depreciation 2916 

167.  Depreciation  of  patent  or  copyrights.  . 2917 

168.  Depreciation  of  drawings  and  models 2918 

169.  Charging  off  depreciation 2919 

170.  Closing  depreciation  account 2920 

171.  Depreciation  in  the  case  of  farmers 2921 

Section  214  (a)  (9).  Deductions  allowed : amortization 134 

^Article  181.  Scope  of  provision  for  amortization 2922 

182.  Property  cost  of  which  may  be  amortized 2922a 

183.  Cost  recoverable  through  amortization ■.  . . 2923 

184.  Cost  which  may  be  amortized 2924 

185.  Method  of  amortization 2925 

186.  Additional  requirements  for  amortization 2926 

187.  Redetermination  of  amortization  allowance 2927 

188.  Information  to  be  furnished  by  taxpayer 2923 

Section  214  (a)  (10).  Deductions  allowed:  depletion 137 

Article  201.  Depletion  of  mines,  oil  and  gas  wells 2929 

202.  Capital  recoverable  through  depletion  allowance  in  the  case  of  owner  2930 

203.  Capital  recoverable  through  depletion  allowance  in  the  case  of  lessee  2931 

204.  Apportionment  of  deductions  between  lessor  amd  lessee. 2932 

205.  Determination  of  cost  of  deposits. ...  2933 

206.  Determination  of  fair  market  value  of  deposits 2934 

207.  Revaluiatlon  of  deposits  not  allowed 2935 

208.  Determination  of  quantity  of  ore  in  mine . ; 2936 

209.  Determination  of  quantity  of  oil  in  ground 2937 

303  TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  301. 


Paragraph 

Article  210.  Computation  of  allowance  for  depletion  of  mines  and  oil  wells.  ..  2938 

211.  Computation  of  allowance  for  depletion  of  gas  wells 2939 

212.  Gas  well  pressure  records  to  be  kept 2940 

213.  Computation  of  allowance  where  quantity  of  oil  or  gas  uncertain.  . 2941 

214.  Computation  of  depletion  allowance  for  combined  holdings  of  oil 

and  gas  wells 2942 

215.  Depletion  of  mine  based  on  advance  royalties 2943 

216.  Depletion  and  depreciation  account  on  books 2944 

217.  Statement  to  be  attached  to  return  where  depletion  of  mine  claimed  2945 

218.  Statement  to  be  attached  to  return  where  depletion  of  oil  or  gas 

claimed 2946 

219.  Discovery  of  mine .’ 2947 

220.  Discovery  of  oil  and  gas  wells 2948 

221.  Proof  of  discovery  of  oil  and  gas  wells 2949 

222.  Charges  to  capital  and  to  expense  in  the  case  of  mine 2950 

223.  Charges  to  capital  and  to  expense  in  the  case  of  oil  and  gas  wells. . 2951 

224.  Depreciation  of  improvements  in  the  case  of  mine 2952 

225.  Depreciation  of  improvements  in  the  case  of  oil  and  gas  wells 2953 

226.  Depletion  and  depreciation  of  oil  and  gas  wells  in  years  before  1916  2954 

227.  Depletion  of  timber 2955 

228.  Capital  recoverable  through  depletion  allowance  in  the  case  of 

timber 2956 

229.  Computation  of  allowance  for  depletion  cf  timber 2957 

230.  Revaluation  of  stumpage  not  allowed 2958 

231.  Charges  to  capital  and  to  expense  in  the  case  of  timber 2959 

232.  Depreciation  of  improvements  in  the  case  of  timber 2960 

233.  Statement  to  be  attached  to  return  where  depletion  of  timber 

claimed 2961 

Section  214  (a)  (11).  Deductions  allowed:  Charitable  contributions 142 

Article  251.  Charitable  contributions 2962 

Section  214  (a)  (12).  Deductions  allowed:  loss  in  inventory 144 

Article  261.  Losses  in  inventor}^  and  from  rebates 2963 

262.  Loss  from  rebates 2963a 

263.  Loss  in  inventory 2963b 

264.  Loss  where  goods  have  been  sold 2963c 

265.  Loss  where  goods  have  not  been  sold 2963d 

266.  Claims 2963e 

267.  Disposition  of  claim 2963f 

268.  Effect  of  claim  in  abatement 2963g 

Section  214  (b)  Deductions  allowed:  nonresident  alien  individual 149 

Article  271.  Deductions  allowed  nonresident  alien  individuals 2964 

Section  215.  Items  not  deductible 151 

Article  291.  Personal  and  family  expenses 2965 

292.  Traveling  expenses 2966 

293.  Capital  expenditures 2967 

294.  Premiums  on  business  insurance 2968a 

Section  216.  Credits  allowed 156 

Article  301.  Credits  against  net  income 2968 

302.  Personal  exemption  of  head  of  family 2969 

303.  Personal  exemption  of  married  person 2970 

304.  Credit  for  dependents 2971 

305.  Date  determining  exemption 2971a 

306.  Credits  to  nonresident  alien  individual 2972 

307.  When  nonresident  alien  Individual  entitled  to  personal  exemption. ..2972a 

Section  217.  Nonresident  aliens — Allowance  of  deductions  and  credits 165 

Article  311.  Allowance  of  deductions  and  credits  to  nonresident  alien  individual2973a 

312.  Who  is  a nonresident  alien  individual 2973 

313.  Proof  of  residence  of  alien 2974 

314.  Loss  of  residence  by  alien 2975 

315.  Duty  of  employer  to  determine  status  of  alien  employee 2976 

316.  Allowance  of  personal  exemption  to  nonresident  alien  employee..  . . 2977 


INC. 


304  TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


Paragraph 

Section  218.  Partnerships  and  personal  service  corporations 168 

Article  321.  Partnerships 2978 

322.  Distributive  shares  of  partners 2978a 

323.  Credits  allowed  partners 2978b 

324.  Taxation  of  partners  in  partnership  with  fiscal  year  ending  in  1918.  2979 

325.  Application  of  different  tax  rates  in  the  case  of  fiscal  year  of  partner- 

ship ending  in  1918 2980 

326.  Taxation  of  partners  in  partnership  with  fiscal  year  ending  in  1919.  2981 

327.  Application  of  different  tax  rates  in  the  case  of  fiscal  year  of  partner- 

ship ending  in  1919 2982 

328.  Personal  service  corporations 2983 

329.  Personal  service  corporation  with  fiscal  year  ending  in  1918 2984 

330.  Distributive  shares  of  stockholders  in  personal  service  corporation..  2985 

331.  Credits  allowed  stockholders  of  personal  service  corporation 2986 

332.  Taxation  of  stockholders  of  personal  service  corporation  with  fiscal 

year  ending  in  1918 2987 

333.  Application  of  different  tax  rates  in  the  case  of  fiscal  year  of  personal 

service  corporation  ending  in  1918 2988 

334.  Taxation  of  stockholders  of  personal  service  corporation  with  fiscal 

year  ending  in  1919 2989 

335.  Application  of  different  tax  rates  in  the  case  of  fiscal  year  of  personal 

service  corporation  ending  in  1919 2990 

Section  219.  Estates  and  trusts 180 

Article  341.  Estates  and  trusts.. 2991 

342.  Estates  and  trusts  taxed  to  fiduciary 2991a 

343.  Decedent’s  estate  during  administration 2992 

344.  Incidence  of  tax  on  estate  or  trust 2993 

345.  Estates  and  trusts  taxed  to  beneficiaries 2994 

346.  Credits  to  trust  or  beneficiary 2994a 

Section  220.  Profits  of  corporations  taxable  to  stockholders 197 

Article  351.  Profits  of  corporation  taxable  to  stockholders 2995 

352.  Purpose  to  escape  surtax 2995a 

353.  Unreasonable  accumulation  of  profits 2995b 

Section  221.  Payment  of  tax  at  source 201 

Article  361.  Withholding  tax  at  source 2996 

362.  Fixed  or  determinable  annual  or  periodical  income 2996a 

363.  Exemption  from  withholding 2997 

364.  Ownership  certificates  for  interest  coupons. 2998 

365.  Form  of  certificate  where  withholding  required 2999 

366.  Form  of  certificate  where  no  withholding  required 3000 

367.  Use  of  substitute  certificates 3001 

368.  Interest  coupons  without  ownership  certificates 3001a 

369.  Interest  on  registered  bonds 3001b 

370.  Return  of  tax  withheld 3002 

371.  Withholding  in  1918 3003 

372.  Release  of  excess  tax  withheld 3004 

373.  Use  of  information  return  where  no  actual  withholding 3005 

374.  Ownership  certificates  in  ihe  case  of  fiduciaries  and  joint  owners...  3006 

375.  Withholding  in  the  case  of  enemies 3007 

376.  Return  of  income  from  which  tax  withheld 3007a 

Section  222.  Credit  for  taxes 226 

Article  381.  Analybis  of  credit  for  taxes 3008 

382.  Meaning  of  terms 3010 

383.  Conditions  of  allowance  of  credit 3011 

384.  Redetermination  of  tax  when  credit  proves  incorrect 3012 

Section  223.  Individual  returns 233 

Article  401.  Individual  returns 3013 

402.  Form  of  return 3013a 

403.  Return  of  income  of  minor 3014 

404.  Return  of  income  of  nonresident  alien 3015 

405.  Return  of  corporate  dividends 3016 

406.  Verification  of  returns 3017 

407.  Use  of  prescribed  form 3017a 


INC. 


305  TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


Paragraph 


Section  224.  Partnership  returns 238 

Article  411.  Partnership  returns 3018 

412.  Contents  of  partnership  return 3018a 

Section  225.  Fiduciary  returns 239 

Article  421.  Fiduciary  returns 3019 

422.  Return  by  guardian  or  committee 3020 

423.  Returns  where  two  trusts 3021 

424.  Return  by  receiver 3022 

425.  Return  for  nonresident  alien  beneficiary 3023 

Section  226.  Returns  where  accounting  period  changed 247 

Article  431.  Returns  when  accounting  period  changed 3024 

Section  227.  Time  and  place  for  filing  return 253 

Article  441.  Time  for  filing  return 3025 

442.  Time  for  filing  return  upon  death  or  termination  of  trust 3025a 

443.  Extension  of  time  by  collector 3026 

444.  Extension  of  time  by  Commissioner 3026a 

445.  Extension  of  time  in  the  case  of  persons  abroad 3027 

446.  Extension  of  time  in  the  case  of  enemies 3028 

447.  Last  due  date 3028a 

448.  Place  for  filing  return t.3029 

Section  228.  Understatement  in  returns 258 

Article  451.  Understatement  of  income 3036 


PART  II-A. 

[Of  Regulations  No.  45,  Revised.] 

INCOME  TAX  ON  CORPORATIONS 

CONTENTS. 

[The  section  numbers  refer  to  the  statute  and  the  article  numbers  to  the  regulations.] 

INCOME  TAX 

Paragraph 


Section  230.  Tax  on  Corporations 260 

Article  501.  Income  tax  on  corporations 3181 

502.  Rates  of  tax 3182 

503.  Corporations  liable  to  tax 3183 

501.  Tax  on  transportation  corporations 3184 

Section  231.  Conditional  and  other  exemptions 265 

Article  511.  Proof  of  exemption 3185 

512.  Agricultural  and  horticultural  organizations 3186 

513.  Mutual  savings  banks 3187 

514.  Fraternal  beneficiary  societies : . : '. 3188 

515.  Building  and  loan  associations 3189 

516.  Cemetery  companies 3190 

517.  Religious,  charitable,  scientific  and  educational  corporations 3191 

518.  Business  leagues . 3195 

519.  Civic  leagues 3196 

520.  Social  clubs ^ ;....  3197 

521.  Mutual  insurance  companies  and  like  organizations 3198 

522.  Cooperative  associations. 3199 

Section  232.  Net  income  defined 280 

Article  531.  Net  income ..7 3200 

Section  233.  Gross  income  defined 281 

Article  541.  Gross  income 3201 

542.  Sale  of  capital  stock 3202 

543.  Contributions  by  stockholders 3203- 

544.  Sale  and  retirement  of  corporate  bonds 3203a 

545.  Sale  of  capital  assets 3204 


INC. 


306  TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


Section  233.  Gross  income  defined. — Concluded. 

Paragraph 

Article  546.  Income  from  leased  property 3205 

547.  Gross  income  of  corporations  in  liquidation 3205a 

548.  Gross  income  of  insurance  companies 3206 

549.  Gross  income  of  life  insurance  companies 3207 

550.  Gross  income  of  foreign  corporations 3208 

Section  234.  Deductions  allowed 287 

Article  561.  Allowable  deductions 3209 

562.  Donations 3210 

563.  Sale  of  capital  stock,  bonds  and  capital  assets 3210a 

564.  Interest 3211 

565.  Effect  of  tax-free  covenant  in  bonds 3212 

566.  Tax  on  bank  stock 3213 

567.  Depositors’  guaranty  fund 3219 

568.  Deductions  allowed  insurance  companies 3220 

569.  Required  addition  to  reserve  funds  of  insurance  companies 3221 

570.  Special  deductions  allowed  in  the  case  of  combined  life,  health  and 

accident  policies 3221a 

571.  Special  deductions  allowed  mutual  marine  insurance  companies. ..  .3221b 

572.  Special  deductions  allowed  mutual  insurance  companies 3221c 

573.  Deductions  allowed  foreign  corporations. 3222 

Section  235.  Items  not  deductible .' 326 

Article  581.  Items  not  deductible 3223 

582.  Capital  expenditures . 3223a 

Section  236.  Credits  allowed 327 

Article  591.  Credits  allowed , 3224 

Section  237.  Payment  of  tax  at  source 332 

Article  601.  Withholding  in  the  case  of  nonresident  foreign  corporations 3225 

Section  238.  Credit  for  taxes 337 

Article  611.  Credit  for  foreign  taxes 3226 

Section  239.  Corporation  returns 343 

Article  621.  Corporation  returns 3227 

622.  Returns  by  receivers.  . . ...  3228 

623.  Returns  of  insurance  companies 3229 

624.  Returns  of  personal  service  corporations ; 3230 

625.  Returns  of  foreign  corporations...  . . . . .\ 3231 

626.  Returns  for  fractional  part  of  year 3232 

Section  240.  Consolidated  returns 349 

Article  631.  Affiliated  corporations ..  3233: 

632.  Consolidated  returns ...  3234 

633.  When  corporations  are  affiliated 3235 

634.  Change  in  ownership  during  taxable  year 3236 

635.  Corporation  deriving  chief  Income  from  Government  contracts 3237 

636.  Domestic  corporation  affiliated  with  foreign  corporation 3238 

637.  Consolidated  net  income  of  affiliated  corporations . 3239 

638.  Different  fiscal  years  of  affiliated  corporations 3240 

Section  241.  Time  and  place  for  filing  returns 358 

Article  651.  Time  and  place  for  filing  returns 3241 


PART  III. 

[Of  Regulations  No.  45,  Revised.] 

ADMINISTRATIVE  PROVISIONS. 

CONTENTS. 

[The  section  numbers  refer  to  the  statute  and  the  article  numbers  to  the  regulations.] 

Paragraph 

section  250.  Payment  of  taxes 361 

Article  1001.  Time  for  payment  of  tax 3031 

1002.  Payment  of  tax  when  no  proper  return 3032 

INC.  307  TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


Section  250.  Payment  of  taxes. — Concluded. 

Paragraph 

1003.  Interest  on  tax 3033 

1004.  Penalty  for  failure  to  file  return 3034 

1005.  Penalty  for  understated  return 3035 

1006.  Penalty  for  nonpayment  of  tax 3036 

1007.  Notice  and  demand  of  payment 3037 

1008.  Collection  of  tax  by  suit.. 3038 

1009.  Collection  of  tax  by  distraint 3039 

1010.  Enforcement  of  tax  lien  by  bill  in  equity 3040 

1011.  Compromise  of  tax  cases 3041 

1012.  Assessment  of  tax 3042 

1013.  Declaration  of  termination  of  taxable  period 3043 

Section  251.  Receipts  for  taxes 384 

Article  1021.  Receipts  for  tax  payments 3044 

Section  252.  Refunds 386 

Article  1031.  Authority  for  abatement,  credit  and  refund  of  taxes 3045 

1032.  Claims  for  abatement  of  taxes  erroneously  assessed 3046 

1033.  Claims  for  abatement  of  uncollectible  taxes 3047 

1034.  Claims  for  credit  of  taxes  erroneously  collected 3047a 

1035.  Action  on  claims  for  credit 3047d 

1036.  Claims  for  refund  of  taxes  erroneously  collected 3048 

1037.  Suits  for  recovery  of  taxes  erroneously  collected 3049 

1038.  Claims  for  refund  of  sums  recovered  by  suit 3050 

Section  253.  Penalties 380 

Article  1041.  Specific  penalties 3051 

Section  254.  Returns  of  payments  of  dividends 389 

Article  1051.  Return  of  information  as  to  payments  of  dividends 3052 

Section  255.  Returns  of  brokers 390 

Article  1061.  Return  of  information  by  brokers 3053 

Section  256.  Information  at  source 391 

Article  1071.  Return  of  information  as  to  payments  of  $1,000 3054 

1072.  Return  of  information  as  to  payments  to  employees 3055 

1073.  Return  of  information  by  partnerships,  personal  service  corpora- 

tions and  fiduciaries 3055a 

1074.  Cases  where  no  return  of  information  is  required 3056 

1075.  Return  of  information  as  to  interest  on  corporate  bonds 3057 

1076.  Return  of  information  as  to  payments  to  non-resident  aliens 3058 

1077.  Source  of  information  as  to  foreign  items 3059 

1078.  Ownership  certificates  for  foreign  items 3060 

1079.  Return  of  information  as  to  foreign  items 3061 

1080.  Information  as  to  actual  owner 3062 

Section  257.  Returns  to  be  public  records 403 

Article  1091.  Inspection  of  returns 3063 

1092.  Inspection  of  returns  by  State 3064 

1093.  Inspection  of  returns  by  stockholder 3065 

1094.  Penalties  for  disclosure  of  returns 3066 

Section  258.  Publication  of  statistics '. 409 

Article  1101.  Statistics  of  income 3067 

Section  259.  Collection  of  foreign  items 410 

Article  1111.  License  to  collect  foreign  Items 3068 

Section  260.  Citizens  of  United  States  possessions 413 

Article  1121.  Status  of  citizen  of  United  States  possession 3069 

Section  261.  Porto  Rico  and  Philippine  Islands 415 

Article  1131.  Income  tax  in  Porto  Rico  and  Philippine  Islands 3070 

1132.  Taxation  of  individuals  between  United  States  and  Porto  Rico 

and  Philippine  Islands 3071 

1133.  Taxation  of  corporations  between  United  States  and  Porto  Rico 

and  Philippine  Islands 3072 


INC. 


308 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 

PART  IV. 

[Of  Regulations  No.  45,  Revised.] 

DEFINITIONS  AND  GENERAL  PROVISIONS. 

CONTENTS. 

[The  section  numbers  refer  to  the  statute  and  the  article  numbers  to  the  regulations.] 

Paragraph 

Section  1.  General  definitions 1 

Article  1501.  Person 3073 

1502.  Association 3074 

1503.  Association  distinguished  from  partnership 3075 

1504.  Association  distinguished  from  trust ■ 3076 

1505.  Limited  partnership  as  partnership 3077 

1506.  Limited  partnership  as  corporation 3078 

1507.  Joint  ownership  and  joint  adventure 3079 

1508.  Insurance  company 3079a 

1509.  Domestic  and  foreign  persons 3080 

1510.  Government  contract 3080a 

Section  200.  Definitions 17 

Article  1521.  Fiduciary 3081 

1522.  Fiduciary  distinguished  from  agent 3082 

1523.  Personal  service  corporation 3083 

1524.  Personal  service  corporation;  certain  corporations  excluded 3084 

1525.  Personal  services  rendered  by  personal  service  corporation 3085 

1526.  Personal  services  rendered  by  personal  service  corporation:  more 

than  one  business 3086 

1527.  Activities  of  stockholders  of  personal  service  corporation 3087 

1528.  Activities  of  stockholders  of  personal  service  corporation:  con- 

duct of  affairs 3088 

1529.  Activities  of  stockholders  of  personal  service  corporation:  stock 

interest  required 3089 

1530.  Activities  of  stockholders  of  personal  service  corporation: 

change  in  ownership 3090 

1531.  Capital  of  personal  service  corporation 3091 

1532.  Capital  of  personal  service  corporation:  inference  from  use 3092 

1533.  “Taxable  year”,  “withholding  agent,”  and  “paid” 3093 

Section  201.  Dividends 29 

Article  1541.  Dividends 3094 

1542.  Presumption  as  to  source  of  distribution 3094a 

1543.  Distributions  which  are  not  dividends 3095 

1544.  Dividends  paid  in  property 3096 

1545.  Stock  dividends 3097 

1546.  Stock  dividends  of  1918 3098 

1547.  Sale  of  stock  received  as  dividend 3099 

1548.  Distribution  In  liquidation 3100 

1549.  Distribution  from  depletion  or  depreciation  reserve 3101 

Section  202.  Basis  for  determining  gain  or  loss 43 

Article  1561.  Basis  for  determining  gain  or  loss  from  sale 3102 

1562.  Sale  of  property  acquired  by  gift  or  bequest 3103 

1563.  Exchanges  of  property 3104 

1564.  Determination  of  gain  or  loss  from  exchange  of  property. 3105 

1565.  Exchange  for  different  kinds  of  property 3106 

1566.  Exchange  of  property  and  stock.  .- 3106a 

1567.  Exchange  of  stock  for  other  stock  of  no  greater  par  value 3107 

1568.  Determination  of  gain  or  loss  from  subsequent  sale 3107a 

1569.  Exchange  of  stock  for  other  stock  of  greater  par  value 3108 

1570.  Readjustment  of  partnership  Interests 3108a 

Section  203.  Inventories 50 

Article  1581.  Need  of  inventories 3109 

1582.  Valuation  of  inventories 3110 

1583.  Inventories  at  cost 3111 

1584.  Inventories  at  market 3112 

1585.  Inventories  by  dealers  in  securities 3113 


INC. 


309  TAX 


Rep.  45,  Rev.  See  Note  on  page  301. 


Paragraph 


Section  2C4.  Net  losses 51 

Article  1601.  Scope  of  net  losses 31  H 

1602.  Claim  for  allowance  of  net  loss 3113 

1603.  Allowance  of  net  loss 3116 

Section  205.  Fiscal  year  with  different  rates. 60 

Article  1621.  Fiscal  year  with  different  rates 3117 

1622.  Fiscal  year  of  corporation  ending  in  1918 ^ 3118 

1623.  Deductions  and  credits:  corporation  fiscal  year  ending  in  1918..  3119 

1624.  Fiscal  year  of  Individual  ending  in  1918 3120 

1625.  Fiscal  year  of  corporation  or  individual  ending  in  1919 3121 

Section  206.  Parts  of  income  subject  to  rates  for  different  years 72 

Article  1641.  Parts  of  income  subject  to  rates  for  different  years 3122 

1642.  Stock  dividend  subject  to  rates  for  different  years 3123 

Section  1301.  Advisory  Tax  Board 423 

Article  1701.  Submission  of  questions  to  Advdsory  Tax  Board 3124 

1702.  Procedure  before  Advisory  Tax  Board 3125 

Section  1305.  Extension  of  existing  statutes 429 

Article  1711.  Aids  to  collection  of  tax 3126 

Section  1313.  Fractional  part  of  cent 434 

Article  1721.  When  fractional  part  of  cent  may  be  disregarded 3127 

Section  1314.  'Medium  of  payment  of  tax 435 

Article  1731.  Payment  of  tax  b}^  certificates  of  indebtedness 3128 

1732.  Procedure  with  respect  to  certificates  of  indebtedness 3129 

1733.  Payment  of  tax  by  uncertified  checks 3130 

1734.  Procedure  with  respect  to  dishonored  checks 3131 

Section  1318.  Jurisdiction  of  district  courts 454 

Section  1320.  Deposit  of  United  States  bonds  as  security 456 

Section  1400.  Repeal  of  former  acts : 461 

Section  1402.  Validating  provision 465 

Section  1405.  Citation  of  Act .' 468 

Section  1408.  Inspection  of  Government  contracts . 3136 

Section  1309.  Authority  for  regulations 433 

Article  1800.  Promulgation  of  regulations. 3137 


REGULATIONS  NO.  45,  REVISED. 


PART  I • 

INCOME  TAX  ON  INDIVIDUALS 
NORMAL  TAX 

2825  Article  1.  Income  Tax  on  Individuals. — The  statute  imposes  an 
76  income  tax  on  individuals,  including  a normal  tax  and  a surtax. 
471  See  section  211  of  the  statute.  The  tax  is  upon  net  income,  as 
defined  in  the  statute,  after  deducting  from  gross  income,  as  de- 
fined in  the  statute,  the  allowable  deductions.  See  sections  212,  213,  214 
and  215.  In  certain  cases  credits  are  allowed  against  net  income  and 
against  the  amount  of  the  tax.  See  sections  216  and  222.  Special  provi- 
sions of  the  statute  deal  with  the  effect  of  the  tax  on  nonresident  alien  in- 
dividuals, partnerships  and  personal  service  corporations,  estates  and 
trusts,  and  the  stockholders  of  corporations  which  unreasonably  accumulate 
their  profits.  See  sections  217,  218,  219,  and  220.  The  tax  is  payable 
upon  the  basis  of  returns  rendered  by  the  persons  liable  thereto,  except 
that  in  some  instances  it  is  to  be  paid  at  the  source  of  the  income.  See 
sections  221,  223,  224,  225,  226,  227  and  228.  The  statute  also  imposes 
an  income  tax  at  a fixed  rate  and  a war  profits  and  excess  profits  tax  on 

310  TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  SOI. 


corporations.  See  Part  II  of  the  regulations.  For  administrative  provi- 
sions, and  for  definitions  and  general  provisions,  see  Parts  III  and  IV'  of  the 
regulations. 

2826  Art.  2.  Normal  Tax. — For  the  calendar  year  1918  the  normal 
income  tax  on  individual  citizens  or  residents  of  the  United  States 

is  at  the  rate  of  6 per  cent  upon  the  first  $4,000  of  net  income  subject  to  the 
normal  tax  and  12  per  cent  upon  the  excess  over  that  amount,  and  for  the 
calendar  year  1919  and  subsequent  years  is  at  the  rate  of  4 per  cent  upon 
the  first  $4,000  and  8 per  cent  upon  the  excess  over  that  amount.  The 
lower  rate  on  the  first  $4,000  applies  to  each  separate  individual,  whether 
married  or  unmarried,  and  should  not  be  confused  with  the  joint  exemption 
granted  married  persons.  In  the  case  of  nonresident  alien  individuals 
the  normal  tax  for  1918  is  12  per  cent  and  for  subsequent  years  8 per  cent. 
In  order  to  determine  the  income  to  which  the  normal  tax  is  applied,  the 
net  income,  as  defined  in  section  212  of  the  statute  and  articles  21-26  of  the 
regulations,  is  first  entitled  to  the  credits  and  exemptions  specified  in  section 
216  of  the  statute  and  articles  301-307. 

2827  Art.  3.  Persons  Liable  to  Tax. — Every  citizen  of  the  United 
States,  wherever  resident,  is  liable  to  the  tax.  It  makes  no  dif- 
ference that  he  may  own  no  assets  within  the  United  States  and  may  receive 
no  income  from  sources  within  the  United  States.  Every  resident  alien 
individual  is  liable  to  the  tax,  even  though  his  income  is  wholly  from  sources 
outside  the  United  States.  Every  nonresident  alien  individual  is  liable  to 
the  tax  on  his  income  from  sources  within  the  United  States.  Sei  section 
213  (c)  of  the  statute  and  articles  91-93.  Estates  and  trusts  are  also  subject 
to  the  tax.  See  section  219  of  the  statute  and  articles  341-346. 


2828  Art.  4.  Who  Is  a Citizen. — Every  person  born  in  the  United 
States  subject  to  its  jurisdiction,  or  naturalized  in  the  United 
States,  is  a citizen.  When^any  naturalized  citizen  has  left  the  United 
States  and  resided  for  two  years  in  the  foreign  country  from  which  he  came, 
or  for  five  years  in  any  other  foreign  country,  he  is  presumed^  to  have  lost 
his  American  citizenship;  but  this  presumption  does  not  apply  to  residence 
abroad  while  the  United  States  is  at  war.  An  Italian,  who  has  come  to 
the  United  States  and  filed  his  declaration  of  intention  of  becoming  a citizen, 
but  who  has  not  yet  received  his  final  citizenship  papers,  is  an' alien.  A 
Swede  who,  after  having  come  to  the  United  States  and  become  naturalized 
here,  returned  to  Sweden  and  resided  there  for  two  years  prior  to  April  6, 
1917,  is  presumed  to  be  once  more  an  alien.  On  the  other  hand,  an  in- 
dividual born  in  the  United  States  of  citizen  or  resident  alien  parents,  who 
has  long  since  moved  to  a foreign  country  and  established  a domicile  there, 
but  who  has  never  been  naturalized  therein  or  taken  an  oath  of  allegiance 
thereto,  is  still  a citizen  of  the  United  States.  For  the  difference  between 
resident  alien  individuals  and  nonresident  alien  individuals,  see  articles 
312-315. 


SURTAX. 


2829  Art.  11.  Surtax. — In  addition  to  the  normal  tax  a surtax  is  im- 
80  posed  at  the  rates  specified  in  the  statute  upon  the  net  income  of 

736  every  individual,  resident  or  nonresident.  See  articles  2-4.  In 

determining  the  taxable  net  income  for  the  purpose  of  the  surtax, 
the  credits  provided  by  section  216  of  the  statute  in  the  case  of  the  normal 
tax  are  nor  applicable. 

INC.  311  TAX 


Reg.  45,  Rev,  See  Note  on  page  301. 


2830  Art.  12.  Computation  of  Surtax. — The  following  table  shows  the 
surtax  on  net  incomes  of  the  specified  amounts.  In  each  instance 
the  first  figure  of  net  income  in  the  net  income  column  is  to  be  excluded  and 
the  second  figure  included.  The  percentage  given  opposite  applies  to  the 
excess  of  income  over  the  first  figure  in  the  net  income  column,  and  the  sum 
in  the  next  column  is  the  tax  on  the  entire  difference  between  the  first  figure 
and  the  second  figure  in  the  net  income  column.  The  final  column  gives 
the  total  surtax  on  a net  income  equal  to  the  second  figure  in  the  net  income 
column. 


Net  Income 

$5,000  to  $6,000 

$6,000  to  $8,000 

$8,000  to  $10,000 

$10,000  to  $12,000 

$12,000  to  $14,000 

$14,000  to  $16,000 

$16,000  to  $18,000 

$18,000  to  $20,000 

$20,000  to  $22,000 

$22,000  to  $24,000 

$24,000  to  $26,000 

$26,000  to  $28,000 

$28,000  to  $30,000 

$30,000  to  $32,000 

$32,000  to  $34,000 

$34,000  to  $36,000 

$36,000  to  $38,000 

$38,000  to  $40,000 

$40,000  to  $42,000 

$42,000  to  $44,000 

$44,000  to  $46,000 

$46,000  to  $48,000 

$48,000  to  $50,000 

$50,000  to  $52,000 

$52,000  to  $54,000 

$54,000  to  $56,000 

$56,000  to  $58,000 

$58,000  to  $60,000 

$60,000  to  $62,000 

$62,000  to  $64,000 

$64,000  to  $66,000 

$66,000  to  ^8,000 

$68,000  to  $70,000 

$70,000  to  $72,000 

$72,000  to  $74,000 

$74,000  to  $76,000 

$76,000  to  $78, 000 

$78,000  to  $80,000 

$80,000  to  $82,000 

$82,000  to  $84,000 

$84,000  to  $86,000. . . . 
$86,000  to  $88,000. . . . 

$88,000  to  $90,000 

$90,000  to  $92,000. . . . 
$92,000  to  $94 ,000.... 


r Cent 

Surtax 

Total  surtax 

1 

$10 

$10 

2 

40 

50 

3 

60 

no 

4 

80 

190 

5 

100 

290 

6 

120 

410 

7 

140 

550 

8 

160 

710 

9 

180 

890 

10 

200 

1,090 

11 

220 

1,310 

12 

240 

1,550 

13 

260 

1,810 

14 

280 

2,090 

15 

300 

2,390 

16 

320 

2,710 

17 

340 

3,050 

18 

360 

3,410 

19 

380 

3,790 

20 

400 

4,190 

21 

420 

4,610 

22 

440 

5,050 

23 

460 

5,510 

24 

480 

5,990 

25 

500 

6,490 

26 

520 

7,010 

27 

540 

7,550 

28 

560 

8,110 

29 

580 

8,690 

30 

600 

9,290 

31 

620 

9,910 

32 

640 

10,550 

33 

660 

11,210 

34 

680 

11,890 

35 

700 

12,590 

36 

720 

13,310 

37 

740 

14,050 

38 

760 

14,810 

39 

780 

15,590 

40 

800 

16,390 

41 

820 

17,210 

42 

840 

18,050 

43 

860 

18,910 

44 

880 

19,790 

45 

900 

20,690 

INC.  312  TAX 


Reg.  45,  Rev,  See  Note  on  page  301. 


Total 


Net  Income 

Per  cent 

Surtax 

Surtax 

$94,000  to  $96,000 

46 

920 

21,6ia 

$96,000  to  $98,000 

47 

940 

22,550 

$98,000  to  $100,000 

960 

23,510 

$100,000  to  $150,000 

52 

26,000 

49,510 

$150,000  to  $200,000 

56 

28,000 

77,510 

$200,000  to  $300,000 

60 

60,000 

137,510 

$300,000  to  $500,000 

63 

126,000 

263,510 

$500,000  to  $1,000,000 

64 

320,000 

583,510 

$1,000,000  up 

65.... 

The  surtax  for  any  amount  of  net  income  not  shown  in  the  above  table  is  com- 
puted by  adding  to  the  total  surtax  for  the  largest  amount  shown  which  is 
less  than  the  income  the  surtax  upon  the  excess  over  that  amount  at  the  rate 
indicated  in  the  table.  For  example,  if  the  amount  of  net  income  is  $63,128, 
the  surtax  is  the  sum  of  $8,690  (the  surtax  upon  $62,000  as  shown  by  the 
table)  plus  30  per  cent  of  $1,128,  or  $338.40,  making  a total  surtax  of 
$9,028.40. 

2831  Art.  13.  Surtax  on  the  Sale  of  Mineral  Deposits. — Where  the 
8*  taxpayer  by  prospecting  and  locating  claims,  or  by  exploring  and 
738  discovering  undeveloped  claims,  has  demonstrated  the  principal 

value  of  mines,  oil  or  gas  wells,  which  prior  to  his  efforts  had  a 
merely  nominal  value,  the  portion  of  the  surtax  attributable  to  a sale  of 
such  property  or  of  the  taxpayer’s  interest  therein  shall  not  exceed  20 
per  cent  of  the  selling  price.  Exploration  work  alone  without  discovery 
is  not  sufficient  to  bring  a case  within  this  provision.  Shares  of  stock 
in  a corporation  owning  mines,  oil  or  gas  wells  do  not  constitute  an 
interest  in  such  property.  To  determine  the  application  of  this  provision 
to  a particular  case,  the  taxpayer  should  first  compute  the  surtax  in  the 
ordinary  way  upon  his  net  income,  including  his  net  income  from  any  such 
sale.  The  proportion  of  the  surtax  indicated  by  the  ratio  which  the  tax- 
payer’s net  income  [profit]  from  the  sale  of  the  property,  computed  as  pres- 
cribed in  article  715,  bears  to  [the  sum  of]  his  total  net  income  [plus  the 
general  deductions  not  chargeable  against  any  particular  item  of  gross 
income]  is  the  portion  of  the  surtax  attributable  to  such  sale,  and  if  it  exceeds 
20  per  cent  of  the  selling  price  of  the  property  such  portion  of  the  surtax 
shall  be  reduced  to  that  amount.  See  articles  219-221. 

NET  INCOME  DEFINED. 

2832  Art.  21.  Meaning  of  Net  Income. — The  tax  imposed  by  the 

83  statute  is  upon  income.  In  the  computation  of  the  tax  various 

754  classes  of  income  must  be  considered:  {a)  Income  (in  the  broad 

k sense),  meaning  all  wealth  which  flows  in  to  the  taxpayer  other 

) than  as  a mere  return  of  capital.  It  includes  the  forms  of  income  specifically 

described  as  gains  and  profits,  including  gains  derived  from  the  sale  or  other 
disposition  of  capital  assets.  It  is  not  limited  to  cash  alone,  for  the  statute 
recognizes  as  income-determining  factors  other  items,  among  which  are 
inventories,  accounts  receivable,  property  exhaustion  and  accounts  payable 
for  expenses  incurred.  See  sections  202,  203,  213  and  214  of  the  statute. 
{b)  Gross  income,  meaning  income  (in  the  broad  sense)  less  income  which  is 
I by  statutory  provision  or  otherwise  exempt  from  the  tax  imposed  by  the 

statute.  See  section  213  and  articles  71-86.  (c)  Net  income,  meaning  gross 

313  TAX 


INC. 


Reg.  4c,  Rev.  See  Note  on  page  3 01. 


income  less  statutory  deductions.  The  statutory  deductions  are  in  general, 
though  not  exclusively,  expenditures,  other  than  capital  expenditures,  con- 
nected with  the  production  of  income.  See  sections  214  and  215  and  the 
articles  thereunder,  {d)  Net  income  less  credits.  See  section  216  and  articles 
301-307.  The  surtax  is  imposed  upon  net  income;  the  normal  tax  upon  net 
income  less  credits.  Though  taxable  net  income  is  wholly  a statutory  con- 
ception it  follows,  subject  to  certain  modifications  as  to  exemptions  and  as 
to  some  of  the  deductions,  the  lines  of  commercial  usage.  Subject  to  these 
modifications  statutory  “net  income”  is  [subject  to  these  modifications] 
commercial  “net  income.”  This  appears  from  the  fact  that  ordinarily  it  is 
to  be  computed  in  accordance  with  the  method  of  accounting  regularly 
employed  in  keeping  the  books  of  the  taxpayer.  [For  instances  in  which  net 
income  is  not  to  be  computed  in  accordance  with  the  taxpayer’s  method  of 
accounting  see  articles  22  and  23.]  As  to  net  income  of  corporations  see 
section  232  [236  of  the  statute]  and  article  531. 

2833  Art.  22.  Computation  of  Net  Income. — Net  income  must  be  com- 
puted with  respect  to  a fixed  period.  Usually  [Ordinarily]  that  period 

is  twelve  months  and  is  known  as  the  taxable  year.  Items  of  income  and 
of  expenditures  which  as  gross  income  and  deductions  are  elements  in  the 
computation  of  net  incomie  need  not  be  in  the  form  of  cash.  It  is  sufficient 
that  such  items,  if  otherwise  properly  included  in  the  computation,  can  be 
valued  in  termis  of  money.  The  time  as  of  which  any  item  of  gross  income 
or  any  deduction  is  to  be  accounted  for  miust  be  determined  in  the  light  of 
the  fundamental  rule  that  the  computation  shall  be  made  in  such  a manner 
as  clearly  refiects  the  taxpayer’s  income.  If  the  method  of  accounting 
regularly  employed  by  him  in  keeping  his  books  clearly  refiects  his  income, 
it  is  to  be  followed  with  respect  to  the  time  as  of  which  items  of  gross 
income  and  deductions  are  to  be  accounted  for.  If  the  taxpayer  does  not 
regularly  employ  a method  of  accounting  which  clearly  refiects  his  income, 
the  computation  shall  be  m.ade  in  such  mianner  as  in  the  opinion  of  the 
Commissioner  clearly  refiects  it. 

2834  Art.  23.  Bases  of  Computation. — Approved  standard  methods  of 
accounting  will  ordinarily  be  regarded  as  clearly  reflecting 

income.  A method  of  accounting  will  not,  however,  be  regarded  as  clearly 
reflecting  income  unless  all  items  of  gross  income  and  all  deductions  are 
treated  with  reasonable  consistency.  See  section  200  of  the  statute  for 
definitions  of  “paid,”  “paid  or  accrued,”  and  “paid  or  incurred.’*  All 
Items  of  gross  incomie  shall  be  included  in  the  gross  income  for  the  taxable 
year  in  which  they  are  received  by  the  taxpayer,  and  deductions  taken 
accordingly,  unless  in  order  clearlv  to  reflect  income  such  amounts  are  to 
be  properly  accounted  for  as  of  a different  period.  See  section  213  {a)  of  the 
statute.  A taxpayer  is  deemed  to  have  received  items  of  gross  income  which 
have  been  credited  to  or  set  apart  for  [made  available  to]  him  without  restric- 
tion. See  article  53.  On  the  other  hand,  appreciation  in  value  of  property  is 
not  even  an  accrual  of  income  to  a taxpayer  prior  to  the  realization  of  such 
appreciation  through  conversion  of  the  property.  The  return  of  income  shall 
in  every  case  be  made  on  the  basis  clearly  reflecting  the  income^  including  such 
i:ems  of  income  and  deductions  as  properly  would  have  been  included  in  the 
return  for  the  preceding  taxable  year  had  the  present  basis  been  used.,  but  which 
were  not  so  included,  and  excluding  such  items  of  income  and  deductions  as 
would  have  been  excluded  from  the  return  for  the  preceding  taxable  year  had  the 
present  basis  been  used,  but  which  were  in  fact  included.  A separate  statement 
shall  be  attached  to  the  return  shozuing  in  detail  all  such  items  and  the  reasons 

INC.  314  TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


why  they  were  excluded  or  included  in  the  return  for  the  preceding  taxable  year. 
If  in  the  opinion  of  the  Commissioner  the  net  effect  of  such  items  upon  the  net 
income  for  the  taxable  year  indicates  that  the  returns  for  any  previous  years  did 
not  approximately  reflect  the  true  income  for  such  years,  amended  returns  for 
such  years  ‘may  be  required. 


2836  Art.  24.  Methods  of  Accounting. — It  is  recognized  that  no 
uniform  method  of  accounting  can  be  prescribed  for  all  taxpayers, 
and  the  law  contemplates  that  each  taxpayer  shall  adopt  such  forms  and 
systems  of  accounting  as  are  in  his  judgment  best  suited  to  his  purpose. 
Each  taxpayer  is  required  by  law  to  make  a return  of  his  true  income. 
He  must,  therefore,  maintain  such  accounting  records  as  will  enable  him 
to  do  so.  See  section  1305  of  the  statute  and  article  1711.  Amiong  the 
essentials  are  the  following: 

(1)  In  all  cases  in  which  the  production,  purchase  or  sale  of  mer- 

2836  chandise  of  any  kind  is  an  income-producing  factor  inventories  of 
the  merchandise  on  hand  (including  finished  goods,  work  in  process, 

raw  materials  and  supplies)  should  be  taken  at  the  beginning  and  end  of 
the  year  and  used  in  computing  the  net  income  of  the  year; 

(2)  Expenditures  made  during  the  year  should  be  properly 

2837  classified  as  between  capital  and  income,  that  is  to  say,  that 
expenditures  for  items  of  plant,  equipment,  etc.,  which  have  a 

useful  life  extending  substantially  beyond  the  year  should  be  charged  to  a 
capital  account  and  not  to  an  expense  account;  and 

(3)  In  any  case  in  which  the  cost  of  capital  assets  is  being  recov- 

2838  ered  through  deductions  for  wear  and  tear,  depletion  or  obsoles- 
cence any  expenditure  (other  than  ordinary  repairs)  made  to  restore 

the  property  or  prolong  its  useful  life  should  be  charged  against  the  property 
account  or  the  appropriate  reserve  and  not  against  current  expenses. 

2839  Art.  25.  Accounting  Period. — The  return  of  a taxpayer  is  made 
and  his  income  computed  for  his  taxable  year,  which  means  his 

fiscal  year,  or  the  calendar  year  if  he  has  not  established  a fiscal  year. 
The  term  “fiscal  year”  means  an  accounting  period  of  12  months  ending 
on  the  last  day  of  any  month  other  than  December.  No  fiscal  year  will, 
however,  be  recognized  unless  before  its  close  it  was  definitely  established 
as  an  accounting  period  by  the  taxpayer  and  the  books  of  such  taxpayer 
were  kept  in  accordance  therewith.  The  taxable  year  1918  is  the  calendar 
year  1918  or  any  fiscal  year  ending  during  the  calendar  year  1918.  See 
section  200  of  the  statute.  A taxpayer  having  an  existing  accounting  period 
which  is  a fiscal  year  within  the  meaning  of  the  statute  not  only  needs  no  per- 
mission to  make  his  return  on  the  basis  of  such  a taxable  year,  but  is  required 
to  do  so,  regardless  of  the  former  basis  of  rendering  returns.  A person  having 
no  such  fiscal  year  must  make  return  on  the  basis  of  the  calendar  year.  The 
first  reUirn  under  the  present  statute  of  a taxpayer  who  has  heretofore  made 
return  on  a basis  diffferent  from  his  accounting  period  will  necessarily  overlap 
his  next  previous  return.  For  the  method  of  adjusting  the  tax  in  such  a case  see 
section  205  of ^ the  statute  and  articles  1621-1624.  Section  226  has  no  applica- 
tion to  this-' situation.  [A  taxpayer  shall  make  his  return  for  the  taxable 
year  1918  on  the  basis  of  his  annual  accounting  period  (fiscal  or  calendar 
year),  even  though  a part  of  such  accounting  period  was  included  in  a period 
for  which  he  had  previously  made  return.  Thus  an  individual  whose  account- 
ing period  ended  June  30,  1918,  and  who  had  previously  made  a return  for 
the  calendar  year  1917,  should  make  a complete  return  in  accordance  with 
the  provisions  of  the  statute  for  the  twelve  months  ending  June  30,  1918. 


INC. 


315 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


For  adjustments  to  be  m.ade  with  respect  to  income  included  in  both  returns 
see  section  205  of  the  statute  and  articles  1622  and  1624.  A taxpayer  making- 
his  first  return  for  income  tax  shall  make  such  return  on  the  basis  of  his  annual 
accounting  period.  See  section  226  of  the  statute  and  article  431.]  Except 
in  the  cases  of  a return  for  the  taxable  year  1918  and  of  a first  return  for  income 
tax  a taxpayer  shall  make  his  return  on  the  basis  (fiscal  or  calendar  year) 
upon  which  he  made  his  return  for  the  taxable  year  immediately  preceding 
unless,  with  the  approval  of  the  Commissioner,  he  has  changed  the  basis  of 
computing  his  net  income. 

2840  Art.  26.  Change  in  Accounting  Period. — If  a taxpayer  changes 
his  accounting  period,  and  not  merely  his  taxable  year  to  conform  zvith 

his  existing  accounting  period^  he  shall  as  soon  as  possible  give  [written  notice] 
to  the  collector  for  transmission  to  the  Commissioner  written  notice  of  such 
change  and  his  reasons  therefor.  The  Commissioner  will  not  approve  a 
change  of  the  basis  of  computing  net  income  unless  such  notice  is  given  at  a 
time  which  is  both  {a)  at  least  30  days  before  the  due  date  of  the  taxpayer’s 
return  on  the  basis  of  his  existing  taxable  year  and  {b)  at  least  30  days  before 
the  due  date  of  his  return  on  the  basis  of  the  proposed  taxable  year.  If  the 
change  in  the  basis  of  computing  the  net  income  of  the  taxpayer  is  approved 
by  the  Commissioner,  the  taxpayer  shall  thereafter  make  his  returns  upon 
the  basis  of  the  new  accounting  period  in  accordance  with  the  requirement 
of  section  226  of  the  statute  and  his  net  income  shall  be  computed  as  therein 
provided.  See  article  431. 

GROSS  INCOME  DEFINED:  INCLUSIONS 

2841  Art.  31.  What  Included  in  Gross  Income. — Gross  income  includes 

in  general  compensation  for  personal  and  professional  services,  [service, 
88  professional  and]  business  income,  profits  from  sales  of  and  dealings 
763  in  property,  interest,  rent,  dividends,  and  gains,  profits  and  income 
derived  from  any  source  whatever,  unless  exempt  from  tax  by  law.  Profits 
derived  from  sales  in  foreign  commerce  are  taxable.  Income  may  be  in  the 
form  of  cash  or  of  property  Dividends  {other  than  stock  dividends  declared 
before  November  1,  1918,  and  received  before  March  27,  1919)  are  taxed  at  the 
rates  for  the  year  in  which  paid.  See  section  201  of  the  statute  and  articles 
1541-1549.  The  amount  of  income  tax  paid  for  a bondholder  by  an  obligor 
pursuant  to  a tax-free  covenant  in  its  bonds  is  in  the  nature  of  additional  interest 
paid  the  bondholder  and  must  be  included  in  his  gross  income.  He  is  not 
however,  entitled  to  deduct  such  income  tax  paid  on  his  behalf  See  sections 
214  {a)  (3)  and  221  {b)  of  the  statute  and  articles  565  and  566.  As  to  the  basis 
for  determining  gain  or  loss  from  sales  see  section  202  and  articles  1561-1570. 
As  to  the  gross  income  of  corporations  see  section  223  and  articles  541-550. 
[See  sections  201  and  202  of  the  statute  and  articles  1541-1548  and  1561- 
1567.] 

2842  Art.  32.  Compensation  for  Personal  Services.— Where  no  deter- 
mination of  compensation  is  had  until  the  completion  of  the 

services,  the  amount  received  is  [ordinarily]  income  for  the  calendar  year 
of  its  determination  [or  receipt.  Where  services  are  paid  for  with  something 
other  than  money,  the  fair  market  value  of  the  thing  taken  in  payment  is 
the  amount  to  be  included  as  income.  If  the  services  were  rendered  at  a 
stipulated  price,  in  the  absence  of  evidence  to  the  contrary  such  price  will 
be  presumed  to  be  the  fair  value  of  the  compensation  received].  Commis- 
sions paid  salesmien,  compensation  for  services  on  the  basis  of  a percentage 


INC. 


316  TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


of  profits,  commissions  on  insurance  premiums,  tips,  retired  pay  of  federal  and 
other  officers,  and  pensions  or  retiring  allowances  paid  by  the  United 
States  or  private  persons,  are  incom.e  to  the  recipients;  as  are  also  marriage 
fees,  baptismal  offerings,  sums  paid  for  saying  masses  for  the  dead,  and  other 
[so-called]  gifts  and  contributions  received  by  a clergyman,  evangelist  or 
religious  worker  for  services  rendered.  The  salaries  of  federal  officers  and 
employees  are  subject  to  tax.  But  see  article  86.  [Premiums  paid  by  an  em- 
ployer on  accident  or  health  policies  in  favor  of  his  employees  as  additional 
compensation  of  such  employees  are  income  to  the  employees.  Compensation 
paid  an  employee  of  a corporation  in  its  stock  is  to  be  treated  as  if  the  cor- 
poration sold  the  stock  for  its  market  value  and  paid  the  employee  in  cash. 
{But  see  article  33  below.)]  See  further  articles  85  and  105-108. 

2842a  Art.  33.  Compensation  Paid  Other  than  in  Cash. — Where  services  are 
paid  for  with  something  other  than  money,  the  fair  market  value  of 
the  thing  taken  in  payment  is  the  amount  to  be  included  as  income.  If  the  services 
were  rendered  at  a stipulated  price,  in  the  absence  of  evidence  to  the  contrary  such 
price  will  be  presumed  to  be  the  fair  value  of  the  compensation  received.  Compen- 
sation paid  an  employee  of  a corporation  in  its  stock  is  to  be  treated  as  if  the 
corporation  sold  the  stock  for  its  market  value  and  paid  the  employee  in  cash. 
When  living  quarters  such  as  camps  are  furnished  to  employees  for  the  con- 
venience of  the  employer,  the  ratable  value  need  not  be  added  to  the  cash  compen- 
sation of  the  employee,  but  where  a person  receives  as  compensation  for  services 
rendered  a salary  and  in  addition  thereto  living  quarters,  the  value  to  such 
person  of  the  quarters  furnished  consitutes  income  subject  to  tax.  Premiums 
paid  by  an  employer  on  life,  accident  or  health  policies  in  favor  of  his  employees 
as  additional  compensation  of  such  employees  are  income  to  the  employees. 

2842b  Art.  34.  Compensation  Paid  in  Notes. — Promissory  notes  received  in 
payment  for  services,  and  not  merely  as  security  for  such  payment^, 
constitute  income  to  the  amount  of  their  fair  market  value.  A taxpayer  receiving 
as  compensation  a note  regarded  as  good  for  its  face  value  at  maturity,  but  not 
bearing  interest,  may  properly  treat  as  income  as  of  the  time  of  receipt  the  fair 
discounted  value  of  the  note  at  such  time.  Thus,  if  it  appears  that  such  a note 
is  or  could  be  discounted  on  a six  or  seven  per  cent  basis,  the  recipient  may  include 
such  note  in  his  gross  income  to  the  amount  of  its  face  value  less  discount  computed 
at  the  prevailing  rate  for  such  transactions.  If  the  payments  due  on  a note  so 
accounted  for  are  met  as  they  become  due,  there  should  be  included  as  income  in 
respect  of  each  such  payment  so  much  thereof  as  represents  recovery  for  the  dis- 
count originally  deducted. 

2842C  Art.  35.  Gross  Income  From  Business. — In  the  case  of  a manu- 
facturing, merchandising  or  mining  business  ^‘gross  income’’  means 
the  total  sales,  less  the  cost  of  goods  sold,  plus  any  income  from  investments  and 
from  incidental  or  outside  operations  or  sources.  In  determining  the  gross  income 
subtractions  should  not  be  made  for  depreciation,  depletion,  selling  expenses  or 
losses,  or  for  items  not  ordinarily  used  in  computing  the  cost  of  goods  sold. 
Gross  income  includes  all  amounts  received  by  the  taxpayer  as  allowances  for 
amortization,  from  whatever  source  and  by  whatever  name  called.  The  allowance 
for  amortization  authorized  by  the  statute  must  be  taken  by  way  of  explicit  de- 
deduction from  gross  income.  See  section  214  {a)  (9)  and  articles  181-188.  See 
also  article  52. 

2843  Art.  36  [Art.  33].  Long  Term  Contracts. — Persons  engaged  in  con- 
tracting operations,  who  have  uncompleted  contracts,  in  some  cases 
perhaps  running  for  periods  of  several  years,  will  be  allowed  to  prepare 

INC.  317  TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 

their  returns  so  that  the  gross  income  will  be  arrived  at  on  the  basis  of 
completed  work;  that  is,  on  jobs  which  have  been  finally  completed  any 
and  all  moneys  received  in  payment  will  be  returned  as  income  for  the  year 
in  which  the  work  was  completed.  If  the  gross  income  is  arrived  at  by  this 
method,  the  deduction  from  gross  income  should  be  limited  to  the 
expenditures  made  on  account  of  such  completed  contracts.  Or  the  per- 
centage of  profit  from  the  contract  may  be  estimated  on  the  basis  of  per- 
centage of  completion,  in  which  case  the  income  to  be  returned  each  year 
during  the  performance  of  the  contract  will  be  computed  upon  the  basis  of 
the  expenses  incurred  on  such  contract  during  the  year;  that  is  to  say,  if 
one-half  of  the  estimated  expenses  necessary  to  the  full  performance  of  the 
contract  are  incurred  during  one  year,  one-half  of  the  gross  contract  price 
should  be  returned  as  income  for  that  year.  Upon  the  completion  of  a 
contract  if  it  is  found  that  as  a result  of  such  estimate  or  apportionment 
the  income  of  any  year  or  years  has  been  overstated  or  understated,  the 
taxpayer  should  file  amended  returns  for  such  year  or  years.  See  section  212 
of  the  statute  and  articles  22—24. 

2844  Art.  37  [Art.  34].  State  Contracts. — ^Any  profit  received  from  a 
State  or  political  subdivision  thereof  by  an  independent  contractor 

is  taxable  income.  Where  warrants  are  issued  by  a city,  town  or  other 
political  subdivision  of  a State,  and  are  accepted  by  the  contractor  in  pay- 
ment for  public  work  done,  the  face  value  of  such  warrants  must  be  returned 
as  income.  If  for  any  reason  the  contractor  upon  conversion  of  the 
warrants  into  cash  does  not  receive  and  can  not  recover  the  full  face  value 
of  the  warrants  so  returned,  he  may  allowably  deduct  from  gross  income 
for  the  year  in  which  the  warrants  are  converted  into  cash  any  loss  sus- 
tained [which  will  be  mieasured  by  the  difference  between  the  face  value 
of  the  warrants  returned  as  incom.e  and  the  aimount  actually  received  for 
them  when  redeemed  or  disposed  of]. 

2845  Art.  38  [Art.  35].  Gross  Income  of  Farmers. — ^All  gains,  profits  and 
income  derived  from  the  sale  or  exchange  of  farm  products,  whether 

produced  on  the  farm  or  purchased  and  resold,  shall  be  included  in  the 
return  of  income  for  the  year  in  which  the  products  were  actually  marketed 
and  sold,  unless  an  inventory  is  used.  In  case  of  the  sale  of  machinery, 
and  of  animals  purchased  as  draft  or  work  animals  or  solely  for  breeding 
purposes  and  not  for  resale,  any  excess  [increase]  over  the  cost  thereof  reduced 
by  all  sums  theretofore  deducted  for  depreciation  shall  be  included  as  gross 
income  in  preparing  the  taxpayer’s  return.  Where  farm  produce  is  ex- 
changed for  merchandise,  groceries  or  mill  products,  the  market  value  of, 
the  article  or  product  received  in  exchange  is  to  be  returned  as  income. 
Rents  received  in  crop  shares  shall  be  returned  as  of  the  year  in  which  the 
crop  shares  are  reduced  to  money  or  a money  equivalent.  If  a farmer  is 
engaged  in  producing  crops  which  take  more  than  a year  from  the  time  of 
planting  to  the  time  of  gathering  and  disposing,  the  income  therefrom 
may  be  computed  upon  the  crop  basis;  but  in  any  such  case  the  entire  cost 
of  producing  the  crop  must  be  taken  as  a deduction  in  the  year  in  which  the 
gross  income  from  the  crop  is  realized.  When  live  stock  purchased  is  sold, 
its  cost  is  to  be  deducted  from  the  sales  price  in  ascertaining  the  amount  of 
gain  or  profit  to  be  returned  for  tax  purposes.  If,  however,  an  inventory 
[method  of  accounting]  is  used,  the  cost  price  of  the  article  sold  must  not  be 
taken  as  an  additional  deduction  in  the  return  of  income,  as  such  cost 
price  will  be  reflected  in  the  inventory.  As  herein  used  the  term  “farm” 
embraces  the  farm  in  the  ordinarily  accepted  sense,  and  includes  stock. 


INC. 


318  TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


dairy,  poultry,  fruit  and  truck  farms,  also  plantations,  ranches  and  all 
land  used  for  farming  operations.  All  individuals,  partnerships  or  cor- 
porations that  cultivate,  operate  or  manage  farms  for  gain  or  profit, 
either  as  owners  or  tenants,  are  designated  [as]  farmers.  A person  cul- 
tivating or  operating  a farm  for  recreation  or  pleasure,  the  result  of  which 
is  a continual  loss  from  year  to  year,  is  not  regarded  as  a farmer.  See 
further  articles  110,  145  and  171. 

2846  Art.  39  [Art.  36].  Sale  of  Stock  and  Rights. — When  shares  of  stock 
in  a corporation  are  sold  from  lots  purchased  at  different  times  and  at 

different  prices  and  the  identity  of  the  lots  can  not  be  determined,  the  stock 
sold  shall  be  charged  against  the  earliest  purchases  of  such  stock.  The  excess 
of  the  amount  realized  on  the  sale  over  the  cost  of  the  stock,  or  its  fair 
market  value  as  of  March  1,  1913,  if  purchased  before  that  date,  will  be 
the  profit  to  be  accounted  for  as  income.  In  the  case  of  stock  received  as 
a stock  dividend,  whether  or  not  paid  out  of  earnings  or  profits  accrued 
since  February  28,  1913,  and  in  the  case  of  stock  in  respect  of  which  any 
such  dividend  was  paid,  the  cost  of  each  share  of  such  stock  shall  be  ascer- 
tained as  specified  in  article  1547.  Where  common  stock  is  received  as  a 
bonus  with  the  purchase  of  preferred  stock  or  bonds,  the  total  purchase 
price  shall  be  fairly  apportioned  between  the  stock  and  securities  purchased 
for  the  purpose  of  determining  the  portion  of  the  consideration  attributable 
to  each  class  of  stock  or  securities  and  so  representing  its  cost,  but  if  that 
should  be  impracticable  in  any  case,  no  profit  on  any  subsequent  sale  of  any 
part  of  the  stock  or  securities  will  be  realized  until  out  of  the  proceeds  of 
sales  shall  have  been  recovered  the  total  cost.  See  article  1565.  The  entire 
amount  realized  from  the  sale  of  rights  to  subscribe  for  stock  is  income. 

2847  Art.  40  [Art.  37].  Sale  of  Patents  and  Copyrights. — A taxpayer 
disposing  of  patents  or  copyrights  by  sale  should  determine  the 

profit  or  loss  arising  therefrom  by  computing  the  difference  between  the  selling 
price  and  the  value  as  of  March  1,  1913,  if  acquired  prior  to  that  date,  or  be- 
tween the  selling  price  and  the  cost,  if  acquired  subsequently  to  that  date. 
The  profit  or  loss  thus  ascertained  should  be  increased  or  decreased,  as  the  case 
may  be,  by  the  amounts  deducted  on  account  of  depreciation  of  such 
patents  or  copyrights  since  February  28,  1913,  or  since  the  date  of  acquisition 
[purchase]  if  [acquired]  subsequently  thereto  [to  that  date].  See  article  167. 

2848  Art.  41  [Art.  38].  Sale  of  Good  Will  [and  Trademarks].— Any 
profit  or  loss  resulting  from  an  investment  in  good  will  can  be  taken 

only  when  the  business,  or  a part  of  it,  to  which  the  good  will  attaches  is  sold, 
in  which  case  the  profit  or  loss  will  be  determined  upon  the  basis  of  the  cost  of 
the  assets,  including  good  will,  or  their  fair  market  value  as  of  March  1,  1913, 
if  acquired  prior  thereto.  If  nothing  was  paid  for  good  will  acquired  after 
February  28,  1913,  no  deductible  loss  is  possible,  although,  on  the  other 
hand,  upon  the  sale  of  the  business  there  may  be  a profit.  It  is  immaterial 
that  good  will  may  never  have  been  carried  on  the  books  as  an  asset,  but 
the  burden  of  proof  is  on  the  taxpayer  to  establish  the  cost  or  fair  market 
value  on  March  1,  1913,  of  the  good  will  sold. 

2849  Art.  42  [Art.  39].  Sale  of  Personal  Property  on  [the]  Installment 
Plan. — Dealers  in  personal  property'ordinarily  sell  either  for  cash, 

or  on  the  personal  credit  of  the  buyer,  or  on  the  Installment  plan.  Occasionally 
a fourth  type  of  sale  is  met  with,  in  which  the  buyer  makes  an  initial 
payment  of  such  a substantial  nature  (for  example,  a payment  of  more 


INC. 


319  TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


than  25  per  cent)  that  the  sale,  though  involving  deferred  payments,  is 
not  one  on  the  installment  plan.  In  sales  on  personal  credit,  and  in  the 
substantial  payment  type  just  mentioned,  obligations  of  purchasers  are 
to  be  regarded  as  the  equivalent  of  cash,  but  a different  rule  applies  to 
sales  on  the  installment  plan.  Dealers  in  personal  property  who  sell  on  the 
installment  plan  usually  adopt  one  of  four  ways  of  protecting  themselves 
in  case  of  default:  {a)  through  an  agreement  that  title  is  to  remain  in  the 
seller  until  the  buyer  has  completely  performed  his  part  of  the  transaction; 
{b)  by  a form  of  contract  in  which  title  is  conveyed  to  the  purchaser  im- 
mediately, but  subject  to  a lien  for  the  unpaid  portion  of  the  purchase 
price;  (c)  by  a present  transfer  of  title  to  the  purchaser,  who  at  the  same 
time  executes  a reconveyance  in  the  form  of  a chattel  mortgage  to  the  seller; 
or  {d)  by  conveyance  to  a trustee  pending  performance  of  the  contract  and 
subject  to  its  provisions.  The  general  purpose  and  effect  being  the  same  in 
all  of  these  plans,  it  is  desirable  that  a uniformly  applicable  rule  be  estab- 
lished. The  rule  prescribed  is  that  in  the  sale  or  contract  for  sale  of  personal 
property  on  the  installment  plan,  whether  or  not  title  remains  in  the  vendor 
until  the  property  is  fully  paid  for,  the  income  to  be  returned  by  the  vendor 
will  be  that  proportion  of  each  installment  payment  which  the  gross  profit 
to  be  realized  when  the  property  is  paid  for  bears  to  the  gross  contract 
price.  Such  income  may  he  ascertained  by  taking  that  proportion  of  the  total  pay- 
ments received  in  the  taxable  year  from  installment  sales  {always  including  pay- 
ments received  in  the  taxable  year  on  account  of  sales  effected  in  earlier  years  as  well 
as  those  effected  in  the  taxable  year)  which  the  gross  profit  to  he  realized  on  the 
total  installment  sales  made  during  the  taxable  year  bears  to  the  gross  contract 
price  of  all  such  sales  made  during  the  taxable  year.  Where  a change  is  made 
to  this  method  of  computing  net  income  the  taxpayer's  balance  sheet  should  he 
adjusted  conformably  as  of  the  date  when  the  change  is  effected.  If  for  any  reason 
the  vendee  defaults  in  his  installment  payments  and  the  vendor  repossesses 
the  property,  the  entire  amount  received  on  installment  payments,  less  the 
profit  already  returned,  will  be  income  of  the  vendor  for  the  year  in  which  the 
property  was  repossessed,  and  the  property  repossessed  must  he  included  in  the 
inventory  at  its  original  cost  to  himself^  less  proper  allowance  for  damage  and 
use,  if  any.  If  the  vendor  chooses  as  a matter  of  consistent  practice  to  treat 
the  obligations  of  purchasers  as  the  equivalent  of  cash,  such  a course  is  per- 
missible. 

2850  Art.  43  [Art.  40].  Sale  of  Real  Estate  in  Lots.— Where  a tract  of 

land  is  purchased  with  a view  to  dividing  it  into  lots  or  parcels  of 

ground  to  be  sold  as  such,  the  entire market  value  as  ofMarch  1,  1913,  or 
the  cost,  if  acquired  subsequently  to  that  date,  shall  be  equitably  apportioned 
to  the  several  lots  or  parcels  and  made  a matter  of  record  in  the  books  of  the 
taxpayer,  to  the  end  that  any  gain  derived  from  the  sale  of  any  such  lots  or  ' 
parcels  may  be  returned  as  incomie  for  the  year  in  which  the  sale  was  made. 
This  rule  contemplates  that  there  will  be  a measure  of  gain  or  loss  in  every 
lot  or  parcel  sold,  and  [does]  not  [contemplate]  that  the  capital  invested  in  the 
entire  tract  shall  be  extinguished  before  any  taxable  income  shall  be  returned. 
The  sale  of  each  lot  or  parcel  will  be  treated  as  a separate  transaction  and 
the  gain  or  loss  will  be  accounted  for  accordingly. 

285 1 Art.  44  [Art.  41  ].  Sale  of  Real  Estate  Involving  Deferred  Payments. 

— Deferred  payment  sales  of  real  estate  ordinarily  fall  into  two 

classes  when  considered  with  respect  to  the  terms  of  sale,  as  follows: 

(1)  Installment  transactions,  in  which  the  initial  payment  is 

2852  relatively  small  (generally  less  than  one-fourth  of  the  purchase 

INC.  320  TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


price)  and  the  deferred  payments  usually  numerous  and  of  small 
amount.  They  include  (a)  sales  where  there  is  immediate  transfer  of  title 
when  a small  initial  payment  is  made,  the  seller  being  protected  by  a 
mortgage  or  other  lien  as  to  deferred  payments,  and  (b)  agreements  of 
purchase  and  sale  which  contemplate  that  a conveyance  is  not  to  be  made 
at  the  outset,  but  only  after  all  or  a substantial  portion  of  the  agreed  in- 
stallments have  been  paid. 

(2)  Deferred  payment  sales  not  on  the  installment  plan,  in  which 

2853  there  is  a substantial  initial  payment  (ordinarily  not  less  than  one- 
fourth  of  the  purchase  price),  deferred  payments  being  secured  by 

a'^mortgage  or  other  lien.  Such  sales  are  distinguished  from  sales  on  the 
installment  plan  by  the  substantial  character  of  the  initial  payment  and 
also  usually  by  a relatively  small  number  of  deferred  payments. 

In  determining  how  these  classes  shall  be  treated  in  levying  the 

2854  income  tax,  the  question  in  each  case  is  whether  the  income  to  be 
reported  for  taxation  shall  be  based  only  on  amounts  actually 

received  in  a taxing  year,  or  on  the  entire  consideration  made  up  in  part  of 
agreements  to  pay  in  the  future. 

2855  Art.  45  [Art.  42].  Sale  of  Real  Estate  on  Installment  Plan. — In  the 

two  kinds  of  transactions  included  in  class  (1)  in  the  foregoing 
article,  installment  obligations  assumed  by  the  buyer  are  not  ordinarily  to  be 
regarded  as  the  equivalent  of  cash,  and  the  vendor  may  report  as  his  income 
from  such  transactions  in  any  year  that  proportion  of  each  payment  actually 
received  in  that  year  which  the  gross  profit  to  be  realized  when  the  property 
is  paid  for  bears  to  the  gross  contract  price.  If  the  return  is  made  on  this 
basis  and  the  vendor  repossesses  the  property  after  default  by  the  buyer, 
retaining  the  previous  payments,  the  entire  amount  of  such  payments, 
less  the  profit  previously  returned,  will  be  income  to  the  vendor  and  will 
be  so  returned  for  the  year  in  which  the  property  was  repossessed,  and  the 
property  repossessed  must  be  included  in  the  inventory  at  its  original  cost  to 
himself  {less  any  -depreciation  as  defined  in  articles  161  and  162).  If  the  tax- 
payer chooses  as  a matter  of  settled  practice  consistently  followed  to  treat 
the  obligations  of  the  purchaser  as  equivalent  to  cash  and  to  report  the  profit 
derived  from  the  entire  consideration,  cash  and  deferred  payments,  as  income 
for  the  year  when  the  sale  is  made,  this  is  permissible.  If  so  treated  the  rule 
prescribed  in  article  46  will  apply. 

2856  Art.  46  [Art.  43].  Deferred  Pa3anent  Sales  of  Real  Estate  not  on 
Installment  Plan. — In  class  (2)  in  the  next  to  the  last  article  the 

obligations  assumed  by  the  buyer  are  much  better  secured  because  of  the 
margin  afforded  by  the  substantial  first  payment,  and  experience  shows  that 
the  greater  number  of  such  sales  are  eventually  carried  out  according  to 
their  terms.  These  obligations  for  deferred  payments  are  therefore  to  be 
regarded  as  equivalent  to  cash,  and  the  profit  indicated  by  the  entire  con- 
sideration is  taxable  income  for  the  year  in  which  the  initial  payment  was 
made  and  the  obligations  assumed.  If  the  buyer  defaults  and  the  seller 
regains  title  to  the  land  by  agreement  or  process  of  law,  retaining  payments 
previously  made,  he  may  deduct  from  his  gross  income  as  a loss  in  the  year  of 
repossession  any  excess  of  the  amount  previously  reported  as  income  over  the 
amount  actually  received^  and  must  include  such  real  estate  in  his  inventory  at  its 
original  cost  to  himself  {less  any  depreciation  as  defined  in  articles  161  and  162) 
[such  proportion  of  the  defaulted  payments  as  was  previously  returned  as 
income,  provided  that  so  much  of  the  selling  price  previously  received  as 
has  not  been  reported  as  income  is  accounted  for  in  the  inventory  of  the 
property  by  deduction  from  the  original  cost].  See  article  153. 

321 


INC. 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


2857  Art.  47  [Art.  44].  Annuities  and  Insurance  Policies.— Annuities 
paid  by  religious,  charitable  and  educational  corporations  under  an 

annuity  contract  are  subject  to  tax  to  the  extent  that  the  aggregate  amount 
of  the  payments  to  the  annuitant  exceeds  any  amounts  paid  by  him  as 
consideration  for  the  contract.  An  annuity  charged  upon  devised  land  is 
income  taxable  to  the  annuitant,  whether  paid  by  the  devisee  out  of  the 
rents  of  the  land  or  from  other  sources.  The  devisee  is  not  required  to 
return  as  taxable  income  the  amount  of  rent  paid  to  the  annuitant,  and  he 
is  not  entitled  to  deduct  from  his  taxable  income  any  sums  paid  to  the 
annuitant.  Where  an  insured  receives  under  life  insurance,  endowment  or 
annuity  contracts  sums  in  excess  of  the  premiums  paid  therefor,  such  excess 
is  income  for  the  year  of  its  receipt.  See  article  72.  Distributions  on  paid-up 
policies  which  are  made  out  of  earnings  of  the  insurance  company  subject 
to  tax  are  in  the  nature  of  corporate  dividends  and  are  income  of  an  indi- 
vidual only  for  the  purpose  of  the  surtax. 

2858  Art.  48  [Art.  45].  Rent  and  Royalties. — When  improvements  made 
by  a lessee  become  part  of  the  real  estate,  the  value  of  such  improve- 
ments upon  the  expiration  [termination]  of  the  existing  term  of  the  lease  is 
income  to  the  lessor.  In  general,  sums  paid  by  a tenant  for  the  use  of  property, 
although  to  another  than  the  landlord,  are  properly  to  be  regarded  as  rent 
and  constitute  income  of  the  landlord.  See  further  article  109.  Royalties  on 
patents  are  income. 

2859  [Art.  46.  Allocation  of  Income  from  Judgments.— Art.  52, 
1[2862^/or  content  of  this  article  and  paragraph  as  originally  printed.] 

2860  Art.  49  [Art.  47].  Ccmpensaticn  for  Less.— In  the  case  of  property 
which  has  been  lost  or  destroyed  in  whole  or  in  part  through  fire, 

storm,  shipwreck  or  other  casualty,  or  where  the  owner  of  property  has 
lost  or  transferred  title  by  reason  of  the  exercise  of  the  power  of  requisition 
or  eminent  domain,  including  cases  where  a voluntary  transfer  or  convey- 
ance is  induced  by  reason  of  the  fact  that  a technical  requisition  or  condem- 
nation proceeding  is  imminent,  the  amount  received  by  the  owner  as  com- 
pensation for  the  property  may  show  an  excess  over  the  value  of  the  property 
on  March  1,  1913,  or  over  its  cost,  if  it  was  acquired  after  that  date  (after 
making  proper  provision  in  either  case  for  depreciation  to  the  date  of  the 
loss,  damage  or  transfer).  The  transaction  is  not  regarded  as  completed 
at  this  stage,  however,  if  the  taxpayer  proceeds  immediately  in  good  faith 
to  replace  the  property,  or  if  he  makes  application  to  establish  a replacement 
fund  as  provided  in  the  following  article.  In  such  a case  the  gain,  if  any, 
is  measured  by  the  excess  of  the  amount  received  over  the  amount^actually 
and  reasonably  expended  to  replace  or  restore  the  property  substantially 
in  kind,  exclusive  of  any  expenditures  for  additions  or  betterments.  The 
new  or  restored  property  effects  a replacement  in  kind  only  to  the  extent 
that  it  serves  the  same  purpose  as  the  property  which  it  replaces  without 
added  capacity  or  other  element  of  additional  value.  Such  new  or  restored 
property  shall  not  be  valued  in  the  accounts  of  the  taxpayer  at  an  amount 
in  excess  of  the  cost  or  value  at  March  1,  1913,  if  acquired  before  that  date 
(after  making  proper  provision  in  either  case  for  depreciation  to  the  date 
of  the  loss,  damage  or  transfer),  of  the  original  property,  plus  the  cost  of 
any  actual  additions  and  betterments.  If  the  taxpayer  does  not  elect  to 
replace  or  restore  the  property,  the  transaction  will  then  be  deemed  to  be 
completed  and  the  income  shall  be  measured  by  the  excess  of  the  amount 
of  the  compensation  received  over  the  cost  of  the  property  or  its  actual 


INC. 


322 


TAX 


value  at  March  1,  1913,  if  acquired  before  that  date  (after  making  proper 
provision  in  either  case  for  depreciation  to  the  date  of  the  loss,  damage 

or  transfer).  See  article  141.  Articles  49  and  50  have  no  application  to 
property  which  is  voluntarily  sold  or  disposed  of. 

2861  Art.  50  [Art.  48].  Replacement  Fund  for  Loss. — In  any  case  in 
1840  which  the  taxpayer  elects  to  replace  or  restore  the  lost,  damaged 

or  transferred  property,  but  where  it  is  not  practicable  to  do  so 
immediately,  he  may  obtain  permission  to  establish  a replacement  fund  in  his 
accounts  in  which  the  entire  amount  of  the  compensation  so  received  shall 
be  held,  without  deduction  for  the  payment  of  any  mortgage,  and  pending 
the  disposition  thereof  the  accounting  for  gain  or  loss  thereupon  may  be 
deferred  for  a reasonable  period  of  time,  to  be  determined  by  the  Com- 
missioner. [The  following  is  a part  of  this  paragraph  in  this  revised  edition.\ 

2862  [Art.  49.  Application  for  Replacement  Fund. — ] In  such  a case 
[specified  in  the  preceding  article]  the  taxpayer  should  make  appli- 
cation to  the  Commissioner  on  form  1114  for  permission  to  establish  such  a 
replacement  fund  and  in  his  application  should  recite  all  the  facts  relating  to 
the  transaction  and  undertake  that  he  will  proceed  as  expeditiously  as  possible 
to  replace  or  restore  such  property.  The  taxpayer  will  be  required  to 
furnish  a bond  with  such  [security  or]  surety  as  the  Commissioner  may  require 
for  an  amount  not  less  than  the  estimated  additional  income  and  war  profits 
and  excess  profits  [and  income]  taxes  assessable  by  the  United  States  upon 
the  income  so  carried  to  the  replacement  fund  [or  at  the  option  of  the  tax- 
payer and  in  lieu  of  such  bond  the  taxpayer  may  deposit,  as  security  for  such 
estimated  additional  amount  of  tax,  obligations  of  the  United  States  issued 
after  September  1,  1917,  such  obligations  to  be  held  in  trust  as  such  security 
under  such  agreement  as  may  be  prescribed  by  the  Commissioner  in  a bank 
or  trust  company  approved  by  him].  See  section  1320  of  the  statute.  The 
estimated  additional  [incom.e  and  excess  profits]  taxes,  for  the  amount  of 
which  the  claimant  is  required  to  furnish  security,  should  be  computed  at  the 
rates  at  which  the  claimant  would  have  been  obliged  to  pay,  taking  into  con- 
sideration the  remainder  of  his  net  income  and  resolving  against  him  all 
matters  in  dispute  affecting  the  amount  of  the  tax.  Onlv  surety  companies 
holding  certificates  of  authority  from  the  Secretary  of  the  Treasury  as  accep- 
table sureties  on  federal  bonds  will  be  approved  as  sureties  [under  schedule 
B of  form  1114,  and  onlv  active  depositaries  of  public  moneys  will  be  ap- 
proved as  depositaries  under  schedule  C].  The  application  should  be  executed 
in  triplicate,  so  that  the  Commissioner,  the  applicant  and  the  surety  or 
depositary  may  each  have  a copy. 

2862a  Art.  51.  Forgiveness  of  Indebtedness.— 7V/<?  cancellation  and  for- 
giveness of  indebtedness  is  dependent  on  the  circumstances  for  its  effect, 
1 1 may  amount  to  a payment  of  income  or  to  a gift  or  to  a capital  transaction. 

example,  an  individual  performs  services  for  a credAtor.,  who  in  consider- 
ation thereof  cancels  the  debt.,  income  to  that  amount  is  realized  by  the  debtor  as 
compensation  for  his  services.  If,  however,  a creditor  merely  desires  to  benefit  a 
debtor  and  zuithout  any  consideration  therefor  cancels  the  debt,  the  amount  of  the 
debt  is  a gift  from  the  creditor  to  the  debtor  and  need  not  be  included  in  the  latteTs 
gross  income.  If  a stockholder  in  a corporation  which  is  indebted  to  him  gratu- 
itously forgives  the  debt,  the  transaction  amounts  to  a contribution  to  the  capital 
of  the  corporation.  If,  however,  a corporation  to  which  a stockholder  is  in- 
debted forgives  the  debt,  the  transaction  has  the  effect  of  the  payment  of  a dividend. 
See  sections  213  {b)  (3)  and  240  of  the  statute  and  articles  543  and  631-638. 

323  TAX 


INC. 


Reg.[45.1Rev.  See  Note  on  page  301. 


2862b  Art.  52.  When  Included  in  Gross  Income.— profits  and 
income  are  to  be  included  in  the  gross  income  for  the  taxable  year  in 
which  they  are  received  by  the  taxpayer ^ unless  they  are  included  when  they 
accrue  to  him  in  accordance  with  the  approved  method  of  accounting  followed  by 
him.  See  articles  21-24.  Lands  which  are  received  as  compensation  for 
services  in  one  year,  the  title  to  which  is  disputed  and  in  a later  year  adjudged 
to  be  valid,  constitute  income  to  the  grantee  in  the  former  year.  [Money  paid 
by  a debtor  to  a receiver,  pending  determination  as  to  which  of  two  or  more 
claimants  other  than  the  debtor  is  entitled  to  it,  is  to  be  treated  as  income 
of  the  successfuPclaimant  in  the  year  when  paid  to  the  receiver.]  On  the 
other^hand,  a person  may  sue  in  one  year  on  a pecuniary  claim  or  for  property, 
but  money  or  property  recovered  on  a judgment  therefor  rendered  in  a later 
year  would  be  income  in  that  year,  assuming  that  it  would  have  been  income 
in  the  earlier  year  if  then  received.  This  is  true  of  a recovery  for  patent  infringe- 
ment.  [In  general,  a judgment  for  the  plantiff  may  produce  income  for  the 
year  when  rendered;  a judgment  for  the  defendant  usually  does  not.]  Bad 
debts  or  accounts  charged  off  because  of  the  fact  that  they  were  determined 
to  be  worthless,  which  are  subsequently  recovered,  whether  or  not  by  suit,  con- 
stitute income  for  the  year  in  which  recovered,  regardless  of  the  date  when  the 
amounts  were  charged  off.  See  articles  111  and  151.  In  view  of  the  unusual 
conditions  prevailing  at  the  close  of  the  year  1918,  it  is  recognized  that  many 
items  of  gross  income  such  as  claims  for  compensation  under  cancelled  contracts^ 
together  with  claims  against  contracting  departments  of  the  Government  for 
amortization  and  other  matters,  while  properly  constituting  gross  income  for  the 
taxable  year  1918,  were  undecided  and  not  sufficiently  definite  in  amount  to 
be  reported  in  the  original  return  for  that  year.  In  every  such  case  the  taxpayer 
should  attach  to  his  return  a full  statement  of  such  pending  claims  and  other  matters, 
and  when  the  correct  amount  of  such  items  is  ascertained  an  amended  return 
for  the  taxable  year  1918  should  be  filed. 

2862C  Art.  53.  Income  Not  Reduced  to  Possession. — Income  which  is 
credited  to  the  account  of  or  set  apart  for  a taxpayer  and  zuhich  may  be 
draivn  upon  by  him  at  any  time  is  subject  to  tax  for  the  year  during  which  so 
credited  or  set  apart,  although  not  then  actually  reduced  to  possession.  To 
constitute  receipt  in  such  a case  the  income  must  he  credited  to  the  taxpayer 
zuithout  any  substantial  limitation  or  restriction  as  to  the  time  or  manner  of 
payment  or  condition  upon  which  payment  is  to  be  made.  A book  entry,  if  made, 
should  indicate  an  absolute  transfer  from  one  account  to  another.  If  the 
income  is  not  credited,  but  is  set  apart,  such  income  must  be  unqualifiedly  subject 
to  the  demand  of  the  taxpayer.  Where  a corporation  contingently  credits  its 
employees  with  bonus  stock,  but  the  stock  is  not  available  to  such  employees  until 
the  termination  of  five  years  of  employment,  the  mere  crediting  on  the  books  of, 
the  corporation  does  not  constitute  receipt.  The  distinction  between  receipt  and 
accrual  must  be  kept  in  mind.  Income  may  accrue  to  the  taxpayer  and  yet  not 
be  subject  to  his  demand  or  capable  of  being  drawn  on  or  against  by  him. 

286 2d  Art.  54.  Examples  of  Constructive  Receipt. — Where  interest  coupons 
have  matured,  but  have  not  been  cashed,  such  interest  payment,  though 
not  collected  when  due  and  payable,  is  nevertheless  available  to  the  taxpayer  and 
should  therefore  be  included  in  his  gross  income  for  the  year  during  which  the 
coupons  matured.  This  is  so  if  the  coupons  are  exchanged  for  other  property 
instead  of  eventually  being  cashed.  Dividends  on  corporate  stock  are  subject  to 
tax  when  set  apart  for  the  stockholder,  although  not  yet  collected  by  him.  See 
section  201  of  the  statute  and  articles  1541-1549.  The  distributive  share  of  the 
profits  of  a partner  in  a partnership  or  of  a stockholder  in  a personal  service 

324  TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page^SOl. 


corporation  is  regarded  as  received.  See  section  218  0/  the  statute  and  articles 
321-335.  Interest  credited  on  savings  banks  deposit,  even  though  the  bank 
nominally  have  a rule,  seldom  or  never  enforced,  that  it  may  require  so  many 
days^  notice  in  advance  of  cashing  depositor's  checks,  is  income  to  the  depositor 
when  credited.  An  amount  credited  to  shareholders  of  a building  and  loan  associa- 
tion, when  such  credit  passes  without  restriction  to  the  shareholder,  has  a taxable 
status  as  income  for  the  year  of  the  credit.  Where  the  amount  of  such  accumula- 
tions does  not  become  available  to  the  shareholder  until  the  maturity  of  a share, 
the  amount  of  any  share  in  excess  of  the  aggregate  amount  paid  in  by  the  share- 
holder '» r income  for  the  year  of  the  maturity  of  the  share. 

GROSS  INCOME  DEFINED : EXCLUSIONS. 

2863  Art.  71.  What  Excluded  from  Gross  Income. — Gross  income  ex- 

94  eludes  the  items  of  income  specifically  exempted  by  the  statute  and 

944  also  certain  other  kinds  of  income  by  statute  or  fundamental  law 
free  from  tax.  Such  tax-free  income  should  not  be  included  in  the 

return  of  income  and  need  not  be  mentioned  in  the  return,  unless  information 
regarding  it  is  specifically  called  for,  as  in  the  case,  for  example,  of  interest  on 
municipal  bonds.  See  article  402.  The  exclusion  of  such  income  should  not  be 
confused  with  the  reduction  of  taxable  income  by  the  application  of  allowable 
deductions.  See  section  212  of  the  statute  and  article  21.  As  to  exclusions  from 
gross  income  by  corporations,  see  section  233  and  article  541.  [For  the  following 
cut  out  here,  see  %2^1Sb:  Compensation  paid  its  officers  and  employees  by  a 
State  or  political  subdivision  thereof,  fees  received  by  notaries  public  com- 
missioned by  States,  and  the  income  of  State  workmen’s  compensation  in- 
surance funds  established  by  State  statutes,  are  not  taxable.  Employees  of 
universities  receiving  salaries  paid  in  part  or  in  whole  from  funds  available 
under  the  Smith-Lever  Act  of  May  8,  1914,  who  are  officers  or  employees  of 
State,  are  not  required  to  return  as  taxable  incomes  the  salaries  so  received. 
For  War- Risk  insurance  see  last  sentence  of  paragraph  2864.] 

2864  Art.  72.  Proceeds  of  Insurance. — {a)  Upon  the  death  of  an  in- 
95  sured  the  proceeds  of  his  life  insurance  policies,  whether  paid  to  his 

945  estate  or  to  individual  beneficiaries,  directly  or  in  trust,  (but  not  if 
paid  to  a corporation  or  partnership)]  are  excluded  from  the  gross 

income  of  the  beneficiary.  See  article  541.  {b)  During  his  life  only  so  much  of 
the  amount  received  by  an  insured  under  life,  endowment  or  annuity  contracts 
ai  represents  a return,  without  interest,  of  premiums  paid  by  him  therefor  is 
excluded  from  his  gross  income.  See  article  47.  (r)  Whether  he  be  alive  or 

dead,  the  amounts  received  by  an  insured  or  his  estate  or  other  beneficiaries 
through  accident  or  health  insurance  or  under  workmen’s  compensation  acts 
as  compensation  for  personal  injuries  or  sickness  are  excluded  from  the  gross 
income  of  the  insured,  his  estate  and  other  beneficiaries.  Any  damages 
recovered  by  suit  or  agreement  on  account  of  such  injuries  or  sickness  are 
similarly  excluded  from  the  gross  income  of  the  individual  injured  or  sick,  if 
living,  or  of  his  estate  or  other  beneficiaries  entitled  to  receive  such  damages, 
if  dead.  further  article  294.  Since  June  25,  1918,  no  assessment”of^any 
.federal  tax  may  be  made  on  any  allotments,  family  allowances,  compensation, 
or  death  or  disability  insurance  payable  under  the  War  Risk  Insurance  Act 
of  September  2,  1917,  as  amended,  even  though  the  benefit  accrued  before 
that  date.  [Any  return  filed  as  the  basis  of  an  assessment  to  be  made  after 
June  25,  1918,  should  not  include  such  benefits  as  part  of  taxable  income.] 


INC. 


325  TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


2864a  Art.  73.  Gifts  and  Bequests. — Money  and  real  or  personal  property 

97  received  as  gifts,  or  received  under  a will  or  under  statutes  of  descent 

961  and  distribution,  are  exempt  from  tax,  although  the  income  therefrom 

derived  from  investment,  sale  or  otherwise  is  not.  See  section  202  of 
the  statute  and  articles  32  and  1562.  An  amount  of  principal  paid  under  a 
marriage  settlement  is  a gift.  Neither  alimony  nor  an  allowance  based  on  a 
separation  agreement  is  taxable  income.  See  article  291. 

2865  Art.  74  [Ajrt.  73].  Interest  Upon  State  Obligations. — Among  income 

98  exempt  from  tax  is  interest  upon  the  obligations  of  a State,  Territory, 

963  or  any  political  subdivision  thereof,  or  the  District  of  Columbia. 

Obligations  issued  for  a public  purpose  by  or  on  behalf  of  the 

State  or  Territory  or  a duly  organized  political  subdivision  acting  by  con- 
stituted authorities  duly  empowered  to  issue  such  obligations  are  the 
obligations  of  a State  or  Territory  or  a political  subdivision  thereof.  The 
term  “political  subdivision’’  denotes  any  division  of  the  State  or  Territory 
made  by  the  proper  authorities  thereof  acting  within  their  constitutional 
powers  for  the  purpose  of  carrying  out  a portion  of  those  functions  of  the 
State  or  Territory  which  by  long  usage  and  the  inherent  necessities  of 
government  have  always  been  regarded  as  public.  Political  subdivisions 
of  a State  or  Territory,  within  the  meaning  of  the  exemption,  include 
special  assessment  districts  so  created,  such  as  road,  water,  sewer,  gas, 
light,  reclamation,  drainage,  irrigation,  levee,  school,  harbor,  port  improve- 
ment, and  similar  districts  and  divisions  of  a State  or  Territory.  The  pur- 
chase by  a State  of  property  subject  to  a mortgage  executed  to  secure  an 
issue  of  bonds  does  not  render  the  bonds  obligations  of  the  State,  and 
[so  that]  the  interest  upon  them  does  not  become  [becomes]  exempt  from  taxa- 
tion, whether  or  not  the  State  assumes  the  payment  of  the  bonds. 

2866  Art.  75  [Art.  74].  Dividends  and  Interest  from  Federal  Land  Bank 

99  and  National  Farm  Loan  Association. — As  section  26  of  the  Federal 

964  Farm  Loan  Act  of  July  17,  1916,  provides  that  every  federal  land 
bank  and  every  national  farm  loan  association,  including  the  capital 

and  reserve  or  surplus  therein  and  the  income  derived  therefrom,  shall  be 
exempt  from  taxation,  except  taxes  upon  real  estate,  and  that  farm  loan 
bonds,  with  the  income  therefrom,  shall  be  exempt  from  taxation,  the 
income  derived  from  dividends  on  stock  of  federal  land  banks  and  national 
farm  loan  associations  and  from  interest  on  such  farm  loan  bonds  is  not  sub- 
ject to  the  income  tax.  See  also  section  231  (13)  of  the  statute. 

2867  Art.  76  [Art.  75].  Dividends  from  Federal  Reserve  Bank.— As 

section  7 of  the  Federal  Reserve  Act  of  December  23,  1913,  provides 
that  federal  reserve  banks,  including  the  capital  stock  and  surplus  therein  and 
the  income  derived  therefrom,  shall  be  exempt  from  taxation,  except  taxes 
upon  real  estate,  such  exemption  attaches  to  and  follows  the  income  derived 
from  dividends  on  stock  of  federal  reserve  banks  in  the  hands  of  the  stock- 
holders, so  that  the  dividends  received  on  the  stock  of  federal  reserve  banks 
are  not  subject  to  the  income  tax.  Dividends  paid  by  member  banks, 
however,  are  treated  like  dividends  of  ordinary  corporations. 

2868  Art.  77  [Art.  76].  Interest  upon  United  States  Obligations.— 

100  Although  interest  upon  the  obligations  of  the  United  States  is  in 

965  general  exempt  from  tax,  in  the  case  of  such  obligations  issued  after 
September  1,  1917,  which  include  Treasury  certificates  of  indebted- 
ness, war  savings  certificates  and  the  liberty  bond  issues  (except  the  first 

326  TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  301. 


liberty  loan  3^  per  cent  bonds)  ^ the  interest  is  exempt  from  tax  [excluded  from 
gross  income]  only  if  and  to  the  extent  provided  in  the  acts  authorizing  the 
issue  thereof,  as  amended  and  supplemented.  [Accordingly,]  Interest  credited 
to  postal  savings  accounts  upon  mioneys  deposited  in  postal  savings  banks  on 
or  before  September  1,  1917,  is  exempt  from  incomie  tax,  while  interest 
credited  upon  deposits  m.ade  subsequently  to  Septemiber  1,  1917,  is  liable  to 
tax.  Interest  on  the  first  liberty  loan  ?>}/2  per  cent  bonds  [of  the  first  liberty 
loan]  is  entirely  exempt  from  tax,  but  that  absolute  exemption  does  not 
extend  to  the  bonds  of  the  first  liberty  loan  converted  [is  lost  if  the  bonds  are  con- 
verted into  bonds  of  later  issues]. 

2869  Art.  78  [Art.  77].  Liberty  Bond  Exemption  from  Normal  Tax  in 

103  1918. — The  Second  Liberty  Bond  Act  of  September  24,  1917, '"‘as 

975  amended  by  the  Third  Liberty  Bond  Act  of  April  4,  1918,  and  by  the 

Fourth  Liberty  Bond  Act  of  July  9,  1918,  provides: 

Sec.  7.  That  none  of  the  bonds  authorized  by  section  one,  nor  of 
the  certificates  authorized  by  section  five,  or  by  section  six,  of  this 
Act,  shall  bear  the  circulation  privilege.  All  such  bonds  and  certifi- 
cates shall  be  exempt,  both  as  to  principal  and  interest  from  all  taxa- 
tion now  or  hereafter  imposed  by  the  United  States,  any  State,  or  any 
of  the  possessions  of  the  United  States,  or  by  any  local  taxing  authority, 
except  (a)  estate  or  inheritance  taxes,  and  (b)  graduated  additional 
income  taxes,  commonly  known  as  surtaxes,  and  excess  profits  and 
war-profits  taxes,  now  or  hereafter  imposed  by  the  United  States,  upon 
the  income  or  profits  of  individuals,  partnerships,  associations,  or 
corporations.  The  interest  on  an  amount  of  such  bonds  and  certifi- 
cates the  principal  of  which  does  not  exceed  in  the  aggregate  $5,000, 
owned  by  any  individual,  partnership,  association,  or  corporation, 
shall  be  exempt  from  the  taxes  provided  for  in  subdivision  (b)  of  this 
section. 

2870  Accordingly.,  in  addition  to  the  interest  on  first  liberty  loan 

bonds,  which  is  entirely  free  from  tax,  all  interest  on  first  liberty  loan 
converted  4 per  cent  bonds,  first  loan  converted  4j^  per  cent  bonds,  first  hberty 
loan  second  converted  4^^  per  cent  bonds,  second  liberty  loan  4 per  cent  bonds, 
second  liberty  loan  converted  43^  per  cent  bonds,  third  liberty  loan  4j^  per  cent 
bonds,  and  fourth  liberty  loan  43^  per  cent  bonds,  together  with  all  interest  on 
United  States  certificates  of  indebtedness  and  war  savings  certificates,  is  exempt 
from  the  normal  tax.  Such  interest  in  excess  of  the  interest  on  not  exceeding 
$5,000  principal  amount  of  such  bonds  and  certificates  may , however,  be  subject 
to  surtax  and  to  the  war  profits  and  excess  profits  tax  and  may  accordingly  require 
to  be  included  in  gross  income.  [Accordingly,  all  interest  on  Liberty  bonds  of 
the  second,  third  and  fourth  issues  is  exempt  from  the  normal  tax.  Such 
interest  may,  however,  be  subject  to  surtax  and  may  require  to  be  included  in 
gross  income.  As  to  any  issue  after  the  fourth,  the  provisions  of  the  act 
authorizing  it  will  govern  its  exemption.] 

2871  Art.  79  [Art.  78].  Liberty  Bond  Exemption  from  Surtax  and  War 

981  Profits  and  Excess  Profits  Tax  in  1918. — Section  7 of  the  Second 

Liberty  Bond  Act  provides  that  the  interest  on  an  aggregate  of  not 
exceeding  $5,000  principal  amount  of  liberty  bonds  of  issues  after  the  first, 
owned  by  any  person,  including  in  such  later  issues  bonds  of  the  first  liberty 
loan  [bonds]  converted.  Treasury  certificates  and  war  savings  certificates 
[owned  by  any  person  at  one  time]  shall  be  exempt  from  surtaxes  and  war 
profits  and  excess  profits  taxes,  as  well  as  the  normal  tax  [all  income  and  war 

327  TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  301. 


excess  profits  taxes].  The  Supplement  to  Second  Liberty  Bond  Act,  approv- 
ed September  24,  1918,  provides: 

That  until  the  expiration  oL’two  years  after  the  date  of  the  termina- 
tion of  the  war  between  the  United|States  and  the  Imperial  German 
Government,  as  fixed  by  proclamation  of  the  President — 

(1)  The  interest  on  an  amount  of  bonds  of  the  Fourth  Liberty  Loan 
the  principal  of  which  does  not  exceed  $30,000  owned  by  any  indi- 
vidual, partnership,  association,  or  corporation,  shall  be  exempt  from 
graduated  additional  income  taxes,  commonly  known  as  surtaxes,  and 
excess-profits  and  war-profits  taxes,  now  or  hereafter  imposed  by  the 
United  States,  upon  the  income  or  profits’ of  individuals,  partnerships, 
associations,  or  corporations; 

(2)  The  interest  received  after  January  1,  1918,  on  an  amount  of 
bonds  of  the  First  Liberty  Loan  Converted,  dated  either  November  15, 
1917,  or  May  9,  1918,  the  Second  Liberty  Loan,  converted  and  uncon- 
verted, and  the  Third  Liberty  Loan,  the  principal  of  which  does  not 
exceed^$45 ,000  inThe  aggregate,  owned  by  any  individual,  partnership, 
association,  or  corporation,  shall  be  exempt  from  such  taxes:  Pro- 
vided, however.  That  no  owner  of  such  bonds  shall  be  entitled  to  such 
exemption  in  respect  to  the  interest  on  an  aggregate  principal  amount 
of  such  bonds  exceeding  one  and  one-half  times  the  principal  amount 
of  bonds  of  the  Fourth  Liberty  Loan  originally  subscribed  for  by  such 
owner  and  still  owned  by  him  at  the  date  of  his  tax  return;  and 

(3)  The  interest  on  an  amount  of  bonds,  the  principal  oLwhich  does 
not  exceed  $30,000,  owned  by  any  individual,  partnership,  association, 
or  corporation,  issued  upon  conversion  of  33^  per  centum  bonds  of  the 
First  Liberty  Loan  in  the  exercise  of  any  privilege  arising  as  a conse- 
quence of  the  issue  of  bonds  of  the  Fourth  Liberty  Loan,  shall  be  ex- 
empt from  such  taxes. 

The  exemptions  provided  in  this  section  shall  be  in  addition  to  the 
exemption  provided  in  section  7 of  the  Second  Liberty  Bond  Act  in  re- 
spect to  the  interest  on  an  amount  of  bonds  and  certificates,  authorized 
by  such  Act  and  amendments  thereto,  the  principal  of  which  does  not 
exceed  in  the  aggregate  $5,000,  and  in  addition  to  all  other  exemptions 
provided  in  the  Second  Liberty  Bond  Act. 

2872  Accordingly^  tne  exemption  from  surtaxes  and  war  profits  and  excess 
profits  taxes  covers^  and  there  may  be  excluded  from  gross  income,  the 
interest  received  on  not  exceeding  $5,000  principal  amount  in  the  aggregate  of 
first  liberty  loan  converted  4 per  cent  bonds,  first  liberty  loan  converted  4J4 
bonds,  first  liberty  loan  second  converted  4}^  P^'^'  bonds,  second  liberty  loan 
4 per  cent  bonds,  second  liberty  loan  converted  434  P^^"  bonds,  third  liberty 
loan  434  P^^  bonds,  fourth  liberty  loan  434  P^^  bonds,  and  treasury 
certificates  and  war  savings  certificates,  apportioned  as  the  taxpayer  may  choose; 
and  in  addition,  until  the  expiration  of  two  years  after  the  termination  of  the 
war,  {a)  the  interest  received  on  not  exceeding  $30,000  principal  amount  of 
fourth  liberty  loan  434  P^^  bonds ; plus  {b)  the  interest  received  on  an  aggre- 
gate principal  amount  of  first  liberty  loan  converted  4 per  cent  bonds,  first  liberty 
loan  converted  434  P^^  cent  bonds  {dated  May  9,  1918),  second  liberty  loan  bonds, 
converted  and  unconverted,  and  third  liberty  loan  434  pe'C  cent  bonds,  not  exceeding 
$45,000  and  not  exceeding  150  per  cent  of  the  principal  amount  of  bonds  of  the 
fourth  liberty  loan  both  originally  subscribed  for  by  the  taxpayer  and  still  owned 
by  him  at  the  date  of  his  return;  plus  (c)  the  interest  received  on  not  exceeding 
$30,000  principal  amount  of  first  liberty  loan  second  converted  434  P^c  cent 

328  TAX 


INC. 


bonds  {dated  October  24,  1918).  [Accordingly , there  may  be  excluded  from 
gross  income  {a)  the  interest  received  on  not  exceeding  $5,000  principal 
amount  of  liberty  bonds  of  any  or  all  issues  after  the  first,  up  to  and  including 
the  fourth;  and,  until  two  years  after  the  war,  {h)  the  interest  received  on 
not  exceeding  $30,000  principal  am.ount  of  liberty  bonds  of  the  fourth  issue; 
plus  {c)  the  interest  received  on  an  aggregate  principal  amount  of  liberty 
bonds  of  the  first  liberty  loan  converted,  the  second  liberty  loan,  converted 
or  unconverted,  and  the  third  liberty  loan,  not  exceeding  $45,000  and  not 
exceeding  150  per  cent  of  the  principal  amount  of  the  bonds  of  the  fourth 
liberty  loan  both  originally  subscribed  for  by  the  taxpayer  and  still  owned 
by  him  at  the  date  of  his  return;  plus  {d)  the  interest  received  on  not  ex- 
ceeding $30,000  principal  amount  of  liberty  bonds  into  which  first  liberty 
bonds  may  have  been  converted  in  the  exercise  of  any  privilege  arising  as^a 
consequence  of  the  issue  of  the  fourth  liberty  bonds.] 

2872a  Art.  80.  Liberty  Bond  Exemption  After  December  31,  1918. — The 
975  Victory  Liberty  Loan  Act  of  March  3,  1919,  provides: 

3169  Sec.  2.  {a)  Thatuntil  the  expiration  of  five  years  after  the  date  of  the  term- 
3297  ination  of  the  war  between  the  U nited  States  and  the  German  Government, 
as  fixed  by  proclamation  of  the  President,  in  addition  to  the  exemptions  provi- 
ded in  section  7 of  the  Second  Liberty  Bond  Act  in  respectto  the  interest  on  an 
amount  of  bonds  and  certificates,  authorized  by  such  Act  and  amendments 
thereto,  the  principal  of  which  does  not  exceed  in  the  aggregate  $5,000,  and  in 
addition  to  all  other  exemptions  provided  in  the  Second  Liberty  Bond  Act 
or  the  Supplement  to  Second  Liberty  Bond  Act,  the  interest  received  on  and 
after  January  1,  1919,  on  an  amount  of  bonds  of  the  First  Liberty  Loan 
converted,  dated  November  15,  1917,  May  9,  1918,  or  October  24,  1918,  the 
Second  Liberty  Loan  converted  and  unconverted,  the  Third  Liberty  Loan, 
and  the  Fourth  Liberty  Loan,  the  principal  of  which  does  not  exceed  $30,000 
in  the  aggregate,  owned  by  any  individual,  partnership,  association,  or 
corporation,  shall  be  exempt  from  graduated  additional  income  taxes, 
commonly  known  as  surtaxes,  and  excess-profits  and  war-profits  taxes,  now 
or  hereafter  imposed  by  the  United  States  upon  the  income  or  profits  of 
individuals,  partnerships,  associations,  or  corporations. 

{b)  In  addition  to  the  exemption  provided  in  subdivision  (a),  and  in 
addition  to  the  other  exemptions  therein  referred  to,  the  interest  received  on 
and  after  January  1,  1919,  on  an  amount  of  the  bonds  therein  specified  the 
principal  of  which  does  not  exceed  $20,000  in  the  aggregate,  owned  by  any 
individual,  partnership,  association,  or  corporation,  shall  be  exempt  from 
the  taxes  therein  specified:  Provided,  That  no  owner  of  such  bonds  shall  be 
entitled  to  such  exemption  in  respect  to  the  interest  on  an  aggregate  principal 
amount  of  such  bonds  exceeding  three  times  the  principal  amount  of  notes 
of  the  Victory  Liberty  Loan  originally  subscribed  for  by  such  owner  and 
still  owned  by  him  at  the  date  of  his  tax  return. 

2872b  Accordingly,  with  respect  to  the  interest  on  liberty  bonds  received  after 
December  2>\,  1918,  the  exemption  from  surtaxes  and  war  profits  and 
excess  profits  taxes  covers,  and  there  may  be  excluded  from  gross  income,  in 
addition  to  the  exemptions  specified  in  articles  77,  78  and  79,  {a)  the  interest 
received  on  and  after  January  1,  1919,  until  the  expiration  of  five  years  after 
the  termination  of  the  war,  on  not  exceeding  $30,000  principal  amount  in  the 
aggregate  of  first  liberty  loan  converted  4 per  cent  bonds,  first  liberty  loan  con- 
verted 43^  per  cent  bonds,  first  liberty  loan  second  converted  434  bonds, 

second  liberty  loan  4 per  cent  bonds,  second  liberty  loan  converted  434 
cent  bonds,  third  liberty  loan  4J4  bonds,  and  fourth  liberty  loan  434 

per  cent  bonds,  apportioned  as  the  taxpayer  may  choose:  and  in  addition  {h) 

329  TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  301. 


the  interest  received  on  and  after  January  1,  1919,  during  the  life  of  the 
notes  of  the  victory  liberty  loan,  on  an  aggregate  principal  amount  of  the  bonds 
described  in  subdivision  {a)  not  exceeding  $20,000  and  not  exceeding  three 
times  the  principal  amount  of  notes  of  the  victory  liberty  loan  originally 
subscribed  for  by  the  taxpayer  and  still  owned  by  him  at  the  date  of  his  return. 

The  specific  exemptions  of  notes  of  the  victory  liberty  loan  will  be  prescribed  by 
the  Secretary  of  the  Treasury  pursuant  to  the  Victory  Liberty  Loan  Act.  [See 
lf3297  for  the  exemption  provisions.] 

2873  Art.  81  [Art.  79 j.  Liberty  Bond  Exemption  in  the  Case  of  Trusts. — 

{a)  When  income  is  taxable  to  beneficiaries,  as  in  the  case  of  a trust 

the  income  of  which  is  to  be  distributed  to  the  beneficiaries  periodically, 
each  beneficiary  is  regarded  as  the  owner  of  a proportionate  part  of  the  bonds 
held  in  trust  and  is  entitled  to  exemption  on  account  of  such  ownership  as 
if  he  owned  such  proportionate  part  of  the  bonds  directly.  In  such  a case 
a subscription  by  a trustee  for  bonds  of  the  fourth  liberty  loan  or  notes  of  the 
victory  liberty  loan,  constitutes  each  beneficiary  existing  at  the  tin  e of  such 
subscription  an  original  subscriber  for  his  proportionate  part  of  such  bonds 
or  notes,  as  the  case  may  be,  and  entitles  such  beneficiary  to  the  appropriate 
collateral  exemption  of  interest  on  bonds  of  previous  issues,  whether  owned 
by  such  beneficiary  or  by  the  trustee,  as  if  the  beneficiary  had  himiself  origin- 
ally subscribed  for  such  proportionate  part  of  the  bonds  or  notes;  and  a 
subscription  by  such  beneficiary  for  bonds  of  the  fourth  liberty  loan,  or  notes 
of  the  victory  liberty  loan,  as  the  case  may  be,  entitles  him  to  the  appropriate 
collateral  exemption  of  interest  on  bonds  of  previous  issues  held  by  the 
trustee,  {b)  When,  on  the  other  hand,  income  is  taxable  to  the  trustee,  as  in 
the  case  of  a trust  the  income  of  which  is  accumulated  for  the  benefit  of  unborn 
or  unascertained  persons,  the  trustee  is  regarded  as  the  owner  of  all  the  bonds 
held  in  trust  and  the  trust  is  entitled  to  any  exemption  on  account  of  such 
ownership.  In  such  a case  a subscription  by  a trustee  constitutes  the  trustee 
as  such  the  original  subscriber  and  entitles  the  trust,  on  account  of  such 
subscription,  to  the  collateral  exem.ption  of  interest  on  bonds  of  previous 
issues. 

2874  Art.  82  [Art.  80].  Liberty  Bond  Exemption  In  the  Case  of  Partner- 
ships and  Personal  Service  Corporations.  —As  income  of  a partner- 
ship is  taxable  to  the  individual  partners,  each  partner  is  treated  as  the  owner 

of  a proportionate  part  of  the  bonds  held  by  the  partnership  and  is  entitled  to  i 

exemption  on  account  of  such  ownership  as  if  such  partner  owned  such 
proportionate  part  of  the  bonds  directly.  Such  partner,  if  a partner  at  he 
time  of  the  original  subscription  by  the  partnership  for  bonds  of  the  fourth 
liberty  loan  or  notes  of  the  victory  liberty  loan,  as  the  case  may  be,  is  treated  as  an 
original  subscriber  for  a proportionate  part  of  such  bonds  or  notes  subscribed 
for  by  the  partnership  and  is  entitled  to  the  appropriate  collateral  exemption 
of  interest  on  bonds  of  previous  issues  on  account  of  such  original  subscription 
for  bonds  or  notes  [of  the  fourth  liberty  loan]  as  if  he  had  subscribed  directly  * 

for  such  proportionate  part  [of  the  bonds].  This  principle  also  applies  to 
stockholders  in  personal  service  corporations. 

2875  Art.  83  [Art.  81].  Income  of  Foreign  Governments. — The  exemption 

104  of  income  of  foreign  governments  applies  also  to  their  political  sub^ 

996  divisions.  Any  income  collected  by  foreign  governments  from  in- 
vestments in  the  United  States  in  stocks,  bonds  or  other  domestic  i 

securities,  which  are  not  actually  owned  by  but  are  loaned  to  such  foreign 
governments,  is  subject  to  tax.  The  income  of  foreign  ambassadors  and  min- 

330  TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  301. 


isters  from  investments  in  bonds  and  stocks  and  from  interest  on  bank 
balances,  and  the  fees  of  foreign  consuls,  are  exempt  from  tax  but  income 
of  such  foreign  officials  from  any  business  carried  on  by  them  in  the  United 
States  would  be  taxable.  The  compensation  of  citizens  of  the  United  States 
who  are  officers  or  employees  of  a foreign  government  is,  however,  not  exempt 
from  tax. 

2875a  Art.  84.  Income  of  States. — In  general  income  accruing  to  any 
107  State,  Territory  or  possession  of  the  United  States,  or  to  any  political 

1005  subdivision  thereof,  or  to  the  District  of  Columbia,  is  exempt  from  tax. 

See  article  74.  The  income  of  State  workmen's  compensation  insurance 
funds  established  by  State  statutes  is  not  taxable.  In  the  case  of  a public  utility 
acquired,  constructed,  operated  or  maintained  by  a taxpayer  under  contract  with 
any  State,  Territory,  or  political  subdivision  thereof,  or  with  the  District  of 
Colu?nbia,  containing  an  agreement  that  a portion  of  the  net  earnings  of  such  pub- 
lic utility  shall  be  paid  to  the  State,  Territory,  or  political  subdivision  thereof,  or 
the  District  of  Columbia,  the  amount  so  paid  may  be  deducted  by  the  taxpayer  as  a 
necessary  expense  in  transacting  business.  See  section  214  {a)  (1)  of  the  statute, 

2875b  Art.  85.  Compensation  of  State  Officers. — -Compensation  paid  its 
1013  officers  and  employees  by  a State  or  political  subdivision  thereof,  in- 
cluding fees  received  by  notaries  public  commissioned  by  States  and 
the  commissions  of  receivers  appointed  by  State  courts,  are  not  taxable.  Employees 
of  universities  receiving  salaries  paid  in  part  or  in  whole  from  funds  available 
under  the  Smith-Lever  Act  of  May  8,  1914,  who  are  officers  or  employees  of  a 
State,  are  not  required  to  return  as  taxable  incomes  the  salaries  so  received.  This 
is  also  true  with  respect  to  the  Act  of  August  30,  1890,  relating  to  colleges  for  the 
benefit  of  agriculture  and  the  mechanic  arts,  and  to  the  Act  of  March  2,  1887, 
relating  to  agricultural  experiment  stations  in  such  colleges. 

287 5C  Art.  86.  Compensation  of  Soldiers  and  Sailors. — A person  of  either 
108  sex  in  active  service  in  the  military  or  naval  forces  of  the  United  States 
1006  may  exclude  from  gross  income  his  or  her  compensation  received  from 
the  United  States  up  to  the  amount  of  $3,500  in  any  taxable  year,  except 
that  this  exemption  does  not  apply  to  compensation  received  either  before  or  after 
the  present  war.  The  date  of  the  termination  of  the  war  for  the  purpose  of  the 
statute  will  be  fixed  by  proclamation  of  the  President.  The  military  and  naval 
forces  of  the  United  States  include,  among  others,  army  contract  surgeons  and  the 
individuals  named  in  section  1 of  the  statute.  A person  is  in  active  service  if  he  is 
actually  serving  in  such  forces,  not  necessarily  in  the  field  or  in  the  theatre  of  war, 
and  is  not  merely  on  the  retired  or  reserve  list.  Accordingly,  if  such  a person 
receives  compensation  from  the  United  States  o/ $3,500  or  less  and  has  no  other 
income  of  an  amount  sufficient  in  itself  to  require  him  to  render  a return  of  income, 
he  need  make  no  return.  Members  of  draft  boards  are  not  as  such  entitled  to  this 
exemption. 

2875d  Art.  87.  Income  Accruing  Prior  to  March  1,  Property  held  by 

the  taxpayer  on  March  1,  1913,  is  capital.  Included  in  this  capital 
are  all  claims,  whether  evidenced  by  writing  or  not,  and  all  interest  which  had 
accrued  thereon  before  that  date.  Interest  accruing  on  or  after  that  date  is  taxable 
income.  Where  an  interest-bearing  claim  contracted  prior  to  March  1,  1913,  is 
paid  in  whole  or  in  part  after  that  date,  any  gain  derived  from  the  conversion  of 
the  claim  into  money  is  taxable.  The  amount  of  such  gain  is  the  excess  of  the  pro- 
ceeds of  the  claim  {both  principal  and  interest),  exclusive  of  any  interest  accrued 
since  February  28,  1913,  already  returned  as  income,  over  the  fair  market  value 

331  TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page"301.^ 


of  the  claim  as  of  March  1,  1913  {both  -principal  and  interest  then  accrued).  In 
the  case  of  an  insurance  policy  its  surrender  value  as  of  March  1,  1913,  may  be 
used  as  a basis  for  the  purpose  of  ascertaining  the  gain  derived  from  the  sale  or 
other  disposition  of  such  policy.  Where  services  were  rendered  prior  to  March 
1,  1913,  hut  paid  for  thereafter,  the  amount  received  is  taxable  income  to  the 
extent  of  the  excess  of  such  amount  over  the  fair  market  value  on  March  1,  1913, 
of  the  principal  of  the  claim  and  any  interest  which  had  then  accrued.  A claim 
for  the  purpose  of  this  article  means  a right  existing  unconditionally  on  March 
1,  1913,  and  then  assignable,  whether  presently  payable  or  not.  Interest  does  not, 
of  course,  include  dividends  on  corporate  stock  See  section  201  of  the  statute 
and  articles  1541-1549. 

28756  Art.  88.  Subtraction  for  Redemption  of  Trading  Stamps. — Where  a 
2021  taxpayer,  for  the  purpose  of  promoting  his  business,  issues  with  sales 
trading  stamps  or  premium  coupons  redeemable  in  merchandise  or  cash, 
he  should  in  computing  the  income  from  such  sales  subtract  only  the  amount  received 
or  receivable  which  will  be  required  for  the  redemption  of  such  part  of  the  total 
issue  of  trading  stamps  or  premium  coupons  issued  during  the  taxable  year  as 
will  eventually  be  presented  for  redemption.  This  amount  will  be  determined  in 
the  light  of  the  experience  of  the  taxpayer  in  his  particular  business  and  of  other 
users  engaged  in  similar  businesses.  The  taxpayer  shall  file  for  each  of  the  five 
preceding  years,  or  such  number  of  these  years  as  stamps  or  coupons  have  been 
issued  by  him,  a statement  showing  {a)  the  total  issue  of  stamps  during  each  year, 
{b)  the  total  stamps  redeemed  in  each  year,  and  (c)  the  percentage  for  each  year 
of  the  stamps  redeemed  to  the  stamps  issued  in  such  year.  A similar  statement 
shall  also  be  presented  showing  the  experience  of  other  users  of  stamps  or  coupons 
whose  experience  is  relied  upon  by  the  taxpayer  to  determine  the  amount  to  be 
subtracted  from  the  proceeds  of  sales.  The  Commissioner  will  examine  the  basis 
used  in  each  return,  and  in  any  case  in  which  the  amount  subtracted  in  respect  of 
such  stamps  or  coupons  is  found  to  be  excessive  an  amended  return  or  amended 
returns  will  be  required.  [Art.  104,  of  the  preliminary  edition  read  as  follows: 
Where  a taxpayer,  for  the  purpose  of  promoting  his  business,  issues  trading 
stamps  or  coupons  redeemable  in  merchandise  or  cash,  and  sets  up  a reserve 
each  year  to  cover  all  probable  redemptions  of  coupons  issued  in  that  year, 
the  reserve  so  set  up  may  be  deducted  from  gross  income  as  a business  ex- 
pense, provided:  {a)  that  the  returns  of  the  taxpayer  are  otherwise  made  on 
an  accrual  basis;  {b)  that  any  income  tax  and  excess  profits  tax  returns  of 
the  taxpayer  which  have  been  previously  made  covering  the  period  since 
March  1,  1913,  shall  be  amended,  if  necessary,  so  that  deductions  for  any 
of  such  years  are  made  on  the  basis  of  reserves  instead  of  upon  actual 
redemptions  as  formerly  required;  and  (c)  that  no  larger  amount  shall  be 
set  up  as  a reserve  for  any  taxable  year  than  would-be  required  for  the 
redemption  of  such  part  of  the  entire  issue  of  that  year  as  it  appears  will 
eventually  be  presented  for  redemption.  The  reserve  percentage  will  be 
determined  by  considering  the  experience  of  the  taxpayer  and  of  other 
users,  taking  into  account  any  material  differences  between  the  taxpayer’s 
situation  and  that  of  other  users  whose  experience  is  relied  on.  Taxpayers 
who  submit  returns  on  this  basis  shall  file  therewith  any  amended  returns 
called  for  by  this  article  and  shall  also  attach  thereto  a statement  of  the 
experience  of  the  taxpayer  and  of  any  other  user  of  coupons  whose  ex- 
perience is  relied  on  to  determine  the  percentage  of  reserve,  indicating 
the  name  of  such  other  user,  the  denominations  most  largely  issued,  and  the 
character  of  business  involved  in  each  instance.] 


INC. 


332  TAxI 


Reg.  45,  Rev.  See  Note  on  page  301. 


GROSS  INCOME  DEFINED:  NONRESIDENT  ALIEN  INDIVIDUAL. 

2876  Art.  91.  Gross  Income  of  Nonresident  Alien  Individuals.— In 

109  the  case  of  nonresident  alien  individuals  “gross  income”  means 

503  only  the  gross  income  from  sources  within  the  United  States.  This 
includes  [including]  interest  on  bonds,  notes  or  other  interest-bearing 
obligations  of  residents,  corporate  or  otherwise,  dividends  from  resident  cor- 
porations, amounts  received  representing  profits  on  the  manufacture  or  dis- 
position of  goods  within  the  United  States,  rentals  and  royalties  from  property 
and  income  from  business  carried  on  in  the  United  States,  [income  from 
isolated  transactions  or  activities,  directly  resulting  in  gain,  carried  on 
within  the  United  States  by  a nonresident  or  his  representative  in  person,] 
interest  on  deposits  in  banks  located  within  the  United  States,  income  from 
capital  otherwise  invested  in  the  United  States,  and  income  from  services 
rendered  or  labor  performed  within  the  United  States.  For  what  is  a resident 
corporation  see  article  1509.  As  to  the  gross  income  of  foreign  corporations  see 
section  233  {b)  of  the  statute  and  article  550. 

2877  Art.  92.  Income  of  Nonresident  Alien  Individuals  not  Subject  to 
Tax. — Salaries,  wages,  commissions  and  rents  paid  by  domestic 

business  enterprises  to  nonresident  alien  employees  for  services  rendered 
entirely  in  a foreign  country  or  for  property  located  in  a foreign  country  are 
not  subject  to  tax  as  income  from  a source  within  the  United  States.  Divi- 
dends on  stock  and  interest  on  notes  of  corporations  organized  in  the 
United  States,  but  doing  no  business  and  owning  no  property  therein,  paid 
to  nonresident  alien  individuals  or  corporations,  are  not  subject  to  the  tax. 
The  tax  does  not  apply  to  charter  money  or  freight  payments  received  by  a 
foreign  owner  in  regard  to  [for]  a vessel  operated  between  the  United  States 
and  foreign  ports,  if  the  person  receiving  the  income  maintains  no  regular 
agency  in  the  United  States  a7id  is  not  doing  business  in  the  United  States. 
Compensation  received  by  nonresident  alien  munitions  inspectors  and  pur~ 
chasing  agents  from  foreign  governments  is  not  subjec  to  the  tax  [making  of  the 
charter  contract  grows  out  of  no  solicitation  or  similar  commercial  activity 
by  the  owner  or  his  representative  in  person  within  the  United  States]. 

287  7a  Art.  93 . Income  of  N onresident  Aliens  from  United  States  Bonds. — 

3180  By  virtue  of  section  4 of  the  Victory  Liberty  Loan  Act  of  March  3,  1919, 
amending  section  3 of  the  Fourth  Liberty  Bond  Act  of  July  9,  1918, 
the  interest  received  on  and  after  March  3,  1919,  on  bonds ^ notes  and  certificates 
of  indebtedness  of  the  United  States  and  bonds  of  the  War  Finance  Corporation^ 
while  beneficially  owned  by  a nonresident  alien  individual,  or  a foreign  corpor- 
ation, partnership  or  association,  not  engaged  in  business  in  the  United  States, 
is  exempt  from  all  income  and  war  profits  and  excess  profits  taxes. 

DEDUCTIONS  ALLOWED : BUSINESS  EXPENSES. 

2878  Art.  101.  Business  Expenses. — Business  expenses,  whether  sub- 
113  tracted  from  total  receipts  in  computing  gross  income  or  deducted  from 

1020  gross  income  in  computing  net  income,  include  all  items  entering  into 
what  is  ordinarily  known  as  the  cost  of  goods  sold,  together  with 
selling  and  management  expenses,  except  such  classes  of  items  as  are  treated 
in  articles  121  to  268.  Among  the  Items  to  be  treated  as  business  expenses 
are  material,  labor,  supplies  and  repairs  in  the  case  of  a manufacturer,  while  a 
merchant  would  include  his  purchases  of  goods  bought  for  resale.  In  either 
case  the  amount  to  be  taken  as  a deduction  in  any  year  should  be  determined 

333  TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  301. 


by  taking  into  consideration  the  inventory  at  the  beginning  and  end  of  the 
year.  Other  items  that  may  be  included  as  business  expenses  are  reasonable 
compensation  for  the  services  of  officers  and  employees,  advertising  and  other 
selling  expenses,  together  with  insurance  premiums  against  fire,  storm,  theft,  ( 

accident  or  other  similar  losses  in  the  case  of  a business,  and  rental  for  the  use 
of  business  property.  A taxpayer  is  entitled  to  deduct  the  necessary  expenses 
paid  in  carrying  on  his  business  from  his  gross  income  from  whatever  source. 

See  section  215  of  the  statute  and  articles  291-294.  As  to  deductions  by  corpo- 
rations see  section  234  and  articles  561-573. 

2879  Art.  102.  Cost  of  Materials. — Taxpayers  carrying  materials  and  ^ 

supplies  on  hand  should  include  in  expenses  the  charges  for  materials 

and  supplies  only  to  the  amount  that  they  are  actually  consumed  and  used 
in  operation  during  the  year  for  which  the  return  is  made,  provided  that  the 
cost  of  such  material  and  supplies  has  not  been  taken  into  account  in  de- 
termining the  net  income  for  any  previous  year.  If  a taxpayer  carries 
materials  or  supplies  on  hand  for  which  no  record  of  consumption  is  kept  or 
of  which  physical  inventories  at  the  beginning  and  end  of  the  year  are  not  , 

taken,  it  will  be  permissible  for  the  taxpayer  to  include  in  his  expenses  and 
deduct  from  gross  income  the  total  cost  of  such  supplies  and  materials  as 
were  purchased  during  the  year  for  which  the  return  is  made,  provided 
the  net  income  is  clearly  reflected  by  this  method. 

2880  Art.  103.  Repairs. — The  cost  of  incidental  repairs  which  neither 
materially  add  to  the  value  of  the  property  nor  appreciably  prolong 

its  life,  but  keep  it  in  an  ordinarily  efficient  operating  condition,  may  be 
deducted  as  expense,  provided  the  plant  or  property  account  is  not  in- 
creased by  the  amount  of  such  expenditures.  Repairs  in  the  nature  of  re- 
placements, to  the  extent  that  they  arrest  deterioration  and  appreciably 
prolong  the  life  of  the  property,  should  be  charged  against  the  depreciation 
reserve.  See  articles  161-171 . 

2881  [Art.  104.  Reserve  for  Redemption  of  Trading  Stamps. — See 
1f2875e.] 

2881a  Art.  104.  Professional  Expenses. — A professional  man  may  claim  as 
1031  deductions  the  cost  of  supplies  used  by  him  in  the  practice  of  his  pro- 
2965  fession,  expenses  paid  in  the  operation  and  repair  of  an  automobile 
used  in  making  professional  calls,  dues  to  professional  societies  and  subscriptions 
to  prof essional  journals,  the  rent  paid  for  office  rooms,  the  expense  of  the  fuel,  lights 
water,  telephone,  etc.,  used  in  such  offices,  and  the  hire  of  office  assistants. 

Amounts  expended  for  books,  furniture  and  professional  instruments  and 
equipment  of  a permanent  character  are  not  allowable  as  deductions.  See  section 
215  and  articles  291-294. 

2882  Art.  105.  Compensation  for  Personal  Services. — Among  the  ordi- 
1979  nary  and  necessary  expenses  paid  or  incurred  in  carrying  on  any 

trade  or  business  may  be  included  a reasonable  allowance  for  salaries 
or  other  compensation  for  personal  services  actually  rendered.  The  test 
of  deductibility  in  the  case  of  compensation  payments  is  whether  they 
are  reasonable  and  are  in  fact  payments  purely  for  services.  This  test  and 
its  practical  application  may  be  further  stated  and  illustrated  as  follows: 

2883  (1)  Any  amount  paid  in  the  form  of  compensation,  but  not  in  fact 
as  the  purchase  price  of  services,  is  not  deductible,  {a)  An  osten- 
sible salary  paid  by  a corporation  may  be  a distribution  of  a dividend  on 

334  TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  301. 


Stock.  This  is  likely  to  occur  in  the  case  of  a corporation  having  few 
stockholders,  practically  all  of  whom  draw  salaries.  If  in  such  a case  the 
salaries  are  based  upon  or  bear  a close  relationship  to  the  stockholdings  of 
the  officers  or  employees,  it  would  seem  likely  that  the  salaries,  if  in  excess 
of  those  ordinarily  paid  for  similar  services,  are  not  paid  wholly  for  services 
rendered,  but  in  part  as  a distribution  of  earnings  upon  the  stock,  {b)  An 
ostensible  salary  paid  by  a corporation  may  be  in  part  a waste  or  appropria- 
tion of  assets  of  the  corporation.  This  may  occur  where  salaried  em- 
ployees are  in  control  of  the  corporation  through  holding  directly  or  in- 
directly a majority  of  its  stock  or,  in  the  case  of  a large  corporation  with 
many  stockholders,  owning  a substantial  minority  of  its  stock,  and  the 
tendency  of  the  officers  unduly  to  inflate  their  salaries  must  be  taken  into 
account,  (r)  An  ostensible  salary  may  be  in  part  payment  for  property. 
This  may  occur,  for  example,  where  a partnership  sells  out  to  a corporation, 
the  former  partners  agreeing  to  continue  in  the  service  of  the  corporation. 
In  such  a case  it  may  be  found  that  the  salaries  of  the  former  partners  are 
not  merely  for  services,  but  in  part  constitute  payment  for  the  transfer  of 
their  business. 

(2)  The  form  or  method  of  fixing  compensation  is  not  decisive  as 

2884  to  deductibility.  While  any  form  of  contingent  compensation  in- 
vites scrutiny  as  a possible  distribution  of  earnings  of  the  enter- 
prise, it  does  not  follow  that  payments  on  a contingent  basis  are  to  be 
treated  fundamentally  on  any  basis  different  from  that  applying  to  com- 
pensation at  a flat  rate.  Generally  speaking,  if  contingent  compensation  is 
paid  pursuant  to  a free  bargain  between  the  enterprise  and  the  individual 
made  before  the  services  are  rendered,  not  influenced  by  any  consideration 
on  the  part  of  the  employer  other  than  that  of  securing  on  fair  and  advantage- 
ous terms  the  services  of  the  individual,  it  should  be  allowed  as  a deduction 
even  though  in  the  actual  working  out  of  the  contract  it  may  prove  to  be 
greater  than  the  amount  which  would  ordinarily  be  paid. 

(3)  In  any  event  the  allowance  for  compensation  paid  may  not 

2885  exceed  what  is  reasonable  in  all  the  circumstances.  It  is  in  general 
just  to  assume  that  reasonable  and  true  compensation  is  only  such 

amount  as  would  ordinarily  be  paid  for  like  services  by  like  enterprises  in 
like  circumstances.  The  circumstances  to  be  taken  into  consideration  are 
thosej^existing  at  the  date  when  the  contract  for  services  was  made,  not  those 
existing  at  the  date  when  the  contract  is  questioned.  See  article  32. 

2886  Art.  106.  Treatment  of  Excessive  Compensation.— As  to  the 
treatment  of  amounts  ostensibly  paid  as  compensation,  but  not 

allowed  to  be  deducted  as  such,  the  following  rules  apply: 

(1)  In  the  case  of  excessive  payments  by  corporations,  if  such 

2887  payments  correspond  or  bear  a close  relationship  to  stockholdings, 
the  amount  of  the  excess  should  be  treated  as  dividends  and  would 

thus  be  exempt  from  the  normal  tax  in  the  hands  of  the  recipients;  or  if  such 
payments  represent  an  appropriation  of  assets  of  the  corporation  by  officers 
who  control  it  and  fix  their  compensation  in  violation  of  the  rights  of  the 
corporation,  the  amount  of  the  excess,  while  disallowed  as  a deduction  by 
the  corporation,  should  be  treated  as  compensation  of  the  individuals  sub- 
ject to  the  normal  tax,  compensation  illegally  secured  being  none  the  less 
subject  to  tax  in  all  respects;  or  if  such  payments  constitute  in  part  payment 
for  property,  the  amount  of  the  excess  should  be  treated  by  the  corporation 
as  a capital  expenditure  and  by  the  recipient  as  part  of  the  purchase  price. 

(2)  In  the  case  of  excessive  payments  by  individuals  or  partner- 

2888  ships,  the  amounts  disallowed  should  ordinarily  be  treated  as 
shares  of  the  profits  of  a partnership,  except  that  a payment  for 

335 


INC. 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


property  should  be  treated  by  the  individual  or  partnership  as  a capital 
expenditure  and  by  the  recipient  as  part  of  the  purchase  price. 

2889  Art.  107.  Bonuses  to  Employees. — Gifts  or  bonuses  to  employees 
will  constitute  allowable  deductions  from  gross  income  when  such 

payments  are  made  in  good  faith  and  as  additional  compensation  for  the 
services  actually  rendered  by  the  employees,  provided  such  payments, 
when  added  to  the  stipulated  salaries,  do  not  exceed  a reasonable  compensa- 
tion for  the  services  rendered.  Donations  made  to  employees  and  others, 
which  do  not  have  in  them  the  element  of  compensation  or  are  in  excess  of 
reasonable  compensation  for  services,  are  considered  gratuities  and  are  not 
deductible  from  gross  income. 

2890  Art.  108.  Pensions. — Amounts  paid  for  pensions  to  retired  em- 
ployees or  to  their  families  or  others  dependent  upon  them,  or  on 

account  of  injuries  received  by  employees,  and  lump  sum  amounts  paid  as 
compensation  for  injuries,  are  proper  deductions  as  ordinary  and  necessary 
expenses.  Such  deductions  are  limited  to  the  amount  not  compensated 
for  by  insurance  or  otherwise.  No  deduction  shall  be  made  for  contribu- 
tions to  a pension  fund  held  by  the  corporation,  the  amount  deductible  in 
such  case  being  the  amount  actually  paid  to  the  employee.  When  the 
amount  of  the  salary  of  an  officer  or  employee  is  paid  for  a limited  period 
after  his  death  to  his  widow  or  heirs  in  recognition  of  the  services  rendered 
by  the  individual,  such  payments  may  be  deducted.  Salaries  paid  by  em- 
ployers during  the  continuance  of  the  war  to  employees  who  are  absent  in 
the  military  or  naval  service  or  are  serving  the  Government  in  other  ways 
at  a nominal  compensation,  but  who  intend  to  return  at  the  conclusion  of 
the  war,  are  allowable  deductions. 

2891  Art.  109.  Rentals. — Where  a leasehold  is  acquired  for  a specified 

115  sum,  the  purchaser  may  take  as  a deduction  in  his  return  an  aliquot 

1022  part  of  such  sum  each  year,  based  on  the  number  of  years  the  lease 
has  to  run.  Taxes  paid  by  a tenant  to  or  for  a landlord  for  business 
property  are  additional  rent  and  constitute  a deductible  item  to  the  tenant 
and  taxable  income  to  the  landlord,  the  amount  of  the  tax  being  deductible 
by  the  latter.  The  cost  of  erecting  buildings  or  permanent  improvements 
on  ground  leased  by  a taxpayer  is  additional  rental  and  is  therefore  a proper 
deduction  from  gross  income,  provided  such  buildings  and  improvements 
under  the  terms  of  the  lease  revert  to  the  owner  of  the  ground  at  the  ex- 
piration of  the  lease.  In  such  a case  the  cost  will  be  prorated  according  to 
the  number  of  years  constituting  the  term  of  the  lease.  The  lessee  will  pot 
be  permitted  to  deduct  from  gross  income  any  depreciation  with  respect  to 
such  buildings,  but  the  cost  of  incidental  repairs  necessary  to  keep  them  in 
an  efficient  condition  for  the  purposes  of  their  use  may  be  deducted.  If, 
however,  the  life  of  the  improvement  is  less  than  the  life  of  the  lease,  de- 
preciation may  be  taken  by  the  lessee  instead  of  treating  the  cost  as  rent. 
See  article  48. 

2892  Art.  110.  Expenses  of  Farmers.— A farmer  who  operates  a farm 
890  for  profit  is  entitled  to  deduct  from  gross  income  as  necessary  ex- 
penses all  amounts  actually  expended  in  the  carrying  on  of  the 

business  of  farming.  The  cost  of  ordinary  tools,  of  short  life  or  small  cost, 
such  as  hand  tools,  including  shovels,  rakes,  etc.,  may  be  included.  The 
cost  of  feeding  and  raising  live  stock  may  be  treated  as  an  expense  deduction, 
in  so  far  as  such  cost  represents  actual  outlay,  but  not  including  the  value 

336 


INC. 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


of  farm  produce  grown  upon  the  farm  or  the  labor  of  the  taxpayer.  Where 
a farmer  is  engaged  in  producing  crops  which  take  more  than  a year  from 
the  time  of  planting  to  the  process  of  gathering  and  disposal,  expenses 
deducted  may  be  determined  upon  the  crop  basis,  and  such  deductions  must 
be  taken  in  the  year  in  which  the  gross  income  from  the  crop  has  been 
realized.  If  a farm  is  operated  for  recreation  or  pleasure  and  not  on  a 
commercial  basis,  and  if  the  expenses  incurred  in  connection  with  the  farm 
are  in  excess  of  the  receipts  therefrom,  the  entire  receipts  from  the  sale  of 
products  may  be  ignored  in  rendering  a return  of  income,  and  the  expenses 
incurred,  being  regarded  as  personal  expenses,  will  not  constitute  allowable 
deductions.  The  cost  of  farm  machinery  and  farm  buildings  represents  a 
capital  investment  and  is  not  an  allowable  deduction  as  an  item  of  expense. 
Amounts  expended  in  the  development  of  farms,  orchards  and  ranches 
prior  to  the  time  when  the  productive  state  is  reached  may  be  regarded  as 
[constitute]  investments  of  capital.  The  amount  expended  in  purchasing 
draft  or  work  animals  or  live  stock  either  for  resale  or  for  breeding  purposes  is 
regarded  as  an  investment  of  capital.  The  purchase  price  of  an  automobile, 
even  when  wholly  used  in  carrying  on  farming  operations,  is  not  deductible, 
but  [and]  it  is  regarded  as  an  investment  of  capital.  The  cost  of  gasoline, 
repairs  and  upkeep  of  an  automobile  if  used  wholly  in  the  business  of  farming 
is  deductible  as  an  expense;  if  used  partly  for  business  purposes  and  partly 
for  the  pleasure  or  convenience  of  the  taxpayer  or  his  family,  such  cost  may 
be  apportioned  according  to  [in  accordance  with]  the  extent  of  the  use  for 
purposes  of  business  and  pleasure  or  convenience,  and  only  the  proportion 
of  such  cost  justly  attributable  to  [use  for]  business  purposes  [alone]  is 
deductible  as  a necessary  expense.  See  articles  38,  145  and  171. 

2893  Art.  111.  When  Charges  Deductible. — Each  year’s  return,  so 
far  as  practicable,  both  as  to  gross  income  and  deductions  there- 
from, should  be  complete  in  itself,  and  taxpayers  are  expected  to  make 
every  reasonable  effort  to  ascertain  the  facts  necessary  to  make  a correct 
return.  See  articles  21-24  and  52.  The  expenses,  liabilities,  or  deficit  of  one 
year  can  not  be  used  to  reduce  the  income  of  a subsequent  year.  A person 
making  returns  on  an  accrual  [accrued]  basis  has  the  right  to  deduct  all 
authorized  allowances,  whether  paid  in  cash  or  set  up  as  a liability,  and  it 
follows  that  if  he  does  not  within  any  year  pay  or  accrue  certain  of  his  ex- 
penses, interest,  taxes  or  other  charges,  and  makes  no  deduction  therefor, 
he  can  not  deduct  from  the  income  of  the  next  or  any  subsequent  year  any 
amounts  then  paid  in  liquidation  of  the  previous  year’s  liabilities.  A loss  from 
theft  or  embezzlement  occurring  in  one  year  and  discovered  in  another  is  de- 
ductible only  for  the  year  of  its  occurrence.  Any  amount  paid  pursuant  to  a 
judgment  or  otherwise  on  account  of  damages  for  personal  injuries,  patent 
infringement  or  otherwise,  is  deductible  from  gross  income  when  the  claim  is 
[liquidated  or]  put  in  judgment  or  [actually]  paid,  less  any  amount  of  such 
damages  as  may  have  been  compensated  for  by  insurance  or  otherwise. 
If  subsequently  to  its  occurrence  [thereto],  however,  a taxpayer  first  ascertains 
[has  for  the  first  time  ascertained]  the  amount  of  a loss  sustained  during  a 
prior  taxable  year  which  has  not  been  [and  not]  deducted  from  the  gross  in- 
come [therefor],  he  may  render  an  amended  return  for  such  preceding  taxable 
year,  including  such  amount  of  loss  in  the  deductions  from  gross  income,  and 
may  file  a claim  for  refund  of  the  excess  tax  paid  by  reason  of  the  failure  to 
deduct  such  loss  in  the  original  return.  See  section  252  of  the  statute  and 
articles  1031-1038. 

2894  [Art.  112.  Charges  to  Capital  Account.— ^12967.] 


INC. 


337 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


DEDUCTIONS  ALLOWED:  INTEREST. 

2895  Art.  121.  Interest. — Interest  paid  or  accrued  within  the  year  on 

116  indebtedness  may  be  deducted  from  gross  income.  But  interest 

1049  on  indebtedness  incurred  or  continued  to  purchase  or  carry  se- 

curities, such  as  municipal  bonds,  the  interest  upon  which  is  exempt 
from  tax,  is  not  deductible.  However,  this  exception  does  not  apply  to 
obligations  of  the  United  States  issued  after  September  24,  1917,  which 
include  the  liberty  bonds  of  the  second  and  subsequent  issues,  and  interest 
on  indebtedness  incurred  to  purchase  such  obligations  is  deductible  pursuant 
to  the  general  rule.  See  articles  77-80.  Interest  paid  by  the  taxpayer  on  a 
mortgage  upon  real  estate  of  which  he  is  the  legal  or  equitable  owner,  even  though 
the  taxpayer  is  not  directly  liable  upon  the  bond  or  note  secured  by  such  mortgage, 
may  be  deducted  as  interest  on  his  indebtedness.  [ The  foregoing  sentence,  slightly 
changed,  is  brought  from  old  Art.  563,  for  which  see  ^3211.]  Payments  made 
for  Maryland  or  Pennsylvania  ground  rents  are  not  deductible  as  interest. 

2896  Art.  122.  Interest  on  Capital. — Interest  calculated  as  being  a 
charge  against  income  on  account  of  capital  or  surplus  invested  in 

the  business,  but  which  does  not  represent  a payment  on  an  interest-bearing 
obligation,  is  not  an  allowable  deduction  from  gross  income;  that  is  to  say, 
the  interest  which  the  money  might  earn  if  otherwise  invested  is  not  a de- 
ductible charge  against  income. 

DEDUCTIONS  ALLOWED:  TAXES. 

2897  Art.  131.  Taxes. — Federal  taxes  (except  income,  war  profits  and 
119  excess  profits  taxes).  State  and  local  taxes  (except  taxes  assessed 

1052  against  local  benefits  of  a kind  tending  to  increase  the  value  of  the 
property  assessed),  and  taxes  imposed  by  possessions  of  the  United 
States  or  by  foreign  countries  (except  the  amount  of  income,  war  profits 
and  excess  profits  taxes  allowed  as  a credit  against  the  tax),  are  deductible 
from  gross  income.  See  section  222  of  the  statute  and  articles  381-384  as 
to  tax  credits.  Postage  is  not  a tax.  Amounts  paid  to  States  under 
secured  debts  laws  in  order  to  render  securities  tax  exempt  are  deductible. 
Automobile  license  fees  are  ordinarily  taxes. 

2898  Art.  132.  Federal  Duties  and  Excise  Taxes. — Import  or  tariff 
duties  paid  to  the  proper  customs  officers,  and  business,  license, 

privilege,  excise  and  stamp  taxes  paid  to  internal  revenue  collectors,  are  de- 
ductible as  taxes  imposed  by  the  authority  of  the  United  States,  provided 
they  are  not  added  to  and  made  a part  of  the  expenses  of  the  business  or  the 
cost  of  articles  of  merchandise  with  respect  to  which  they  are  paid,  in  which 
case  they  can  not  be  separately  deducted. 

2899  Art.  133.  Taxes  for  Local  Benefits. — So-called  taxes,  more  prop- 
erly assessments,  paid  for  local  benefits,  such  as  street,  sidewalk 

and  other  like  improvements,  imposed  because  of  and  measured  by  some 
benefit  inuring  directly  to  the  property  against  which  the  assessment  is 
levied,  do  not  constitute  an  allowable  deduction  from  gross  income.  A 
tax  is  considered  assessed  against  local  benefits  when  the  property  subject 
to  the  tax  is  limited  to  property  benefited.  Special  assessments  are  not 
deductible,  even  though  an  incidental  benefit  may  inure  to  the  public 
welfare.  The  taxes  deductible  are  those  levied  for  the  general  public  wel- 
fare by  the  proper  taxing  authorities  at  a like  rate  against  all  property  in 
the  territory  over  which  such  authorities  have  jurisdiction.  Assessments 


INC. 


338  TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


under  Illinois  laws  relating  to  drainage  districts  are  not  limited  to  the 
property  benefited,  and  assessments  so  paid  are  deductible.  Assessments 
under  the  statutes  of  California  relating  to  irrigation  and  of  Iowa  relating  to 
drainage,  and  under  certain  statutes  of  Tennessee  relating  to  levees,  are 
limited  to  property  benefited,  and  amounts  so  paid  are  not  deductible  as 
taxes.  When  assessments  are  made  for  the  purpose  of  maintenance  or 
repair  of  local  benefits,  the  taxpayer  may  deduct  the  assessments  paid  as  an 
expense  incurred  in  business,  if  the  payment  of  such  assessments  is  neces- 
sary to  the  conduct  of  his  business.  Where  the  assessments  are  made  for 
the  purpose  of  constructing  local  benefits,  the  payments  by  the  taxpayer 
are  in  the  nature  of  capital  expenditures  and  are  not  deductible.  Where 
assessments  are  made  for  the  purpose  of  both  construction  and  maintenance 
or  repairs,  the  burden  is  on  the  taxpayer  to  show  the  allocation  of  the 
amounts  assessed  to  the  different  purposes.  If  the  allocation  can  not  be 
made,  none  of  the  amounts  so  paid  is  deductible. 

2SC0  Art.  134.  Inheritance  Taxes. — State  inheritance  taxes  paid  by  the 
executor  or  administrator  of  an  estate  of  a deceased  person,  which 
are  provided  by  law  to  be  deducted  from  the  respective  legacies  or  distri- 
butive shares,  are  not  allowable  deductions  in  computing  the  net  income 
of  such  estate  subject  to  tax,  even  though  the  will  contains  a direction  to 
pay  inheritance  taxes  out  of  the  residue.  (An  inheritance  tax  is  upon  the 
transfer  of  the  property  and  not  upon  the  estate  of  the  decedent  or  upon 
the  executor  or  administrator,  although  the  latter  is  required  to  pay  it. 
In  general,  taxes  paid  or  accrued  within  the  year  imposed  by  the  authority 
of  any  State,  or  otherwise,  are  limited  to  those  imposed  upon  the  taxpayer 
and  do  not  include  taxes  paid  by  him  on  behalf  of  another,  even  though  he 
is  required  by  law  to  make  such  payment.  See  articles  565  and  566.  Since, 
moreover,  the  tax  is  imposed  upon  the  transfer  before  the  property  reaches 
the  legatee  or  distributee,  and  merely  diminishes  the  capital  share  of  the 
estate  received  by  him,  such  tax  is  not  imposed  upon  the  legatee  or  distributee 
and  is  not  an  allowable  deduction  from  his  income.  Similarly^  Federal  estate 
taxes  are  not  deductible. 

DEDUCTIONS  ALLOWED— LOSSES 

2901  Art.  141.  Losses. — Losses  sustained  during  the  taxable  year  and 

126  not  compensated  for  by  insurance  or  otherwise  are  fully  deductible 

127  (except  by  nonresident  aliens)  if  {a)  incurred  in  the  taxpayer’s 

129  trade  or  business,  or  Q?)  incurred  in  any  transaction  entered  into 

1066  for  profit,  or  (c)  arising  from  fires,  storms,  shipwreck  or  other 

1086  casualty,  or  from  theft.  They  must  usually  be  evidenced  by  closed 

1084  and  completed  transactions.  In  the  case  of  the  sale  of  assets^the 

1085  loss  will  be  the  difference  between  the  cost  thereof,  less  depreciation 

sustained  since  acquisition,  or  X.\\Q.fair  market  value  as  of  Marcli  1, 

1913,  if  acquired  before  that  date,  less  depreciation  since  sustained,  and  the 
price  at  which  they  were  disposed  of.  See  section  202  of  the  statute  and 
articles  39-46  and  1561.  When  the  loss  is  claimed  through  the  destruction 
of  property  by  fire,  flood  or  other  casualty,  the  amount  deductible  will  be 
the  difference  between  the  cost  of  the  property  or  \l?>  fair  market  value  as  of 
March  1,  1913,  and  the  salvage  value  thereof,  after  deducting  from  the  cost 
or  value  as  of  ^Viarch  1,  1913,  the  amount,  if  any,  which  has  been  or  should 
have  been  set  aside  and  deducted  in  the  current  year  and  previous  years  from 
gross  income  on  account  of  depreciation  and  which  has  not  been  paid  out  in 
making  good  the  depreciation  sustained.  But  the  loss  should  be  reduced  by 


NC. 


339 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


the  amount  of  any  insurance  or  other  compensation  received.  See  articles 
49  and  50.  A loss  in  the  sale  of  an  individuals  residence  is  not  deductible. 
Losses  in  illegal  transactions  are  not  deductible. 

2902  Art.  142.  Voluntary  Removal  of  Buildings. — Loss  due  to  the 
voluntary  removal  or  demolition  of  old  buildings,  the  scrapping 

of  old  machinery,  equipment,  etc.,  incident  to  renewals  and  replacements 
will  be  deductible  from  gross  income  in  a sum  representing  the  difference 
between  the  cost  of  such  property  demolished  or  scrapped  and  the  amount 
of  a reasonable  allowance  for  the  depreciation  which  the  property  had 
undergone  prior  to  its  demolition  or  scrapping;  that  is  to  say,  the  deductible 
loss  is  only  so  much  of  the  original  cost  of  the  property,  less  salvage,  as 
would  have  remained  unextinguished  had  a reasonable  allowance  been 
charged  off  for  depreciation  during  each  year  prior  to  its  destruction. 
When  a taxpayer  buys  real  estate  upon  which  is  located  a building  which 
he  proceeds  to  raze  with  a view  to  erecting  thereon  another  building,  it  will 
be  considered  that  the  taxpayer  has  sustained  no  deductible  loss  by  reason 
of  the  demolition  of  the  old  building,  and  no  deductible  expense  on  account 
of  the  cost  of  such  removal,  the  value  of  the  real  estate,  exclusive  of  old 
improvements,  being  presumably  equal  to  the  purchase  price  of  the  land 
and  building  plus  the  cost  of  removing  the  useless  building. 

2903  Art.  143.  Loss  of  Useful  Value. — When  through  some  change  in 
business  conditions  the  usefulness  in  the  business  of  some  or  all  of 

the  capital  assets  is  suddenly  terminated,  so  that  the  taxpayer  discontinues 
the  business  or  discards  such  assets  permanently  from  use  in  the  business, 
he  may  claim  as  a loss  for  the  year  in  which  he  takes  such  action  the  difference 
between  the  cost  or  the  fair  market  value  as  of  jVfarch  1,  1913,  of  any  asset 
so  discarded  (less  any  depreciation  allowances)  and  its  salvage  value  remain- 
ing. This  exception  to  the  rule  requiring  a sale  or  other  disposition  of  pro- 
perty in  order  to  establish  a loss  requires  proof  of  some  unforeseen  cause 
by  reasdn  of  which  the  property  must  be  prem.aturely  discarded,  as,  for 
example,  where  machinery  or  other  property  must  be  replaced  by  a new 
invention,  or  where  an  increase  in  the  cost  of  or  other  change  in  the  m.anu- 
facture  of  any  product  makes  it  necessary  to  abandon  such  manufacture, 
to  which  special  machinery  is  exclusively  devoted,  or  where  new  legislation 
directly  or  indirectly  makes  the  continued  profitable  use  of  the  propertv  im- 
possible. This  exception  does  not  extend  to  a case  where  the  useful  life  of 
property  termiinates  solely  as  a result  of  those  gradual  processes  for  wTich 
depreciation  allowances  are  authorized.  It  does  not  apply  to  inventories  or 
to  other  than  capital  assets.  The  exception  applies  to  buildings  only  when 
they  are  permanently  abandoned  or  perm.anently  devoted  to  a radically 
different  use,  and  to  machinery  onlv  when  its  use  as  such  is  permanentb.- 
abandoned.  Any  loss  to  be  deductible  under  this  exception  must  be  charged 
off  on  the  books  and  fully  explained  in  returns  of  income.  But  see  articles  181- 
188.  [This  article  is  not  intended  to  cover  cases  calling  for  the  application 
of  articles  181-187.] 

2904  Art.  144.  Shrinkage  in  Securities  and  Stocks. — A person  possess- 
ing securities,  such  as  stocks  and  bonds,  can  not  deduct  from  gross 

income  any  amount  claimed  as  a loss  on  account  of  the  shrinkage  in  value 
of  such  securities  through  fluctuation  of  the  market  or  otherwise.  The 
loss  allowable  in  such  cases  is  that  actually  suffered  when  the  securities 
mature  or  are  disposed  of.  See,  however,  article  154.  In  the  case  of  banks 
or  other  corporations  which  are  subject  to  supervision  by  State  or  federal 


INC. 


340  TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


authorities,  and  which  in  obedience  to  the  orders  of  such  supervisory  officers 
charge  off  as  losses  amounts  representing  an  alleged  shrinkage  in  the  value 
of  property,  the  amounts  so  charged  off  do  not  constitute  allowable  deduc- 
tions. The  foregoing  applies  only  to  owners  and  investors,  and  not  to 
dealers  in  securities,  as  to  whom  see  article  1585.  However,  if  stock  of  a 
corporation  becomes  worthless,  its  cost  or  its  fair  market  value  as  of 
March  1,  1913,  if  acquired  prior  thereto,  may  be  deducted  by  the  owner  in 
the  taxable  year  in  which  the  stock  was  ascertained  to  be  worthless  and 
charged  off,  provided  a satisfactory  showing  of  its  worthlessness  be  made 
as  in  the  case  of  bad  debts.  See  article  151. 

2905  Art.  145.  Losses  of  Farmers. — Losses  incurred  in  the  operation 
890  of  farms  as  business  enterprises  are  deductible  from  gross  income. 

If  farm  products  are  held  for  favorable  markets,  no  deduction  on 
account  of  shrinkage  in  weight  or  physical  value  or  by  reason  of  deteriora- 
tion in  storage  shall  be  allowed.  The  total  loss  by  frost,  storm,  flood  or 
fire  of  a prospective  crop,  or  of  a crop  which  has  not  been  sold,  is  not  a 
deductible  loss  in  computing  net  income.  A farmer  engaged  in  raising  and 
selling  stock,  cattle,  sheep,  horses,  etc.,  is  not  entitled  to  claim  as  a loss 
the  value  of  animals  that  perish  from  among  those  animals  that  were 
raised  on  the  farm.  If  live  stock  has  been  purchased  for  any  purpose,  and 
afterwards  dies  from  disease,  exposure  or  injury,  or  is  killed  by  order  of  the 
authorities  of  a State  or  the  United  States,  the  actual  purchase  price  of  such 
stock,  less  any  depreciation  which  may  have  been  previously  claimed  with 
respect  to  such  perished  live  stock,  and  less  also  any  insurance  or  indemnity  re- 
covered, may  be  deducted  as  a loss.  The  actual  cost  of  other  property,  less 
depreciation  already  allowed,  destroyed  by  order  of  the  authorities  of  a 
State  or  of  the  United  States  may  in  like  manner  be  claimed  as  a loss;  but 
if  reimbursement  is  made  by  a State  or  the  United  States  in  whole  or  in 
part  on  account  of  stock  killed  or  property  destroyed,  the  amount  received 
shall  be  reported  as  income  for  the  year  in  which  reimbursement  is  made. 
In  determining  the  cost  of  stock  for  the  purpose  of  ascertaining  the  deductible 
loss  there  shall  be  taken  into  account  only  the  purchase  price,  and  not  the 
cost  of  any  feed,  pasturage  or  care  which  has  been  deducted  as  an  expense 
of  operation.  If  gross  income  is  ascertained  by  inventories,  no  deduction 
can  be  made  for  live  stock  or  products  lost  during  the  year,  whether  pur- 
chased for  resale  or  produced  on  the  farm,  as  such  losses  will  be  reflected  in 
the  inventory  by  reducing  the  amount  of  live  stock  or  products  on  hand  at 
the  close  of  the  year.  If  an  individual  owns  and  operates  a farm,  in  addition 
to  being  engaged  in  another  trade,  business  or  calling,  and  sustains  a loss 
from  such  operation  of  the  farm,  then  the  amount  of  loss  sustained  may 
be  deducted  from  gross  income  received  from  all  sources,  provided  the  farm 
is  not  operated  for  recreation  or  pleasure.  See  articles  38,  110,  and  171. 

DEDUCTIONS  ALLOWED— BAD  DEBTS 

2906  Art.  151.  Bad  Debts. — An  account  merely  written  down  or  a debt 
132  recognized  as  worthless  prior  to  the  beginning  of  the  taxable  year 

1088  is  not  deductible.  Where  all  the  surrounding  and  attendant 
circumstances  indicate  that  a debt  is  worthless  and  uncollectible 
and  that  legal  action  to  enforce  payment  would  in  all  probability  not  result 
in  the  satisfaction  of  execution  on  a judgment,  a showing  of  these  facts 
will  be  sufficient  evidence  of  the  worthlessness  of  the  debt  for  the  purpose 
of  deduction.  Bankruptcy  may  or  may  not  be  an  indication  of  the  worth- 
lessness of  a debt,  and  actual  determination  of  worthlessness  in  such  a case 


INC. 


341 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


is  sometimes  possible  before  and  at  other  times  only  when  a settlement  in 
bankruptcy  shall  have  been  had.  Where  a taxpayer  ascertained  a debt  to  C 

be  worthless  and  charged  it  off  in  one  year,  the  mere  fact  that  bankruptcy 
proceedings  instituted  against  the  debtor  are  terminated  in  a later  year 
confirming  the  conclusion  that  the  debt  is  worthless  will  not  authorize  shift- 
ing the  deduction  to  such  later  year.  In  the  case  of  debts  existing  prior  to 
March  1,  1913,  only  their  value  on  that  date  may  be  deducted  upon  sub- 
sequently ascertaining  them  to  be  worthless.  See  article  52.  If  a taxpayer 
computes  his  income  upon  the  basis  of  valuing  his  notes  or  accounts  receivable  ^ 

at  their  fair  market  value  when  received,  which  may  be  less  than  their  face  value, 
the  amount  deductible  for  bad  debts  in  any  case  is  limited  to  such  original  valu- 
ation. 

2907  Art.  152.  Examples  of  Bad  Debts. — Worthless  debts  arising  from 
unpaid  wages,  salaries,  rents  and  similar  items  of  taxable  income 

will  not  be  allowed  as  a deduction  unless  the  income  such  items  represent  4 

has  been  included  in  the  return  of  income  for  the  year  in  which  the  deduc-  ■ 

tion  as  a bad  debt  is  sought  to  be  made  or  in  a previous  year.  Only  the 
difference  between  the  amount  received  in  distribution  of  the  assets  of  a 
bankrupt  and  the  amount  of  the  claim  may  be  deducted  as  a bad  debt.  The 
difference  between  the  amount  received  by  a creditor  of  a decedent  in  dis- 
tribution of  the  assets  of  the  decedent’s  estate  and  the  amount  of  his  claim 
may  be  considered  a worthless  debt.  A purchaser  of  accounts  receivable 
which  can  not  be  collected  and  are  consequently  charged  off  the  books  as 
bad  debts  is  entitled  to  deduct  them,  the  amount  of  deduction  to  be  based 
upon  the  price  he  paid  for  them  and  not  upon  their  face  value. 

2908  Art.  153.  Worthless  Mortgage  Debt. — Where  under  foreclosure 
a mortgagee  buys  in  the  mortgaged  property  and  credits  the  in- 
debtedness with  the  purchase  price,  the  difference  between  the  purchase 
price  and  the  indebtedness  will  not  be  allowable  as  a deduction  for  a bad 
debt,  for  the  property  which  was  security  for  the  debt  stands  in  the  place 
of  the  debt.  The  determination  of  loss  in  such  a situation  is  deferred  until 
the  property  is  disposed  of,  except  where  a purchase  money  mortgage  is  fore- 
closed by  the  vendor  of  the  property.  See  article  46.  Only  where  a purchaser 
for  less  than  the  debt  is  another  than  the  mortgagee  may  the  difference  be- 
tween the  debt  and  the  net  proceeds  from  the  sale  be  deducted  as  a bad  debt. 

2909  Art.  154.  Worthless  Securities. — Where  bonds  purchased  before 
March  1,  1913,  depreciated  in  value  between  the  date  of  purchase 

and  that  date,  and  were  in  a later  year  ascertained  to  be  worthless  and 
charged  off,  the  owner  is  entitled  to  a deduction  in  that  year  equal  to  the 
value  of  the  bonds  on  March  1,  1913.  Bonds  purchased  since  February  28, 

1913,  when  ascertained  to  be  worthless,  may  be  treated  as  bad  debts  to 
the  amount  actually  paid  for  them,  but  not  exceeding  their  amortized  value 
if  purchased  at  a premium.  Bonds  of  an  insolvent  corporation  secured  only 
by  a mortgage  from  which  on  foreclosure  nothing  is  realized  for  the  bond- 
holders are  regarded  as  ascertained  to  be  worthless  not  later  than  the  year 
of  the  foreclosure  sale,  and  no  deduction  for  a bad  debt  is  allowable  in  com- 
puting a bondholder’s  income  for  a subsequent  year.  To  authorize  a deduc- 
tion for  a bad  debt  on  account  of  notes  held  prior  to  March  1,  1913,  their 
value  on  that  date  must  be  established. 


INC. 


342  TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


DEDUCTIONS  ALLOWED— DEPRECIATION 

2910  Art.  161.  Depreciation. — A reasonable  allowance  for  the  exhaus- 

133  tion,  wear  and  tear  and  obsolescence  of  property  used  in  the  trade 

1089  or  business  may  be  deducted  from  gross  income.  For  convenience 
such  an  allowance  will  usually  be  referred  to  as  covering  depreciation^ 
excluding  from  the  term  any  idea  of  a mere  reduction  in  market  value  not  resulting 
from  exhaustion,  wear  and  tear  or  obsolescence.  The  proper  allowance  for 
^ such  depreciation  of  any  property  used  in  the  trade  or  business  is  that  amount 

which  should  be  set  aside  for  the  taxable  year  in  accordance  with  a consistent 
plan  by  which  the  aggregate  of  such  amounts  for  the  useful  life  of  the  property 
in  the  business  will  suffice,  with  the  salvage  value,  at  the  end  of  such  useful  life 
to  provide  in  place  of  the  property  its  cost,  or  its  value  as  of  Tvlarch  1,  1913,  if 
acquired  by  the  taxpayer  before  that  date.  See  further  articles  839  and  844. 

^ 2911  Art.  162.  Depreciable  Property. — The  necessity  for  a depreciation 

^ allowance  arises  from  the  fact  that  certain  property  used  in  the 

business  gradually  approaches  a point  where  its  usefulness  is  exhausted. 
The  allowance  should  be  confined  to  property  of  this  nature.  In  the  case 
of  tangible  property,  it  applies  to  that  which  is  subject  to  wear  and  tear, 
to  decay  or  decline  from  natural  causes,  to  exhaustion,  and  to  obsolescence 
due  to  the  normal  progress  of  the  art  or  to  becoming  inadequate  to  the  grow- 
ing needs  of  the  business.  It  does  not  apply  to  inventories  or  to  stock  in 
trade;  nor  to  land  apart  from  the  improvements  or  physical  development 
added  to  it.  It  does  not  apply  to  bodies  of  minerals  which  through  the 
process  of  removal  suffer  depletion,  other  provision  for  this  being  made  in 
I the  statute.  See  articles  201-233.  Property  kept  in  repair  may,  nevertheless, 

' be  the  subject  of  a depreciation  allowance.  See  article  103.  The  deduction 

of  an  allowance  for  depreciation  is  limited  to  property  used  in  the  taxpayer’s 
trade  or  business.  No  such  allowance  may  be  made  in  respect  of  automobiles 
or  other  vehicles  used  chiefly  for  pleasure,  a building  used  by  the  taxpayer 
solely  as  his  residence,  nor  in  respect  of  furniture  or  furnishings  therein, 
personal  effects,  or  clothing;  but  properties  and  costumes  used  exclusively  in 
a business,  such  as  a theatrical  business,  may  be  the  subject  of  a depreciation 
allowance. 

2912  Art.  163.  Depreciation  of  Intangible  Property.— Intangibles,  the 

I use  of  which  in  the  trade  or  business  is  definitely  limited  in  dura- 

tion, may  be  the  subject  of  a depreciation  allowance.  Examples  are  pat- 
ents and  copyrights,  [and  limited  leases,]  licenses  and  franchises.  Intan- 
gibles, the  use  of  which  in  the  business  or  trade  is  not  so  limited,  will  not 
usually  be  a proper  subject  of  such  an  allowance.  If,  however,  an  intangible 
asset  acquired  through  capital  outlay  is  known  from  experience  to  be  of 
value  in  the  business  for  only  a limited  period,  the  length  of  which  can  be 

. estimated  from  experience  with  reasonable  certainty,  such  intangible  asset 

' may  be  the  subject  of  a depreciation  allowance,  provided  the  facts  are 

fully  shown  in  the  return  or  prior  thereto  to  the  satisfaction  of  the  Com- 
missioner. There  can  be  no  such  allowance  in  respect  of  good  will,  trade 
names,  trade  marks,  trade  brands,  secret  formulae  or  processes. 

2913  [Art.  164.  Depreciation  of  Trust  Propenj^. — in  the  case  of  a trust 
1253  where  the  terms  of  the  will  or  trust  or  the  decree  of  a court  of 

) competent  jurisdiction  or  the  general  law  require  the  corpus  of  the 

estate  to  be  kept  intact,  and  where  physical  property  forming  a 
part  of  the  corpus  of  such  estate  is  subject  to  depreciation  through  its  em- 


INC. 


343 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


ployment  in  business,  the  fiduciary  may  claim  in  his  return  of  income  an 
allowance  for  such  depreciation  for  the  taxable  year,  provided  the  amount 
of  the  deduction  is  applied  or  held  by  the  fiduciary  for  making  good  such 
depreciation.  Fiduciaries  in  their  returns  should  set  forth  the  provision  of 
the  law,  trust  or  decree  requiring  such  depreciation  deduction  and  should 
show  that  the  amount  deducted  has  been  or  will  be  preserved  and  so  applied. 
All  amounts  paid  by  fiduciaries  to  beneficiaries  of  trust  estates  as  income 
from  such  trust  estates,  whether  from  reserves  or  otherwise,  are  distribu- 
tions of  income  and  will  be  so  treated  for  income  tax  purposes.]  See  note  on 
page  301. 

2914  Art.  164  [Art.  165].  Capital  Sum  Recoverable  through  Depreciation 

Allowances. — The  capital  sum  to  be  replaced  by  depreciation  allow- 
ances is  the  cost  of  the  property  in  respect  of  ’which  the  allowance  is  mmde, 
except  that  in  the  case  of  property  acquired  by  the  taxpayer  prior  to  March  1, 
1913,  the  capital  sum  to  be  replaced  is  the  fair  miarket  value  of  the  property 
as  of  that  date.  In  the  absence  of  proof  to  the  contrary,  it  will  be  assumed 
that  such  value  as  of  A'larch  1,  1913,  is  the  cost  of  the  property  less  depre- 
ciation up  to  that  date.  To  this  sum  should  be  added  from  timie  to  time  the 
cost  of  improvements,  additions  and  betterments,  [replacements,  and  re- 
newals,] the  cost  of  ’wTich  is  not  deducted  as  an  expense  in  the  taxpayer’s 
return,  and  from  it  should  be  deducted  from,  tim.e  to  tim.e  the  amount  of  any 
definite  loss  or  dam.age  sustained  by  the  property  through  casualty,  as  dis- 
tinguished from  the  gradual  exhaustion  of  its  utility  which  is  the  basis  of  the 
depreciation  allo’wance.  In  the  case  of  the  acquisition  after  March  1,  1913,  of  a 
combination  of  depreciable  and  nondepreciable  property  for  a lump  price,  as, 
for  example,  land  and  buildings,  the  capital  sum  to  be  replaced  is  limited 
to  that  part  of  the  lump  price  which  represents  the  value  of  the  depreciable 
property  at  the  time  of  such  acquisition. 

2915  Art.  165  [Art.  166].  Method  of  Computing  Depreciation  Allowance. 

— The  capital  sum  to  be  replaced  should  be  charged  off  over  the 
useful  life  of  the  property  either  in  equal  annual  installments  or  in  accordance 
with  any  other  recognized  trade  practice,  such  as  an  apportionment  of  the 
capital  sum  over  units  of  production.  Whatever  plan  or  method  of  apportion- 
ment is  adopted  must  be  reasonable  and  should  be  described  in  the  return. 

2916  Art.  166  [Art.  167].  Modification  of  Method  of  Computing  De- 
preciation.— If  it  develops  that  the  useful  life  of  the  propertv''  has 

been  underestimated,  the  plan  of  computing  depreciation  should  be  miodified 
and  the  balance  of  the  cost  of  the  property,  or  its  fair  market  value  as  of 
March  1,  1913,  not  already  provided  for  through  a depreciation  reserve,  or 
deducted  from  book  value^  should  be  spread  over  the  estimated  remaining  life 
of  the  property.  A taxpayer  who  in  computing  depreciation  allowances  in 
returns  for  years  prior  to  1918  has  not  taken  ordinary  obsolescence  into  con- 
sideration may  for  the  year  1918  and  subsequent  years  revise  the  estimate 
of  the  useful  life  of  any  property  so  as  to  allow  for  such  future  obsolescence 
as  may  be  expected  from  experience  to  result  from  the  normal  progress  of 
the  art  [sic].  No  modification  of  the  method  should  be  made  on  afccount  of 
changes  in  the  market  value  of  the  property  from  time  to  time,  such  as,  on 
the  one  hand,  loss  in  rental  value  of  buildings  due  to  deterioration  of  the 
neighborhood,  or,  on  the  other,  appreciation  due  to  increased  demand. 
The  conditions  affecting  such  market  values  should  be  taken  into  considera- 
tion only  so  far  as  they  affect  the  estimate  of  the  useful  life  of  the  property. 


INC. 


344 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


2917  Art.  167  [Art.  168].  Depreciation  of  Patent  or  Copyright. — In  com- 
puting a depreciation  allowance  in  the  case  of  a patent  or  copyright, 

the  capital  sum  to  be  replaced  is  the  cost  (not  already  deducted  as  current  ex- 
pense) of  the  patent  or  copyright  or  its  fair  market  value  as  of  March  1 , 1913, 
if  acquired  prior  thereto.  The  allowance  should  be  computed  by  an  appor- 
tionment of  the  cost  of  the  patent  or  copyright  or  of  its  fair  market  value  as 
of  March  1,  1913,  over  the  life  of  the  patent  or  copyright  since  its  grant,  or 
since  its  acquisition  by  the  taxpayer,  or  since  March  1,  1913,  as  the  case 
may  be.  If  the  patent  or  copyright  was  acquired  from  the  Government, 
its  cost  consists  of  the  various  Government  fees,  cost  of  drawings,  experi- 
' mental  models,  attorney’s  fees,  etc.,  actually  paid.  If  a corporation  pur- 

chased a patent  and  paid  for  it  in  stock  or  securities,  its  cost  is  the  fair  market 
value  of  the  stock  or  securities  at  the  time  of  the  purchase.  Depreciation  of  a 
patent  can  be  taken  on  the  basis  of  the  fair  market  value  as  of  March  1,  1913, 
only  when  affirmi.ative  and  satisfactory  evidence  of  such  value  is  offered.  Such 
evidence  should  whenever  practicable  be  submitted  with  the  return.  If  the  patent 
becomes  obsolete  prior  to  its  expiration  such  proportion  of  the  amount  on  which 
1 its  depreciation  may  be  based  as  the  number  of  years  of  its  remaining  life  bears 

to  the  whole  number  of  years  intervening  between  the  date  when  it  was  acquired  and 
the  date  when  it  legally  expires  may  be  deducted,  if  permission  so  to  do  is  specifi- 
cally secured  from  the  Commissioner.  Owing  to  the  difficulty  of  allocating  to  a 
particular  year  the  obsolescence  of  a patent,  such  permission  will  be  granted  only 
if  affirmative  and  satisfactory  evidence  that  the  obsolescence  occurred  in  the  year 
for  which  the  return  is  made  is  submitted  to  the  Commissioner.  The  fact  that 
depreciation  has  not  been  taken  in  prior  years  does  not  entitle  the  taxpayer  to 
deduct  in  any  taxable  year  a greater  amount  for  depreciation  than  would  other- 
zvise  be  allowable.  See  articles  40  and  843.  [A  taxpayer  may  elect  not  to  take 
a depreciation  allowance  for  patents,  but  such  election  if  made  is  final  and 
) will  control  the  returns  for  all  subsequent  years.] 

2918  Art.  168  [Art.  169].  Depreciation  of  Drawings  and  Models. — A tax- 
pa;'mr  who  has  incurred  expenses  in  his  business  for  designs,  drawings, 

patterns,  models,  or  work  of  an  experimental  nature  calculated  to  result 
in  improvement  of  his  facilities  or  his  product,  may  at  his  option  deduct 
such  expenses  from  gross  income  for  the  taxable  year  in  which  they  are 
incurred  or  treat  such  articles  as  a capital  asset  to  the  extent  of  the  amount 
so  expended.  In  the  latter  case,  if  the  period  of  usefulness  of  any  such  asset 
may  be  estimated  from  experience  with  reasonable  accuracy,  it  may  be 
\ the  subject  of  depreciation  allowances  spread  over  such  estimated  period  of 

' usefulness.  The  facts  must  be  fully  shown  in  the  return  or  prior  thereto  to 

the  satisfaction  of  the  Commissioner.  Except  for  such  depreciation  allow- 
ances no  deduction  shall  be  made  by  the  taxpayer  against  any  sum  so  set 
up  as  an  asset  except  on  the  sale  or  other  disposition  of  such  assets  at  a loss 
or  on  proof  of  a total  loss  thereof. 

2919  Art.  169  [Art.  170].  Charging  Off  Depreciation. — A depreciation  al- 

) lowance,  in  order  to  constitute  an  allowable  deduction  from  gross  in- 

come, must  be  charged  off.  The  particular  manner  in  which  it  shall  be  charged 
off  is  not  material,  except  that  the  amount  measuring  a reasonable  allow- 
ance for  depreciation  must  be  either  deducted  directly  from  the  book  value 
of  the  assets  or  preferably  credited  to  a depreciation  reserve  account,  which 
must  be  reflected  in  the  annual  balance  sheet.  The  allowances  should  be 
computed  and  charged  off  with  express  reference  to  specific  items,  units  or 

A groups  of  property,  each  item  or  unit  being  considered  separately  or  specifi- 

cally included  in  a group  with  others  to  which  the  same  factors  apply.  The 


INC. 


345 


TAX 


Reg.  45,  Rev.  See  Note  cn  page  301. 


taxpayer  should  keep  such  records  as  to  each  item  or  unit  of  depreciable 
property  as  will  permit  the  ready  verification  of  the  factors  used  in  com- 
puting the  allowance  for  each  year  for  each  item,  unit  or  group. 

2920  Art.  170  [Art.  171].  Closing  Depreciation  Account. — If  the  use 
of  any  [the]  property  in  the  business  is  permanently  discontinued,  al- 
though no  sale  or  other  disposition  of  the  property  has  taken  place  [been  made], 
a determination  of  any  gain  or  loss  may  be  made;  but  any  deduction  in  respect 
of  any  loss  thereon  must  be  disclosed  in  the  taxpayer’s  return  for  the  year 
in'which  the  determination  is  made  and  a full  statement  of  the  facts  and  the 
basis  upon  which  the  computation  is  calculated  must  be  attached  to  the 
return.  Upon  a sale  or  other  disposition  of  the  property,  the  consideration 
received  shall  be  compared  with  the  amount  of  the  estimated  salvage  value 
used  in  computing  the  gain  or  loss  as  above  provided,  and  the  amount  of  the 
difference  shall  be  treated  as  a gain  or  loss,  as  the  case  may  be,  of  the  year 
in  which  the  sale  or  other  disposition  was  made.  See  articles  141-145. 

2921  Art.  171  [Art.  172].  Depreciation  in  the  Case  of  Farmers. — k reason- 
890  able  allowance  for  depreciation  may  be  claimed  on  farm  buildings 

(other  than  a dwelling  occupied  by  the  owner),  farm  machinery  and 
other  physical  property,  including  live  stock  purchased  for  draft,  dairy  or 
breeding  purposes,  but  no  claim  for  depreciation  on  life  stock  raised  or  pur- 
chased for  resale,  will  be  allowed.  Live  stock  purchased  for  draft,  breeding  or 
dairy  purposes,  or  for  any  purpose  other  than  resale,  maybe  included  in  the 
inventory  for  each  year  at  a figure  which  will  reflect  the  reduction  in  value 
estimated  to  have  occurred  during  the  year  through  increase  of  age  or  other 
causes.  Such  a reduction  in  value  should  be  based  on  the  cost  and  estimated 
life  of  the  live  stock.  If  an  inventory  is  not  used,  a reasonable  allowance 
for  depreciation  may  be  claimed  based  upon  the  cost  of  draft  and  work 
animals  and  animals  kept  solely  for  breeding  purposes  and  not  for  resale. 
See  also  articles  38,  110  and  145. 

DEDUCTIONS  ALLOWED : AMORTIZATION. 

2922  Art.  181.  Scope  of  Provision  for  Amortization. — Any  allowance 

134  made  to  a taxpayer  by  a contracting  Department  of  the  Government  or 

1093  by  any  other  contractor  for  amortization  or  fall  in  the  value  of  prop- 
erty^ either  as  a part  of  the  cost  of  production  or  as  a part  of  the  price  of 
the  product^  shall  be  included  in  gross  income.  See  article  52.  The  a?nount  to 
be  allowed  as  a deduction  from  gross  income  for  amortization  for  the  purpose 
of  the  tax  is  to  be  based  upon  the  provisions  of  articles  181  to  188,  pursuant 
to  which  the  deduction  should  be  made  instead  of  upon  the  basis  of  any  amounts 
contractually  or  otherwise  determined.  The  allowance  for  amortization  covers 
the  decline  in  value  of  the  property  subject  thereto  and  is  inclusive  of  the  deprecia- 
tion which  would  ordinarily  be  allowed  separately.  Depreciation  for  any  tax- 
able period  after  December  31,  1917,  should.,  therefore  not  be  claimed  with  respect 
to  property  as  to  which  an  allowance  for  amortization  is  claimed.  ISee  also 
section  204  of  the  statute  and  articles  1601-1603. 

2^2a~  Art.  182  [Art.  181].  Property  Cost  of  Which  May  Be  Amortized. — 

The  taxpayer  may  make  a reasonable  deduction  from  gross  income 
not  in  excess  of  a sum  sufficient  to  extinguish  the  cost  of  buildings,  ma- 
chinery, equipment  or  other  facilities  constructed,  erected,  installed  or 
acquired  on  or  after  April  6,  1917,  for  the  production  of  articles  contributing 
to  the  prosecution  of  the  present  war,  and  of  vessels  constructed  or  acquired 


INC. 


346  TAX 


Reg.  45,  Rev,  See  Note  on  page  iJOl. 


on  or  after  such  date  for  the  transportation  of  articles  or  men  contributing 
to  the  prosecution  of  the  present  war.  In  the  case  of  property  the  construction 
or  installation  of  which  was  commenced  before  April  6,  1917,  and  completed 
subsequently  to  that  date,  arnortization  will  be  allowed  with  respect  only  to  the 
cost  incurred  on  or  after  April  6,  1917.  [A  deduction  on  account  of  amortiz- 
ation will  be  allowed  only  in  the  case  of  enterprises  or  projects  falling  within 
the  class  of  activities  contributing  to  the  prosecution  of  the  present  war. 
See  also  section  204  of  the  statute  and  articles  1601-1603.] 

2923  Art.  183.  Cost  Recoverable  Through  Amortization. — The  total 
amount  to  be  extinguished  by  amortization,  in  general,  is  the  excess  of 

the  unextinguished  or  unrecovered  cost  of  the  property  over  its  maximum  value 
{either  for  sale  or  for  use  as  part  of  the  plant  or  equipment  of  a going  business) 
under  stable  postwar  conditions.  Under  the  provisions  of  the  statute  authorizing 
reexamination  of  the  claim  at  any  time  within  three  years  after  the  termination 
of  the  present  war,  the  allowance  will  be  finally  determined  upon  such  basis. 
However,  in  many  cases  it  will  be  impracticable  during  the  calendar  year  1919  to 
make  final  determination  either  of  the  length  of  the  amortization  period  or  of  the 
value  of  the  property  under  stable  postwar  conditions.  Consequently,  in  returns 
made  during  the  calendar  year  1919  the  amortization  allowance  will  tentatively 
be  determined  in  accordance  with  articles  184  and  185. 

2924  Art.  184.  Cost  Which  May  Be  Amortized. — For  the  purpose  of 
making  returns  in  1919  the  total  amount  to  be  extinguished  by  amortiz- 
ation is  the  difference  between  the  value  of  the  property  on  the  basis  indicated 
below  and  the  original  cost  of  the  property  less  any  amounts  otherwise  deducted 
for  depreciation,  losses,  etc.,  prior  to  January  1,  1918;  or  in  the  case  of  property 
acquired  or  completed  after  December  31,  1917,  it  is  the  difference  between  the 
value  of  the  property  on  the  basis  indicated  below  and  the  cost  of  such  property  at 
the  date  of  acquisition  or  completion. 

2924a  (1)  In  the  case  of  property  useful  only  during  the  war  period  and 

permanently  discarded  at  the  date  of  the  return  the  basis  is  the  salvage 
value  as  of  the  date  when  the  property  was  discarded. 

2924b  (2)  In  the  case  of  property  still  in  use  which  will  not  be  required  for 

the  future  use  of  the  business  and  which  is  certain  to  be  permanently 
discarded  before  the  last  installment  payment  of  the  tax  covered  by  the  return  the 
basis  is  the  salvage  value  as  of  the  date  when  the  property  will  be  permanently  dis- 
carded. 

2924C  (3)  In  the  case  of  other  property  the  basis  is  the  estimated  reproduction 

cost  as  of  April,  1919,  of  such  property  in  its  then  condition.  In  the 
final  determination  such  cost  will  be  ascertained  under  stable  postwar  conditions, 
without  reference  to  such  date. 

2924d  A special  record  of  all  property  falling  in  classes  (1)  and  (2)  must  be 
preserved  by  the  taxpayer  and  the  Commissioner  must  be  promptly 
advised  {a)  if  such  property  is  restored  to  use;  {b)the  selling  price  if  sold;  and  (c), 
if  still  on  hand  and  not  in  use  at  the  close  of  the  three  year  period,  the  reasons  why 
such  property  has  not  been  disposed  of. 

2925  Art  185.  Method  of  Amortization. — For  the  purpose  of  making  re- 
turns in  1919  the  amount  to  be  extinguished  by  amortization  shall  be 
spread  in  proportion  to  the  net  income  {computed  without  benefit  of  the  amortiz- 

347 


I NX. 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


ation  allowance)  between  January  1,  1918,  and  the  following  dates:  {a)  if  the 
claim  is  based  on  subdivision  (1)  of  article  184,  the  date  when  the  property  was 
permanently  discarded;  {b)  if  the  claim  is  based  on  subdivision  (2)  of  article 
184,  the  date  upon  which  the  property  will  be  permanently  discarded;  and  (c) 
if  the  claim  is  based  upon  subdivision  (3)  of  article  184,  Aprif  1919.  All  tax- 
payers claiming  an  allowance  for  amortization  will  be  required  to  estimate  the 
amount  of  their  net  income  for  the  period  between  January  1,  1918,  and  the  dates 
specified  above^  and  also  to  estimate  what  part  of  such  net  income  is  properly 
allocable  to  the  calendar  year  1918  and  what  part  thereof  is  properly  allocahle  to 
the  calendar  year  1919.  Such  estimates  shall  be  the  basis  for  apportioning  the 
amounts  to  be  extinguished  by  amortization  between  the  calendar  years  1918  and 
1919.  Taxpayers  reporting  on  the  fiscal  year  basis  {a)  in  all  computations  based 
upon  1918  rates  shall  use  the  amount  of  such  allowance  apportioned  to  the 
calendar  year  1918;  {b)  in  any  computation  based  upon  1919  rates  for  a year 

beginning  in  1918  and  ending  in  1919  shall  use  the  amount  of  such  allowance 
apportioned  to  the  calendar  year  1919;  and  (c)  in  any  computation  for  a fiscal 
year  beginning  in  1919  shall  use  as  many  twelfths  of  the  allowance  apportioned 
to  the  calendar  year  1919  as  there  are  months  of  such  fiscal  year  falling  in  the 
calendar  year  1919.  ' 

[Art.  182.  Cost  Which  May  Be  Amortized. — The  total  amount  to  be 
extinguished  by  amortization  is  the  difference  between  the  original  cost 
to  the  taxpayer  of  the  property  and  its  value  to  the  taxpayer  at  the  close  of 
the  amortization  period  {a)  for  sale  or  {b)  for  use,  immediate  or  prospective, 
as  part  of  the  plant  or  equipment  of  a going  business,  which  ever  value  is  the 
larger,  less  any  amounts  otherwise  deducted  or  deductible  for  wear,  tear, 
obsolescence,  and  loss.  In  the  case  of  property  the  construction  or  installation 
of  which  was  commenced  before  April  6,  1917,  and  completed  subsequently 
to  that  date,  amortization  will  be  allowed  with  respect  only  to  the  cost  incurred 
on  or  after  April  6,  1917.]  See  note  on  page  301.  ( 

[Art.  183.  Amortization  Period. — The  period  over  which  the  deduction 
allowed  is  to  be  spread,  or  during  which  it  is  to  be  amortized,  is  the  estimated 
period  between  the  date  of  acquisition  or  completion  of  the  property  and  the 
date  upon  which  either  {a)  the  property  will  become  useless  or  (Z?)the  taxpayer 
will  be  able  to  earn  by  operation  or  use  a normal  return  upon  the  unamortized 
cost,  whichever  date  is  the  earlier.)  See  note  on  page  301. 

[Art.  184.  Method  of  Amortization. — The  proportion  of  allowable 
deduction  to  be  allocated  to  each  taxable  year  of  the  amortization  period 
will  be,  as  nearly  as  may  be  determined,  the  same  proportion  which  the 
net  income  or  profit  derived  during  such  taxable  year  bears  to  the  entire  i 

net  income  or  profit  derived  during  the  amortization  period  from  the  operation 
or  use  of  such  property.)  See  note  on  page  301. 

2926  Art.  186  [Art.  185).  Additional  Requirements  for  Amortization. — 

Claims  for  amortization  must  be  unmistakably  differentiated  in  the 
return  from  all  other  claims  for  wear,  tear,  obsolescence  and  loss.  No  such 
claim  will  be  allowed  unless  it  is  reflected  in  any  accounts  submitted  by  the  ^ 

taxpayer  to  stockholders  and  in  any  credit  statements  by  the  taxpayer  to 
banks,  and  is  given  full  effect  on  his  financial  books  of  account.  If  Govern- 
ment or  other  contracts  taken  by  the  taxpayer  contained  recognition  of 
amortization  as  an  element  in  the  cost  of  production,  copies  of  such  con- 
tracts shall  be  filed  with  the  taxpayer’s  return,  together  with  a statement 
and  description  of  any  sums  received  on  account  of  amortization  and  the 
basis  upon  which  they  were  determined.  In  any  case  in  which  an  allowance  ^ 

has  been  made  for  amortization  of  cost  the  taxpayer  will  not  be  allowed  to  * 

348  TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  301. 


6-6-19. 


restore  to  his  invested  capital  for  the  purpose  of  the  war  profits  and  excess 
profits  tax  any  portion  of  the  amount  covered  by  such  allowance. 

2927  Art.  187  [Art.  186].  Redetermination  of  Amortization  Allowance. — 

A redetermination  of  the  deduction  allowed  on  account  of  amort- 
tization  may,  or  at  the  request  of  the  taxpayer  shall,  be  made  by  the  Com- 
missioner at  any  time  within  three  years  after  the  termination  of  the  present 
war,  and  if  as  a result  of  an  appraisal  or  from  other  evidence  it  is  found  that 
the  deduction  originally  allowed  was  incorrect,  the  amount  of  tax  due  for  each 
taxable  year  during  the  amortization  period  will  be  adjusted  by  additional 
assessment  or  by  refund. 

2928  Art.  188  [Art.  187).  Information  to  be  Furnished  by  Taxpayer. — ^To 

obtain  the  benefit  of  this  provision  of  the  statute  the  taxpayer  must 
establish  to  the  satisfaction  of  the  Commissioner  that  the  entire  deduction 
claimed  and  the  proportion  claimed  for  any  particular  year  are  reasonable. 
The  taxpayer  shall  also  submit  a supplementary  statement  setting  forth 
the  following  information:  {a)  a description  of  the  property  in  reasonable 
detail;  {b)  the  date  or  dates  on  which  the  property  was  acquired,  and  from 
whom,  or,  if  constructed,  erected  or  installed  by  the  taxpayer,  the  dates  on 
which  such  construction,  erection  or  installation  was  begun  and  completed; 
(c)  evidence  establishing  the  intention  of  the  taxpayer  on  and  after  April 
6,  1917,  or  on  and  after  the  date  of  acquisition  or  the  date  of  beginning  con- 
struction, erection  or  installation,  to  devote  such  property  or  vessels  to  the 
production  of  articles  (or,  in  the  case  of  vessels,  the  transportation  of  articles 
or  men)  contributing  to  the  prosecution  of  the  present  war;  {d)  the  cost  of 
construction,  erection,  installation  or  acquisition;  {e)  the  value  of  the 
property  after  termination  of  the  amortization  period;  (/)  a segregation  of 
the  property  permanently  discarded^  or  of  the  property  which  will  be  permanently 
discarded  before  the  last  installment  payment  covered  by  the  return  [which  will 
have  no  value  (except  for  salvage)  following  the  amortization  period,  and  of 
property  which  will  have  value  after  such  period  for  use  in  a going  concern 
or  business];  (g)  all  deductions  from  gross  income  otherwise  taken  or  claimed 
with  respect  to  such  property;  Qi)  the  computation  by  which  the  total  amount 
to  be  extinguished  by  amortization  was  determined;  and  (i)  the  computation 
by  which  the  proportion  of  the  amortization  charge  claimed  as  a deduction  in 
the  taxable  year  for  which  return  is  being  made  was  determined. 

DEDUCTIONS  ALLOWED— DEPLETION 

2929  Art.  201.  Depletion  of  Mines,  Oil  and  Gas  Wells. — A reasonable 
137  deduction  from  gross  income  for  the  depletion  of  natural  deposits 

1096  and  for  the  depreciation  of  improvements  is  permitted,  based  {a) 

upon  cost,  if  acquired  after  February  28,  1913,  or  {b)  upon  the  fair 
market  value  as  of  March  1,  1913,  if  acquired  prior  thereto,  or  (c)  upon  the 
fair  market  value  within  30  days  after  the  date  of  discovery  in  the  case  of 
mines,  oil  and  gas  wells  discovered  by  the  taxpayer  after  February  28,  1913, 
where  the  fair  market  value  is  materially  disproportionate  to  the  cost. 
The  essence  of  this  provision  is  that  the  owner  of  such  property,  whether  it 
be  a leasehold  or  freehold,  shall  secure  through  an  aggregate  of  annual 
depletion  and  depreciation  deductions  a return  of  the  amount  of  capital 
invested  by  him  in  the  property,  or  in  lieu  thereof  an  amount  equal  to  the 
fair  market  value  as  of  March  1,  1913,  of  the  properties  owned  prior  to  that 
date,  or  an  amount  equal  to  the  fair  market  value  within  30  days  after  the 
date  of  discovery  of  mines,  oil  or  gas  wells  discovered  by  the  taxpayer  on  or 

349  TAX 


INC. 


Reg.  46,  Rev.  See  Note  on  page  301. 


after  March  1,  1913,  and  not  acquired  as  the  result  of  purchase  of  a proven 
tract  or  lease,  where  the  fair  market  value  of  the  property  is  materially 
disproportionate  to  the  cost;  plus  in  any  case  the  subsequent  cost  of  plant  ( 

and  equipment  (less  salvage  value)  and  underground  and  overground  de- 
velopment, which  is  not  chargeable  to  current  operating  expense,  but  not 
including  land  values  for  purposes  other  than  the  extraction  of  minerals. 
Operating  owners,  lessors  and  lessees  are  entitled  to  deduct  an  allowance  for 
depletion,  but  a stockholder  in  a mining  or  oil  or  gas  corporation  is  not. 
further  articles  839  and  844. 

t 

2930  Art.  202.  Capital  Recoverable  through  Depletion  Allowance  in 
the  Case  of  Owner. — In  the  case  of  an  operating  owner  in  fee  or  a 

lessor  the  capital  remaining  in  any  year  recoverable  through  depletion  allow- 
ances is  the  sum  of  {a)  the  cost  of  the  property,  or  its  fair  market  value  as  of 
March  1,  1913,  or  its  fair  market  value  within  30  days  after  discovery,  as 
the  case  may  be,  plus  (b)  the  cost  of  subsequent  improvements  and  de- 
velopment not  charged  to  current  operating  expenses,  but  minus  (c)  deduc-  ^ 

tions  for  depletion  which  [have]  has  or  should  have  been  taken  to  date  and 
{d)  the  portion  of  the  capital  account,  if  any,  as  to  which  depreciation  has 
been  and  is  being  deducted  instead  of  depletion.  The  value  of  the  surface 
of  the  land  should  be  taken  into  consideration.  In  no  case,  however,  may 
a lessor  [take  deductions  for  depletion  in  any  year  during  the  continuance 
of  the  lease  in  excess  of  the  royalties  payable  thereunder  for  such  year,  nor 
may  hej  include  in  his  capital  recoverable  through  such  an  allowance  any 
part  of  development  costs  not  borne  by  the  lessor  nor  any  part  of  the  dis- 
covery value. 

2931  Art.  203.  Capital  Recoverable  through  Depletion  Allowance  in  ^ 

the  Case  of  Lessee. — In  the  case  of  a lessee  the  capital  remaining 

in  any  year  recoverable  through  depletion  allowances  is  the  sum  of  {a)  the 
cost  of  the  leasehold,  or  its  fair  market  value  as  of  March  1,  1913,  or  its 
fair  market  value  within  30  days  after  discovery,  as  the  case  may  be, 
plus  (b)  the  cost  of  subsequent  improvements  and  development  not  charged 
to  current  operating  expenses,  but  minus  (c)  deductions  for  depletion  which 
[have]  has  or  should  have  been  taken  to  date  and  {d)  the  portion  of  the 
capital  account,  if  any,  as  to  which  depreciation  has  been  and  is  being  deducted 
instead  of  depletion.  Any  annual  or  periodical  rents  or  royalties  supple- 
menting the  bonus  or  other  amount  paid  for  the  lease  may  be  charged  to  ^ 

current  operating  expenses  or,  until  the  property  reaches  the  operating  stage, 
to  capital  account,  and  in  the  latter  event  will  form  part  of  the  capital  return- 
able through  deductions  for  depletion. 

2932  Art.  204.  Apportionment  of  Deductions  between  Lessor  and 
Lessee. — As  the  value  of  property  comprehends  the  interests  of 

both  lessor  and  lessee,  no  computation,  for  the  purpose  of  depletion  allow-  | 

ances,  of  the  value  of  these  interests  separately  as  of  any  date  which  com- 
bined exceeds  the  value  of  the  property  in  fee  simple  will  be  permitted. 

The  same  principle  applies  to  holders  of  fractional  interests.  If  the  aggre- 
gate deduction  claimed  is  deemed  excessive,  the  Commissioner  may  request 
the  owner  or  lessee  to  show  that  the  valuation  claimed  does  not  exceed  the 
fair  market  value  of  the  property  at  a specified  date  determined  in  the 
manner  explained  in  article  206.  The  lessor  and  lessee  shall,  with  the  ap-  a 

proval  of  the  Commissioner,  eq  uitably  apportion  the  allowance  in  the  light  ' 

of  the  peculiar  conditions  in  each  case  and  on  the  basis  of  their  respective 

INC-  350  TAX 


Reg.  45,  Rev.  See  Note  on  page  301, 


interests  therein.  To  the  return  of  every  taxpayer  claiming  an  allowance  for 
depletion  in  respect  of  {a)  property  in  which  he  owns  a fractional  interest 
only  or  {h)  a leasehold  or  {c)  property  subject  to  a lease,  there  shall  be  at- 
tached a statement  setting  forth  the  name  and  address  and  the  precise 
nature  of  the  holdings  of  each  person  interested  in  the  property. 

2933  Art.  205.  Determination  of  Cost  of  Deposits. — In  any  case  in 
which  a depletion  or  depreciation  deduction  is  computed  on  the  basis 

of^the  cost  or  price  at  which  any  mine,  mineral  deposit,  mineral  right  or 
leasehold  was  acquired,  the  owner  or  lessee  will  be  required  upon  request  of 
the  Commissioner  to  show  that  the  cost  or  price  at  which  the  property  was 
bought  was  fixed  for  the  purpose  of  a bona  fide  purchase  and  sale,  by  which 
the  property  passed  to  an  owner  in  fact  as  well  as  in  form  different  from 
the  vendor.  No  fictitious  or  inflated  cost  or  price  will  be  permitted  to  form 
the  basis  of  any  calculation  of  a depletion  or  depreciation  deduction,  and 
in  determining  whether  or  not  the  price  or  cost  at  which  any  purchase  or 
sale  was  made  represented  the  actual  market  value  of  the  property  sold, 
due  weight  will  be  given  to  the  relationship  or  connection  existing  between 
the  person  selling  the  property  and  the  buyer  thereof, 

2934  Art.  206.  Determination  of  Fair  Market  Value  of  Deposits, — 
Where  the  fair  market  value  of  the  property  at  a specified  date 

in  lieu  of  the  cost  thereof  is  the  basis  for  depletion  and  depreciation  deduc- 
tions, such  value  must  be  determined,  subject  to  approval  or  revision  by 
the  Commissioner,  by  the  owner  of  the  property  in  the  light  of  the  con- 
ditions and  circumstances  known  at  that  date,  regardless  of  later  dis- 
coveries or  developments  in  the  property  or  in  methods  of  mining  or  ex- 
traction. The  value  sought  should  be  that  established  assuming  a transfer 
between  a willing  seller  and  a willing  buyer  as  of  that  particular  date. 
No  rule  or  method  of  determining  the  fair  market  value  of  mineral  property 
is  prescribed,  but  the  Commissioner  will  lend  due  weight  and  consideration 
to  any  and  all  factors  and  evidence  having  a bearing  on  the  market  value, 
such  as  cost,  actual  sales  and  transfers  of  similar  properties,  market  value  of 
stock  or  shares,  royalties  and  rentals,  value  fixed  by  the  owner  for  purposes 
of  the  capital  stock  tax,  valuation  for  local  or  State  taxation,  partnership 
accountings,  records  of  litigation  in  which  the  value  of  the  property  was  in 
question,  the  amount  at  which  the  property  may  have  been  inventoried  in 
probate  court,  disinterested  appraisals  by  approved  methods,  and  other 
factors. 

2935  : Art.  207.  Revaluation  of  Deposits  not  Allowed.— The  cost  of  the 

property  or  its  fair  market  value  at  a specified  date,  as  the  case  may 
be,  plus  subsequent  charges  to  capital  account  not  deductible  as  current 
expense,  will  be  the  basis  for  determining  the  depletion  and  depreciation 
deductions  for  each  year  during  the  continuance  of  the  ownership  under 
which  the  fair  market  value  or  cost  was  fixed,  and  during  such  ownership 
there  can  be  no  revaluation  for  the  purpose  of  this  deduction.  This  rule 
will  not  forbid  the  redistribution  of  the  capital  account  over  the  estimated 
number  of  units  remaining  in  the  property  in  accordance  with  either  of  the 
next  two  articles. 

2936  Art.  208.  Determination  of  Quantity  of  Ore  in  Mine.— Every 
taxpayer  claiming  a deduction  for  depletion  will  be  required  to 

estimate  with  respect  to  each  separate  property  the  total  units  (tons, 
pounds,  ounces  or  other  units)  of  ores  and  minerals  reasonably  known  or 
on  good  evidence  believed  to  have  existed  in  the  ground  on  March  1,  1913, 

INC.  351 


TAX 


Reg.  46,  Rev.  See  Note"on"pagel301. 


or  on  the  date  of  acquisition  of  the  property,  or  within  30  days  after  the  date 
of  discovery,  as  the  case  may  be.  In  estimating  the  total  units  of  ores  and 
minerals  for  purposes  of  depletion  the  property  must  be  considered  in  the 
condition  in  which  it  was  on  March  1,  1913,  or  the  date  of  acquisition,  or 
within  30  days  after  the  date  of  discovery,  but  if  subsequently  during  the 
ownership  of  the  taxpayer  making  the  return  additional  recoverable 
mineral  deposits  have  been  discovered  or  developed  which  were  not  taken 
into  account  in  estimating  the  number  of  units  for  purposes  of  depletion, 
or  if  it  shall  be  discovered  by  working,  development  or  exploration  that 
ground  previously  estimated  to  contain  commercially  recoverable  mineral 
is  barren  or  contains  only  commercially  unworkable  mineral,  a new  estimate 
of  the  recoverable  units  of  ores  or  minerals  {but  not  of  the  cost  or  fair  market 
value  at  a specified  date)  shall  be  made  and  when  made  shall  thereafter  con- 
stitute a basis  for  depletion.  In  the  selection  of  the  unit  of  estimate  the 
custom  or  practice  applicable  to  the  type  of  mineral  deposit  and  the  character 
of  the  operations  thereon  should  be  considered.  The  estimate  of  the  recover- 
able units  of  ores  or  minerals  for  the  purpose  of  depletion  shall  include  {a) 
the  ores  and  minerals  “in  sight,”  “blocked  out,”  “developed,”  or  “assured,”  ^ 

in  the  usual  or  conventional  meaning  of  these  terms  in  respect  to  the  type  of 
deposit,  and  may  also  include  {b)  “prospective”  or  “probable”  ores  and  min- 
erals (in  the  same  sense),  that  is,  ores  and  minerals  that  are  believed  to 
exist  on  the  basis  of  good  evidence,  although  not  actually  known  to  occur 
on  the  basis  of  existing  development;  but  “probable”  or  “prospective” 
ores  and  minerals  may  be  computed  for  purposes  of  depletion  only  as  exten- 
sions of  known  deposits  into  undeveloped  ground. 

2937  Art.  209.  Determination  of  Quantity  of  Oil  in  Ground.— In  the 

case  of  either  an  owner  or  lessee  it  will  be  required  that  an  esti- 
mate, subject  to  the  approval  of  the  Commissioner,  shall  be  made  of  the  ’ 

probable  recoverable  oil  contained  in  the  territory  with  respect  to  which 

the  investment  is  made  as  of  the  time  of  purchase,  or  as  of  March  1,  1913, 
if  acquired  prior  to  that  date,  or  within  30  days  after  the  date  of  discov- 
ery, as  the  case  may  be.  The  oil  reserves  must  be  estimated  for  all  unde- 
veloped proven  land  as  well  as  producing  land.  If  information  subse- 
quently obtained  clearly  shows  the  estimate  to  have  been  materially 
erroneous,  it  may  be  revised  with  the  approval  of  the  Commissioner. 

2938  Art.  210.  Computation  of  Allowance  for  Depletion  of  Mines  and 

Oil  Wells. — When  the  cost  or  value  as  of  March  1,  1913,  or  within  | 

30  days  after  the  date  of  discovery  of  the  property  shall  have  been  det^- 
mined,  and  the  number  of  mineral  units  in  the  property  as  of  the  date  of 
acquisition  or  valuation  shall  have  been  estimated,  the  division  of  the 
former  amount  by  the  latter  figure  will  give  the  unit  value  for  purposes 
of  depletion,  and  the  depletion  allowance  for  the  taxable  year  may  be 
computed  by  multiplying  such  unit  value  by  the  number  of  units  of  mineral 
extracted  during  the  year.  If,  however,  proper  additions  are  made  to  the 
capital  account  represented  by  the  original  cost  or  value  of  the  property,  * 

or  unforeseen  [extraordinary]  circumstances  necessitate  a revised  estimate  of 
the  number  of  mineral  units  in  the  ground,  a new  unit  value  for  purposes 
of  depletion  may  be  found  by  dividing  the  capital  account  at  the  end  of 
the  year,  less  deductions  for  depletion  to  the  beginning  of  the  taxable 
year  which  have  or  should  have  been  taken,  by  the  number  of  units  in  the 
ground  at  the  beginning  of  the  taxable  year.  This  number,  unless  a re- 
vision of  the  original  estimate  has  been  necessary,  will  equal  the  number  | 

of  units  in  the  ground  at  the  date  of  original  acquisition  or  valuation  less 

352  TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  301. 


the  number  extracted  prior  to  the  taxable  year.  If,  however,  a recalcula- 
tion is  needed,  the  number  of  units  at  the  beginning  of  the  year  will  be 
the  sum  of  the  gross  production  of  the  year  and  the  estimated  mineral 
reserves  in  the  property  at  the  end  of  the  year. 

2939  Art.  211.  Computation  of  Allowance  for  Depletion  of  Gas  Wells. — 

On  account  of  the  peculiar  conditions  surrounding  the  production 
of  natural  gas  it  will  be  necessary  to  compute  the  depletion  allowances  for 
gas  properties  by  methods  suitable  to  the  particular  cases  in  question  and 
acceptable  to  the  Commissioner.  Usually,  the  depletion  of  natural  gas 
properties  should  be  computed  on  the  basis  of  decline  in  closed  or  rock  pres- 
sure, taking  into  account  the  effects  of  water  encroachment  and  any  other 
modifying  factors.  [The  following  methods  may  also  be  used.  In  many 
fields  more  or  less  additional  evidence  on  depletion  is  to  be  had  from  such 
considerations  as  (a)  details  of  production  (performance  record  of  well  or 
property);  (b)  decline  in  open  flow  capacity;  (c)  comparison  with  life  his- 
tories of  similar  wells  or  properties,  particularly  those  now  exhausted;  and 
(d)  size  of  reservoir  and  pressure  of  gas.  In  using  the  closed  pressure 
decline  method,  the  pressure  at  which  wells  are  abandoned  may  be  sub- 
tracted from  the  observed  pressures  in  order  to  determine  the  correct  per- 
centages. The  estimates  for  properties  in  certain  fields  are  subject  to  some 
further  correction  for  various  reasons,  among  which  are  (a)  irregular 
encroachment  of  water  or  oil  which  reduces  the  rate  of  decline  in  pressure; 
(b)  even  though  there  be  no  encroachment  of  oil  or  water,  the  size  of  the 
reservoir  remaining  fixed,  the  pressure  decline  does  not  follow  in  exact 
and  precise  proportion  to  the  amount  withdrawn;  and  (c)  as  a rule  less  gas 
is  marketed  for  50  pounds  of  decline  in 'the  early  history  of  the  well  than 
during  the  decline  of  a similar  amount  in  the  later  history  or  after  the 
pressure  has  become  low.]  The  gas  producer  will  be  expected  to  compute 
the  depletion  as  accurately  as  possible  and  submit  with  his  return  a de- 
scription of  the  method  by  which  the  computation  was  made.  The  following 
formula,  in  which  the  units  of  gas  are  pounds  per  square  inch  of  closed  pressure 
may  be  used  and  is  recommended:  the  quotient  of  the  capital  account 
recoverable  through  depletion  allowances  to  the  end  of  the  taxable  year, 
divided  by  the  sum  of  the  pressures  at  the  beginning  of  the  year  less  the 
sum  of  the  pressures  at  the  time  of  expected  adandonment  (which  quo- 
tient is  the  unit  cost),  multiplied  by  the  sum  of  the  pressures  at  the  be- 
ginning of  the  taxable  year  plus  the  sum  of  the  pressures  of  new  wells  less 
the  sum  of  the  pressures  at  the  end  of  the  tax  year,  equals  the  depletion 
allowance. 

2940  Art.  212.  Gas  Well  Pressure  Records  to  be  Kept. — Beginning  with 
1919  closed  pressure  readings  of  representative  wells,  if  not  of  all 

wells,  must  be  carefully  made  and  kept.  In  order  to  standardize  pressure 
readings  the  well  should  remain  closed  until  [such  time  as]  the  pressure 
does  [will]  not  build  up  more  than  1 per  cent  of  the  total  pressure  in  10  minutes. 
Ordinarily  24  hours  will  suffice  for  this  purpose,  but  some  wells  will  need  to 
remain  closed  for  a longer  period.  If  there  is  any  water  in  the  well  it  should 
be  blown  or  pumped  off  before  the  well  is  closed.  A closed  pressure  reading 
of  a gas  well  which  has  been  producing,  or  is  near  gas  wells  that  have  been 
producing,  is  lower  than  the  actual  pressure  of  the  gas  in  the  reservoir  by  an 
amount  [reduced  to  a greater  or  less  extent,]  depending  on  the  welV s [its] 
location  with  reference  to  other  producing  wells  and  the  length  of  time  it  has 
been  closed  in.  [To  get  readings  most  useful  for  tax  purposes]  It  is  necessary 
to  record  the  length  of  time  the  well  has  been  closed  and  to  show  how  the 

353  TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  301. 


pressure  built  up  during  this  period.  Successive  [Several]  readings  [at  suc- 
cessive times]  will  [tend  to]  indicate  the  point  at  which  the  pressure  becomes 
approximately  stationary,  that  is,  the  point  at  which  the  closed  pressure 
approaches  as  nearly  as  possible  the  maximum  pressure  which  would  be  shown 
\i  all  wells  [the  well  and  all  others]  in  the  pool  were  closed  for  several  months. 
The  length  of  time  required  varies  [of  course]  with  the  character  of  the  sand, 
position  of  the  packer,  the  location  of  the  well  with  reference  to  other  wells, 
the  limits  of  the  pool,  and  otlutv  factors  [considerations].  The  depth  of  the 
well,  diameter  of  tubing,  and  line  pressure  when  the  well  was  shut  off,  should 
be  noted.  Since  readings  at  the  exact  end  of  the  taxable  [fiscal]  year  will 
ordinarily  not  be  available,  the  pressure  of  that  date  may  be  obtaine  1 by 
interpolation  or  extrapolation,  [or]  In  certain  cases  readings  taken  regularly 
in  September  or  some  other  month  may  be  applicable  to  the  end  of  the 
taxable  [fiscal  or  tax]  year.  As  a general  rule  September  closed  pressure 
readings  [taken  regularly]  furnish  the  best  indication  of  depletion  and  it  is 
recommended  that  such  readings  be  made  with  [especial]  regularity  and  care. 
Where  interpolated  or  extrapolated  readings  are  used  the  data  from  which 
they  are  obtained  should  be  given.  Gauges  should  be  of  appropriate  capacity 
[considering  the  pressure  to  be  measured]  and  should  be  frequently  tested. 
A record  should  be  kept  of  the  number^]  of  [the]  gauges,  date  each  was 
[dates  the  gauges  were]  tested,  names  of  men  testing,  and  other  significant 
details. 

294 1 Art  213 . Computation  of  Allowance  Where  Quantity  of  Oil  or  Gas 
Uncertain. — If  by  reason  of  the  youth  of  the  field,  the  restricted  pro- 

duction,  or  for  any  other  cause,  it  is  not  possible  to  determine  with  any  degree  of 
certainty  the  quantity  of  oil  or  gas  in  a property,  it  will  be  necessary  to  make  a 
tentative  estimate  which  will  apply  until  production  figures  are  available  from 
which  an  accurate  determination  may  be  made.  [If  for  any  reason  the  quantity 
of  oil  OT  gas  on  the  property  can  not  be  determined  with  any  degree  of  cer- 
tainty, thus  precluding  the  use  of  the  unit  cost  method  of  computing  de- 
pletion, the  depletion  deduction  may  be  computed  in  accordance  with  some 
other  method  or  rule  satisfactory  to  the  Commissioner.  In  case  any  method 
other  than  the  unit  cost  method  is  proposed  to  be  used  by  the  taxpayer  in 
computing  his  depletion  allowance,  a full  description  of  the  method  used 
must  be  submitted  with  the  return,  together  with  a summary  of  the  figures 
or  calculations  pertaining  to  such  computation.] 

2942  Art  214.  Computation  of  Depletion  Allowance  for  Combined 
Holdings  of  Oil  and  Gas  Wells. — (1)  [Oil  properties. — ] The  recover- 
able oil  belonging  to  the  taxpayer  shall  be  estimated  separately  on  the 
smallest  unit  on  which  data  are  available,  such  as  individual  wells  or 
tracts,  and  these  added  together  into  a grand  total  to  be  applied  to  the 
total  capital  account  returnable  through  depletion.  The  capital  account 
shall  include  the  cost  or  value,  as  the  case  may  be,  of  all  oil  or  gas  leases 
or  rights  within  the  United  States  and  its  possessions,  plus  all  incidental 
costs  of  development  not  charged  as  expense  nor  returnable  through 
depreciation.  The 'unit  value  of  the  total  recoverable  oil  or  gas  is  the 
quotient  obtained^by  dividing*  the  totarcapital  account  recoverable  through 
depletion^by  the  total Jestima ted  recoverable  oil  or  gas.  This  unit  multi- 
p^lied  by  the’totaUnumber  oUunits  of,  oikor'gas  produced  by  the  taxpayer 
during  the  taxable  year  from  all  of  the  oil  and  gas  properties  will  deter- 
mine the  amount  which  may  be  allowably  deducted  from  the  gross  income 
of  that  year.  [This  total  depletion  allowance  divided  by  the  total  capital 
account  returnable  through  depletion  will  give  the  percentage  of  depletion 

354  TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  301. 


for  the""taxable  year.  This  percentage  must  be  applied  to  the  capital 
account'^returnable  through  depletion  of  each  separate  leasehold  and  fee 
property  included  in  the  holdings  of  the  taxpayer  to  find  the  proper  amount 
deductible  for  depletion  from  the  capital  account  of  each  tract  at  the  end 
of  the  taxable  year.] 

(2)  [Gas  properties. — ] In  the  case  of  the  gas  properties  of  a tax- 
2942a  payer  the  depletion  allowance  for  each  pool  may  be  computed' by 
using  the  combined  capital  account  returnable  through  depletion 
of  all  the  tracts  of  gas  land  "owned  by  the  taxpayer  in  the  pool  and  The 
average  decline  in  rock  pressures  of  all  the  taxpayer’s  wells  in  such  pool 
[as]  in  the  formula  given  in  article  211.  The  total  allowance  for  depletion 
of  the  gas  properties  of  the  taxpayer  will  be  the  sum  of  the  amounts  com- 
puted for  each  pool. 

2943  Art  215.  Depletionof  Mine  Based  on  Advance  Royalties. — Where 
the  owner  has  leased  a mining  property  for  a term  of  years  with 

a requirement  in  the  lease  that  the  lessee  shall  mine  and  pay  for  annually 
a specified  number  of  tons  or  other  agreed  units  of  measurement  of  such 
mineral,  or  shall  pay  annually  a specified  sum  of  money  which  shall jbe 
applied  in  payment  of  the  purchase  price  or  agreed  royalty  per  unit  of 
such  mineral  whenever  the  same  shall  thereafter  be  mined  and  removed 
from  the  leased  premises,  the  value  in  the  ground  to  the  lessor  for  pur- 
poses of  depletion  of  the  number  of  units  so  paid  for  in  advance  of  mining 
will  constitute  an  allowable  deduction  from  the  gross  income  of  the  year 
in  which  such  payment  or  payments  shall  be  made;  but  no  deduction  for 
depletion  by  the  lessor  shall  be  claimed  or  allowed  in  any  subsequent  year 
on  account  of  the  mining  or  removal  in  such  year  of  any  ore  or  mineral  so 
paid  for  in  advance  and  for  which  deduction  has  been  once  made.**-  If  for 
any  reason  any  such  mining  lease  shall  be  terminated  before  the  ore  or 
mineral  therein  which  has  been  paid  for  in  advance  has  been  mined  and 
removed,  and  the  lessor  repossesses  the  leased  property,  an  amount  equal 
to  the  aggregate  deductions  for  depletion  allowed  in  respect  of  ore  or  min- 
eral not  mined  and  removed  by  the  lessee,  but  still  in  the  ground,  will  be 
deemed  income  to  the  lessor  and  will  be  returned  as  such  for  the’year  in 
which  the  property  is  repossessed.  ^ 

2944  Art.  216.  Depletion  and  Depreciation  Accounts  on  Books. — Every 
taxpayer  claiming  and  making  a deduction  for  depletion  and  de- 
preciation of  mineral  property  shall  keep  accurate  ledger  accounts  in  which 
shall  be  charged  the  fair  market  value  as  of  March  1,  1913,  or  within  30  days 
after  the  date  of  discovery,  or  the  cost,  as  the  case  may  be,  {a)  of  the  property, 
and  {h)  of  the  plant  and  equipment,  together  with  such  amounts  expended 
for  development  of  the  property  or  additions  to  plant  and  equipment  since 
that  date  as  have  not  been  deducted  [allowed]  as  expense  in  his  returns.  These 
accounts  shall  be  credited  with  the  amount  of  the  depreciation  and  depletion 
deductions  claimed  and  allowed  each  year,  or  the  amount  of  the  depreciation 
and  depletion  shall  be  credited  to  depletion  and  depreciation  reserve  ac- 
counts, to  the  end  that  when  the  sum  ot  the  credits  for  depletion  and 
depreciation  equals  the  value  or  cost  of  the  property,  plus  the  amount 
added  thereto  for  development  or  additional  plant  and  equipment,  less 
salvage  value  of  the  physical  property,  no  further  deduction  for  depletion 
and  depreciation  with  respect  to  the  property  will  be  allowed.  If^|dividends 
are  paid  out  of  a depletion  or  depreciation  reserve,  the  stockholders' must 
be  expressly  notified  that  the  dividend  is  a return  of  capital  and  not  an 
ordinary  dividend  out  of  profits.  See  article  1549. 

355  TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  301. 


2945  Art.  217.  Statement  to  be  Attached  to  Return  Where  Depletion  of 
Mine  Claimed. — To  the  return  of  the  taxpayer  claiming  a deduction 

for  depletion  or  depreciation  or  both  there  should  be  attached  a statement 
setting  out:  {a)  whether  the  owner  is  a fee  owner  or  lessee  or  both;  {b)  a 
description  of  the  property  owned  in  fee,  if  any,  and  a description  of  the 
leasehold  property,  if  any,  including  the  date  of  acquisition  and  the  date 
of  expiration  of  the  lease;  {c)  the  fair  market  value  as  of  March  1,  1913, 
or  within  30  days  of  the  date  of  discovery,  or  the  cost,  as  the  case  may 
be,  of  the  property  owned  in  fee  and  the  leasehold  property,  together  with 
a statement  of  the  precise  method  by  which  the  value  or  the  cost  of  free- 
hold and  leasehold  property  was  determined;  id)  the  estimated  number  of 
units  of  mineral  or  ore  at  the  date  of  acquisition  or  of  valuation  in  the 
property  owned  in  fee  and  in  the  leasehold  property  separately,  together 
with  an  explanation  of  the  method  used  in  estimating  in  each  case  the 
number  of  units  of  mineral  or  ore  for  purposes  of  depletion;  (e)  the  amount 
of  capital  applicable  to  each  unit;  (/)  the  number  of  units  removed  and  sold 
during  the  year  for  which  the  return  was  made;  {g)  the  total  amount 
deducted  on  account  of  depletion  and  on  account  of  depreciation,  stated 
separately,  up  to  the  taxable  year  during  the  ownership  of  the  taxpayer; 
and  (Ji)  any  other  data  which  would  be  helpful  in  determining  the  reason- 
ableness of  the  depletion  and  depreciation  deductions  claimed  in  the 
return. 

2946  Art.  218.  Statement  to  be  Attached  to  Return  Where  Depletion  of 
Oil  or  Gas  Claimed. — ^To  each  return  made  by  a person  owning  or 

operating  oil  or  gas  properties,  there  should  be  attached  a statement 
showing  for  each  property  the  following  information,  which  may  be  given 
in  the  form  of  a table,  if  desired,  by  taxpayers  owning  more  than  one 
property:  {a)  the  fair  market  value  of  the  property  (exclusive  of  machinery, 
equipment,  etc.,  and  the  value  of  the  surface  rights)  as  of  March  1,  1913, 
if  acquired  prior  to  that  date;  or  the  fair  market  value  of  the  property 
within  30  days  after  the  date  of  discovery;  or  the  actual  cost  of  the  prop- 
erty, if  acquired  subsequently  to  February  28,  1913,  and  not  covered  by 
the  foregoing  clause;  (h)  how  the  fair  market  value  was  ascertained,  if  the 
property  came  under  the  first  or  second  head  under  (a);  (c)  the  estimated 
quantity  of  oil  or  gas  in  the  property  at  the  time  that  the  value  of  cost 
was  determined;  (d)  the  name  and  address  of  the  person  making  the  esti- 
mate and  the  manner  in  which  this  estimate  was  made,  including  a summary 
of  the  calculations;  (e)  the  amount  of  capital  applicable  to  each  unit  (this 
being  found  by  dividing  the  value  or  cost,  as  the  case  may  be,  by  the 
estimated  number  of  units  of  oil  or  gas  in  the  property  at  the  time  the 
value  or  cost  was  determined);  (/)  the  quantity  of  oil  or  gas  produced 
during  the  year  for  which  the  return  is  made  (in  the  case  of  new  properties 
it  is  desirable  that  this  information  be  furnished  by  months);  (g)  the  num- 
ber of  acres  of  producing  and  proven  oil  or  gas  land;  (h)  the  number 
of  wells  producing  at  the  beginning  and  end  of  the  taxable  year;  (i)  the 
date  of  completion  of  wells  finished  during  the  taxable  year;  (j)  the  date 
of  abandonment  of  all  wells  abandoned  during  the  taxable  year;  (k)  a 
property  map  showing  the  location  of  the  property  and  of  the  producing 
and  abandoned  wells,  dry  holes,  and  proven  oil  and  gas  land;  (1)  the  aver- 
age gravity  of  the  oil  produced  on  the  tract;  (m)  the  number  of  pay  sands 
and  average  thickness  of  each  pay  sand  or  zone  on  the  property;  (n)  the 
average  depth  to  the  top  of  each  of  the  different  pay  sands;  (o)  any  data 
regarding  change  in  operating  conditions,  such  as  flooding,  use  of^jeom- 
pressed  air,  vacuum,  shooting,  etc.,  which  have  a direct  effect  on  the  pro- 

iNC.  356 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


duction  of  the  property;  (p)  the  monthly  or  annual  production  of  individual 
wells  and  the  initial  daily  production  of  new  wells  (this  is  highly  desirable 
information  and  should  be  furnished  wherever  possible);  (q)  (for  the  first 
year  in  which  the  above  information  is  filed  for  a property  which  was 
producing  prior  to  the  taxable  year  covered  by  the  above  statement  the 
following  information  must  be  furnished)  annual  production  of  the  tract 
or  of  the  individual  wells,  if  the  latter  information  is  available,  from  the 
beginning  of  its  productivity  to  the  beginning  of  the  taxable  year  for 
which  the  return  was  filed;  the  average  number  of  wells  producing  during 
each  year;  and  the  initial  daily  production  of  each  well;  and  (r)  any  other 
data  which  will  be  helpful  in  determining  the  reasonableness  of  the  deple- 
tion deduction.  When  a taxpayer  has  filed  adequate  maps  with  the  Com- 
missioner he  may  be  relieved  of  filing  further  maps  of  the  same  properties, 
provided  all  additional  information  necessary  for  keeping  the  maps  up  to 
date  is  filed  each  year.  This  includes  records  of  dry  holes,  as  well  as  pro- 
ducing wells,  together  with  logs,  depth  and  thickness  of  sands,  location 
of  new  wells,  etc.  By  ‘‘production”  is  meant  ihe  net  [gross]  production  of  [all] 
oil  or  gas  belonging  to  the  taxpayer  [recovered  from  the  wells  and  tanked  or 
utilized].  In  those  leases  where  no  account  is  kept  of  the  oil  or  gas  used  for 
fuel,  the  [gross]  production  will  necessarily  be  that  remaining  after  the  fuel 
used  in  the  property  has  been  taken  out.  In  cases  of  this  kind  an  estimate  of 
the  fuel  used  from  each  tract  should  be  given  for  each  year. 

2947  Art.  219.  Discovery  of  Mine.— The  discovery  of  a mine  or  a 

139  natural  deposit  of  mineral,  whether  it  be  made  by  an  owner  of 

1098  the  land  or  by  a lessee,  shall  be  deemed  to  mean  (a)  the  bona  fide 

discovery  of  a commercially  valuable  deposit  of  ore  or  mineral  of 
a value  materially  in  excess  of  the  cost  of  discovery  in  natural  exposure  or 
by  drilling  or  other  exploration  conducted  above  or  below  ground,  or  (6)  the 
development  and  proving  of  a mineral  or  ore  deposit  which  has  been 
abandoned  or  apparently  worked  out,  or  sold,  leased  or  otherwise  dis- 
posed of,  by  an  owner  or  lessee  prior  to  the  development  of  a body  of  ore 
or  mineral  of  sufficient  size,  quality  and  character  to  determine  it,  in  con- 
nection with  the  physical  and  geological  conditions  of  its  occurrence,  to  be 
a minable  deposit  of  ore  or  mineral  having  a value  materially  in  excess  of 
the  cost  of  the  proving  and  development.  In  determining  whether  a dis- 
covery has  been  made  the  Commissioner  will  take  into  account  the  peculiar 
conditions  of  the  case,  and  every  taxpayer  claiming  the  value  of  a mineral 
deposit  on  the  date  of  discovery  or  within  30  days  thereafter  for  purposes 
of  depletion  will  be  required  to  attach  to  his  return  a statement  setting 
forth  the  conditions  and  circumstances  of  the  discovery  and  the  size,  char- 
acter and  location  of  the  deposit,  together  with  the  cost  of  discovery,  its 
value  and  the  precise  method  used  in  determining  the  value. 

2948  Art.  220.  Discovery  of  Oil  and  Gas  Wells. — In  order  to  take  ad- 

139  vantage  of  his  discovery  on  or  after  March  1,  1913,  of  oil  or  gas 

1098  wells,  the  taxpayer  must  show  {a)  that  the  tract  for  which  such 
valuation  is  claimed  was  not  proven  oil  land  as  to  the  particular 
sand  or  zone  discovery  of  which  is  claimed  at  the  time  the  so-called  dis- 
covery was  made,  proven  oil  land  being  that  which  has  been  shown  by 
finished  wells,  supplemented  by  geologic  data,  to  be  such  that  other  wells 
drilled  thereon  are  practically  certain  to  be  commercial  producers;  {b)  that 
the  discovery  was  a bona  fide  discovery  of  a commercial  well  of  oil  or  gas 
or  both  of  these  substances  on  the  property  in  question,  a commercial  well 
being  one  whose  production  is  such  as  to  offer  a reasonable  expectation  of 

357  TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  301. 


it  least  returning  the  capital  invested  in  such  well  through  the  sale  of  the 
oiror  gas  or  both  derived  therefrom  during  its  economic  life;  and  (c)  that 
the  fair  iriarket  value  of  the  property  was  materially  in  excess  of  the  cost. 

2949  Art.  221.  Proof  of  Discovery  of  Oil  and  Gas  Wells. — In  order  to 

meet  the  requirertients  of  the  preceding  article  to  the  satisfaction 
of  the  Commissioner  the  taxpayer  will  be  required/among  other  things, 
to  submit  the  following  with  his  return:  (a)  a map'^of  convenient  scale, 
showing  the  location  of  the  tract  and  discovery  well  in  question  and  of  the 
nearest  producing  well,  and  the  development  for  a radius  of  at  least  3 
miles  from  the  tract  in  question,  both  on  the  date  of  discovery  and  on  the 
date  when  the  fair  market  value  was  set;  (b)  a certified  copy  of  the  log  of 
the  discovery  well," showing"  the  location,  the  date  drilling^^began,  the  date 
of  completion  and  beginning" of  production,  the  formations  penetrated,  the 
oil,  gas  and  water  sands  penetrated,  the  casing  record,  including  the  record 
of  perforations^  and  any  other  information  tending  to  show  the  condition 
of  the  well  and  the  location  of  the  sand  or  zone  from  which  the  oil  or  gas  is  pro-- 
duced  on  the  date  the  discovery  was  claimed;  ic)  the  logs  of  enough  other  wells 
drilled  prior  to  the  date  of  completion  of  the  discovery  in  the  vicinity  of  the 
discovery  well  to  convince  the  Commissioner  that  the  sand  or  zone  discovery 
of  which  is  claimed  was  not  known  prior  to  the  so-called  discovery;  {d)  a 
sworn  record  of  production,  clearly  proving  the  comm.ercial  productivity 
of  the  discovery  well;  (e)  a sworn  copy  of  the  records,  showing  the  cost  of 
the  property;  and  (/)  a full  explanation  of  the  method  of  determining  the 
vdue  on  the  date  of  discovery  or  within  30  days  thereafter,  supported  by 
satisfactory  evidence  of  the  fairness  of  this  value. 

9260  Art.  222 . Charges  to  Capital  and  to  Expense  in  the  Case  of  Mine . — 

In  the  case  of  mining  operations  all  expenditures  for  plant,  equip- 
ment, development,  rent  and  royalty  prior  to  production,  and  thereafter 
all  major  items  of  plant  and  equipment,  shall  be  charged  to  capital  account 
for  purposes  of  depletion  and  depreciation.  After  a mine  has  been  developed 
and  equipped  to  its  notmal  and  regular  output  capacity,  however,  the  cost 
of  additional  minor  items  of  equipment  and  plant,  including  mules,  motors, 
mine  cars,  trackage,  cables,  trolley  wire,  fans,  small  tools,  etc.,  necessary 
to  maintain  the  normal  output  because  of  increased  length  of  haul  or  depth 
of  working  consequent  on  the  extraction  of  mineral,  and  the  cost  of  replace- 
ments of  these""^and  'similar'"minor  items  of  worn-out  and  discarded  plant 
and  equipment,  may  be  charged  to  current  expense  of  operations,  unless  the 
taxpayer  elects  to  write  off  such  expenditures  through  charges  for  depreciation, 

295l^^Art.  223.  Charges  to  Capital>nd  to  Expense'in  the  Case  of  Oil 
r and  Gas  Wells. — Such  incidental  expenses  as  are  paid  forVages, 
fuel, '^repairs,  hauling,  etc.,  in  connection  with  the  exploration  of  the  prop- 
erty,*^ drilling  of ' wells,  building  of  pipe  lines,  and  development  of  the 
property  may  at  the  option  of  the  taxpayer  be  deducted  as  an  operating 
expense  or  charged^to  the'  capital 'account  returnable^ through  depletion. 
lf|in  exercising  this^option  the  taxpayer  charges  these  incidental  expenses 
to"capitaPacc6unt,^in  so  far  as^^such  expense^is^represented^by'  physical 
property' iPmay  be^taken  into  account'  in  determining' a reasonable^allow- 
ance^for^depreciation .%  TheJcosPoPdrilling"  nonproductive"*  wells^  may  at 
the^option'of  the  operator* be''deducted^from;'^gross^income  as  an^operating 
expense^or^charged  to  capital  ^account  rcturnable^through  depletion  and 
depreciation  as  in  the  case  of  productive  wells.  Jn  election  once  made  under 
this  option  will  control  the  taxpayer's  returns  for  all  subsequent  years,  Casing- 

358  TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  801. 


head-gas  contracts  have  been  construed  to  be  tangible  assets  and  their  cost 
may  be  added  to  the  capital  account  returnable  through  depletion,  following 
the  rate  set  by  the  oil  wells  from  which  the  gas  is  derived,  or,  if  the  life  of  the 
contract  is  shorter  than  the  reasonable  expectation  of  the  life  of  the  wells 
furnishing  the  gas,  the  capital  invested  in  the  contract  may  be  written  off 
through  yearly  allowances  equitably  distributed  over  the  life  of  the  contract. 
All  oil  produced  during  the  taxable  year,  whether  sold  or  unsold,  must  be 
considered  in  the  computation  of  the  depletion  allowance  for  that  [the  taxable] 
year.  In  computing  net  income  all  oil  in  storage  at  the  beginning  and  at  the  end 
of  the  taxable  year  must  be  inventoried  at  cost,  that  is^  unit  cost  plus  lifting  cost. 
Where  deductions  for  depreciation  or  depletion  have  either  on  the  books  of  the 
taxpayer  or  in  his  returns  of  net  income  been  included  in  the  past  in  expense  or 
other  accounts,  rather  than  specifically  as  depreciation  or  depletion,  or  tvhere 
capital  expenditures  have  been  charged  to  expense  in  lieu  of  depreciation  or 
depletion,  a statement  indicating  the  extent  to  which  this  practice  has  been  carried 
should  accompany  the  return. 

2952  ^ Art.  224.  Depreciation  of  Improvements  in  the  Case  of  Mine. — 

‘ It  shall  be  optional  with  the  taxpayer,  subject  to  the  approval  of 
the  Commissioner,  {a)  whether  the  cost  or  value  of  the  mining  property, 
including  ores  and  minerals,  plant  and  equipment,  and  charges  and  addi- 
tions to  capital  account  not  charged  to  expense  and  deducted  as  expense 
on  the  returns  of  the  taxpayer,  shall  be  recovered  at  a rate  established  by 
current  exhaustion  of  mineral,  or  {b)  whether  the  cost  or  value  of  the 
mineral  and  charges  to  capital  account  of  expenditures  other  than  for 
physical  property  shall  be  recovered  by  appropriate  charges  based  on 
depletion  and  the  cost  or  value  of  plant  and  equipment  shall  be  recovered 
by  reasonable  charges  for  depreciation  calculated  by  the  usual  rules  for 
depreciation  or  according'to  the  peculiar  conditions  of  the  taxpayer’s  case 
by  a method  satisfactory^to  the  Commissioner.  Nothing  in  these  regula- 
tions shall  be  interpreted^'to  mean  that  the  value  of  a mining  plant  and 
equipment  may  be  reduced  by  depreciation  or  depletion  deductions  to  a 
sum  below  the  value  of  the  salvage  when  the  property  shall  have  become 
obsolete  or  shall  have  been  abandoned  for  the  purpose  of  mining,  or  that 
any  part  of  the  value  of  land  for  purposes  other  than  mining  may  be  recov- 
erable through  depletion  or]^depreciation. 

29531  Art.  225.  Depreciation  of  Improvements  in  the  Case  of  Oil  and 
Gas  Wells. — Both  owners  and  lessees  operating  oil  or  gas  proper- 
ties will,  in  addition  to  and  apart  from  the  deduction  allowable  for  the 
depletion  or  return  of  capital  as  hereinbefore  provided,  be  permitted  to 
deduct  a reasonable  allowance^for  depreciation  of  physical  property,  such 
as  machinery,  tools,*^ equipment,  pipes,  etc.,  so  far  as  not  in  conflict  with 
the  option  exercised j^by  the  taxpayer  under  article  223.  The  amount  de- 
ductible on  this  account  shall  be  such  an  amount  based  upon  its  cost  or  fair 
market  value  as  of  March  1,  1913  [capitalized  value  or  cost]  equitably  dis- 
tributed over  its  useful  life  as  will  bring  such  property  to  its  true  salvage 
value  when  no  longer  useful  for  the  purpose  for  which  such  property  was 
acquired.  Accordingly,  where  it  can  be  shown  to  the  satisfaction  of  the 
Commissioner  that  the  reasonable  expectation  of  the  economic  life  of  the  oil 
or  gas  deposit  with  which  the  property  is  connected  is  shorter  than  the  normal 
useful  life  of  the  physical  property,  the  amount  annually  deductible  for 
depreciation  may  for  such  property  be  based  upon  the  length  of  life  of  the 
deposit.  See  articles  161-170. 


iiic.  559  TAX 


Reg.  46,  Rev.  See  Note  on  page  301. 


2954  Art.  226.  Depletion  and  Depreciation  of  Oil  and  Gas  Wells  in 
Years  Before  1916. — If  upon  examination  it  is  found  that  in  respect 

of  the  entire  drilling  cost  of  wells,  including  physical  property  and  inci- 
dental expenses,  between  March  1,  1913,  and  December  31,  1915,  a tax- 
payer has  been  allowed  a reasonable  deduction  sufficient  to  provide  for  the 
elements  of  exhaustion,  wear  and  tear,  and  depletion,  it  will  not  be  neces- 
sary to  reopen  the  returns  for  years  prior  to  1916  in  order  to  show  separately 
in  these  years  the  portions  of  such  deduction  representing  depletion  and 
depreciation,  respectively.  Such  separation  will  be  required  to  be  made 
of  the  reserves  for  depreciation  at  January  I,  1916,  and  proper  allocation 
between  depreciation  and  depletion  must  be  maintained  after  that  date. 
In  any  case  in  which  it  is  found  that  the  deductions  taken  between  March 
1,  1913,  and  December  31,  1915,  are  not  reasonable,  amended  returns  may 
be  required  for  these  years.  See  article  839. 

2955  Art.  227.  Depletion  of  Timber. — A reasonable  deduction  from 
2209  gross  income  for  the  depletion  of  timber  and  for  the  depreciation 

of  improvements  is  permitted,  based  (a)  upon  cost  if  acquired 
after  February  28,  1913,  or  (b)  upon  the  fair  market  value  as  of  March  1, 
1913,  if  acquired  prior  thereto.  The  essence  of  this  provision  is  that  the 
owner  of  timber  property,  whether  it  be  a leasehold  or  a freehold,  shall 
secure  through  an  aggregate  of  annual  depletion  and  depreciation  deduc- 
tions a return  of  the  amount  of  capital  invested  by  him  in  the  property, 
or  in  lieu  thereof  an  amount  equal  to  its  fair  market  value  as  of  March  1, 
1913,  plus  in  any  case  the  subsequent  cost  of  plant,  equipment  and  de- 
velopment which  is  not  chargeable  to  current  operating  expenses,  but  not 
including  cut-over  land  values. 

2956  Art.  228.  Capital  Recoverable  Through  Depletion  Allowance  In 
the  Case  of  Timber. — In  general,  the  capital  remaining  in  any  year 

recoverable  through  depletion  allowances  may  be  determined  as  indicated 
in  articles  202  and  203.  In  the  case  of  leases  the  apportionment  of  deduc- 
tions between  the  lessor  and  lessee  should  be  made  as  specified  in  article 
204.  Where  it  becomes  necessary  to  determine  the  cost  or  fair  market 
value  as  of  March  1,  1913,  of  the  property,  the  rules  laid  down  in  articles 
205  and  206  should  be  followed  so  far  as  possible. 

2957  Art.  229.  Computation  of  Allowance  for  Depletion  of  Timber. — 

An  allowance  for  the  depletion  of  timber  in  any  taxable  year  shall 
be  based  upon  the  number  of  feet  of  stumpage  cut  during  the  year  and  the 
unit  cost  of  the  stumpage  at  the  date  of  acquisition  or  the  unit  market 
value  on  March  1,  1913,  if  acquired  prior  thereto.  The  unit  market  value 
as  of  March  1,  1913,  shall  be  the  unit  price  at  which  the  standing  timber  in 
its  then  condition  and  in  view  of  its  then  environment  could  have  been 
sold  for  cash  or  its  equivalent.  The  amount  of  the  deduction  for  deple- 
tion in  any  taxable  year  shall  be  the  product  of  the  number  of  feet  of 
stumpage  cut  during  the  year  multiplied  by  such  unit  cost  or  market  value 
of  the  stumpage. 

2958  Art.  230.  Revaluation  of  Stumpage  Not  Allowed. — The  fair  market 
value  of  stumpage  when  determined  as  of  March  1,  1913,  for  the 

purpose  of  depletion  allowances  in  the  case  of  timber  acquired  prior  thereto, 
shall  be  the  basis  for  determining  the  depletion  deduction  for  each  year  during 
the  continuance  of  the  ownership  under  which  the  fair  market  value  of  the 
stumpage  was  fixed,  and  during  such  ownership  there  can  be  no  redeter- 

360  TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  301. 


mination  of  the  fair  market  value  of  the  stumpage  for  such  purpose.  How- 
ever, the  unit  market  value  of  stumpage  adopted  by  the  taxpayer  may 
subsequently  be  changed  if  from  any  cause  such  value,  if  continued  as  a 
basis  of  depletion,  should  upon  evidence  satisfactory  to  the  Commissioner 
be  found  inadequate  or  excessive  for  the  extinguishment  of  the  fair  market 
value  of  the  timber  as  of  March  1,  1913. 

2959  Art.  231.  Charges  to  Capital  and  to  Expense  in  the  Case  of  Tim- 
ber.— In  the  case  of  timber  operations  all  expenditures  for  plant, 

equipment,  development,  rent  and  royalty  prior  to  production,  and  there- 
after all  major  items  of  plant  and  equipment,  shall  be  charged  to  capital 
account  for  purposes  of  depreciation.  After  a timber  operation  and  plant 
has  been  developed  and  equipped  to  its  normal  and  regular  output  capacity, 
the  cost  of  additional  minor  items  of  equipment  and  the  cost  of  replacement 
of  minor  items  of  worn-out  and  discarded  plant  and  equipment  may  be 
charged  to  current  expenses  of  operations. 

2960  Art.  232.  Depreciation  of  Improvements  in  the  Case  of  Timber . — 
The  cost  or  value  as  of  March  1,  1913,  as  the  case  may  be,  of  de- 
velopment not  represented  by  physical  property  having  an  inventory 
value,  and  such  cost  or  value  of  all  physical  property  which  has  not  been 
deducted  and  allowed  as  expense  in  the  returns  of  the  taxpayer,  shall  be 
recoverable  through  depreciation.  It  shall  be  optional  with  the  taxpayer, 
subject  to  the  approval  of  the  Commissioner,  (a)  whether  the  cost  or  value, 
as  the  case  may  be,  of  the  property  subject  to  depreciation  shall  be  recov- 
ered at  a rate  established  by  current  exhaustion  of  stumpage,  or  (b)  whether 
the  cost  or  value  shall  be  recovered  by  appropriate  charges  for  depreciation 
calculated  by  the  usual  rules  for  depreciation  or  according  to  the  peculiar 
conditions  of  the  taxpayer’s  case  by  a method  satisfactory  to  the  Com- 
missioner. In  no  case  may  charges  for  depreciation  be  based  on  a rate 
which  will  extinguish  the  cost  or  value  of  the  property  prior  to  the  termin- 
ation of  its  useful  life.  Nothing  in  these  regulations  shall  be  interpreted 
to  mean  that  the  value  of  a timber  plant  and  equipment,  so  far  as  it  is  rep- 
resented by  physical  property  having  an  inventory  value,  may  be  reduced 
by  depreciation  deductions  to  a sum  below  the  value  of  the  salvage  when 
the  plant  and  equipment  shall  have  become  obsolete  or  worn  out  or  shall 
have  been  abandoned,  or  that  any  part  of  the  value  of  cut-over  land  may 
be  recoverable  through  depreciation. 

2961  Art . 233 . Statement  to  Be  Attached  to  Return  Where^^Depletion  of 
Timber  Claimed. — To  the  return  of  the  taxpayer  claiming  a deduc- 
tion for  depletion  or  depreciation  or  both  there  should  be  attached  a state- 
ment setting  out  (a)  whether  the  owner  is  an  owner  in  fee  or  a lessee  or 
both;  (b)  a description  of  the  property  owned  in  fee,  if  any,  and  a descrip- 
tion of  the  leasehold  property,  if  any,  including  the  date  of  acquisition  and 
the  date  of  expiration  of  the  lease;  (c)  the  cost  of  the  freehold  and  the 
leasehold  property;  (d)  the  number  of  feet  of  timber  removed  and  sold 
during  the  year  for  which  the  return  was  made;  (e)  the  total  amount  de- 
ducted on  account  of  depletion  and  on  account  of  depreciation,  stated 
separately,  up  to  the  taxable  year  during  the  ownership  of  the  taxpayer; 
and  (f)  any  other  data  which  would  be  helpful  in  determining  the  reason- 
ableness of  the  depletion  and  depreciation  deductions  claimed  in  the  return. 
The  taxpayer  shall  keep  accurate  ledger  accounts  as  outlined  in  article  216, 
and  in  general  should  comply  with  the  requirements  of  the  foregoing 
articles  relating  to  the  depiction  of  mines  and  oil  and  gas  wells  so  far  as 
applicable. 


INC. 


361  TAX 


Reg.  46,  Rev.  See  Note  on  page  301. 

DEDUCTIONS  ALLOWED-CHARITABLE  CONTRIBUTIONS 

2^0.$  Art.  251.  Charitable  Contributions. — Con^tributlons  or  gifts  within 
142  t{ie  taxable  year  are  deductible  to  an  aggregate  amount  not  in 
1102  excess  of  fifteen  per  cent  of  the  taxpayer’s  net  Income  including 
such  payments,  if  made  (a)  to  corporations  or  associations  of  the  kind 
exempted  from  tax  by  subdivision  (6)  of  section  231  of  the  statute  or  {h)  to  the 
special  fund  for  vocational  rehabilitation  under  the  Vocational  Rehabili- 
tation Act  of  June  27,  1918.  For  a discussion'of  what  corporations  and 
associations  are  included  within  (a)  see  article  517.  A gift  to  a common  agency 
{as  a wOfT  chest)  for  several  such  corporations  or  associations  is  treated  like  a gift 
dvTrectly  to  them.  In  connection  with  claims  for  this  deduction  there  shall  be 
stated  on  returns  of  Income  the  name  and  address  of  each  organization 
[corpqration  or  fund]  to  which  a gift  was  made  and  the  approximate  date 
and  the  amount  of  the  gift  in  each  case.  Where  the  gift  is  other  than  money, 
the  basis  for  calculation  of  the  amount  of  the  gift  shall  be  the  fair  market 
value  of  the  property  at  the  time  given.  A gift  of  real  estate  to  a city  to  be 
maintained  perpetually  as  a public  park  is  not  an  allowable  deduction.  This 
article  does  not, apply  to  gifts  by  partnerships^  estates  and  trusts,  or  corporations. 
Ses  sections  218  and  219  of  the  statute  and  articles  561  and  562. 

DEpyjCTIONS  ALLOWED:  LOSS  IN  INVENT9Ry. 

[The  old  provisions  follow  at  the  end  of  the  new  matter,  in  italics,  below.] 

290,3  Art.  261.  Losses  in  Inventory  and  From  Rebates. — Taxpayers  are 
144  allowed  deductions  from  net  income  for  the  taxable  year  1918 /or  losses 
11,19  resulting  (a)  from  material  reductions  after  the  close  of  the  taxable, 
year  1918  of  the  values  of  inventories  for  such  taxable  year.,  and  {b) 
fro.7^  actucd  payments  after  the  close  of  the  taxable  year  1918  of  rebates  in  pur- 
suance  of  contracts  entered  into  during  such  year  upon  sales  made  during  such 
year^  The  taxable  year  of  the  taxpayer,  whether  calendar  or  fiscal,  is  meant  in 
every  case.  Such  deductions  may  be  secured  by  two  methods,  either  by  a claim  in 
alsatemenl  or  by  a claim  for  refund,  and  must  not  be  entered  upon  the  regular 
return. 

2900a  Art.  262.  Loss  from  Rebates. — Where  after  the  close  of  the  taxable 
year  ,1918  rebates  have  been  bona  fide  paid  in  pursuance  of  contracts 
enler^d  into  during  such  year  upon  sales  made  during  such  year,  the  n^t  income 
for  that  year  may  be  reduced  by  the  deduction  of  the  amount  of  such  rebates 
actually  paid.  No  such  deduction  will  be  allowed  unless  the  profits  from  such 
sales  have  been  included  in  the  income  for  the  taxable  year  1918. 

29e3b  Art.  263.  Loss  in  Inventory. — Inventory  losses  are  allowable  either 
(a)  where  goods  included  in  an  inventory  at  the  end  of  the  taxable  year 
191-8  have  been  sold  at  a loss  during  the  succeeding  taxable  year,  or  {b)  where 
such  goods'  remain  unsold  throughout  the  taxable  year  1919  and  at  its  close  have 
a then  market  value  {not  resulting  from  a temporary  fluctuation)  materially 
below  the  value  at  which  they  were  inventoried  at  the  end  of  the  taxable  year  1918. 
No  deduction  is  allowable  for  losses  of  anticipated  profits  or  for  losses  not  sub- 
stantial in  amount,  nor  for  physical  damage  or  obsolescence  occurring  in  the 
taxable  year  1919.  In  determining  whether  goods  included  in  an  inventory  at 
the  end  of  the  taxable  year  1918  have  been  sold  during  the  succeeding  taxable  year, 
and  whether  loss  has  resulted  therefrom,  sales  of  goods  made  in  the  taxable  yecMt 
191*^  will  be  deemed  to  have  been  made  from  the  inventoried  stock  of  1918  until 
such  inventoried  stock  is  exhausted. 


INC. 


362  TAX 


Reg.  45,  iRev.  See  Note  on  page  301. 


4^0-19. 


2963C  Art.  264.  Loss  Where  Goods  Have  Been  Sold. — Where  goods 
included  in  the  inventory  at  the  end  of  the  taxable  year  1918  have  been 
sold  during  the  succeeding  taxable  year^  the  loss  which  may  be  deducted  from  net 
income  for  the  taxable  year  1918  is  the  amount  by  which  the  value  at  which  the 
goods  sold  were  included  in  the  inventory  exceeds  the  actual  selling  price  minus 
a reasonable  allowance  for  selling  expenses  and  for  manufacturing  expenses, 
if  any,  incurred  in  the  taxable  year  1919  and  attributable  to  such  goods. 

2963d  Art.  265.  Loss  Where  Goods  Have  Not  Been  Sold. — Where  goods 
included  in  the  inventory  at  the  end  of  the  taxable  year  1918  have  not 

been  sold  during  the  succeeding  taxable  year,  the  loss  which  may  be  deducted  from 
net  income  for  the  taxable  year  1918  is  the  am.ount  by  which  the  net  income  for 
such  year  would  be  reduced  if  the  inventory  were  redetermined  and  such  goods 
taken  at  their  market  value  {ignoring  mere  temporary  fluctuations  of  vahie)  at  the 
end  of  the  taxable  year  1919. 

2963e  Art.  266.  Claims. — Claims  in  abatement  should  be  filed  with  the 
collector  on  form  47  when  the  return  for  the  taxable  year  1918  is  made. 
Claims  for  refund  should  be  filed  on  form  46  not  later  than  30  days  after  the  close 
of  the  taxable  year  1919.  Each  claim  shall  contain  a concise  statement  of  the 
amount  of  the  loss  sustained  and  the  basis  upon  which  it  has  been  computed,  to- 
gether with  all  pertinent  facts  necessary  to  enable  the  Commissioner  to  determine 
the  allowability  of  the  claim  . The  amount  allowed  by  the  Commissioner  in  respect 
of  any  such  claim  shall  be  deducted  from  the  net  income  for  the  taxable  year  1918 
and  the  taxes  shall  be  recomputed  accordingly.  Any  excess  paid  over  the  tax  due 
shall  be  credited  or  refunded  to  the  taxpayer.  See  section  252  of  the  statute  and 
articles  1031-1038.  In  computing  income  for  the  taxable  year  1919  the  opening 
inventory  must  be  properly  adjusted  by  the  taxpayer  in  respect  of  any  claim 
allowed  for  the  year  1918  under  this  article. 

2963f  Art.  267.  Disposition  of  Claims. — A claim  for  loss  resulting  from 
rebates  paid  or  from  actual  sales  will  be  decided  as  soon  as  practicable 
after  it  has  been  filed.  A claim  for  loss  in  inventory  not  realized  by  sale  will  be 
decided  only  after  the  close  of  the  taxable  year  1919  upon  the  basis  of  any  per- 
manent reduction  in  the  level  of  market  values  which  may  occur  during  such 
year  from  the  inventory  values  taken  at  the  close  of  the  taxable  year  1918.  Not 
later  than  thirty  days  after  the  close  of  the  taxable  year  1919  <2  taxpayer  who  has 
filed  either  a claim  in  abatement  or  a claim  for  refund,  or  both,  shall  submit  to 
the  Commissioner  a descriptive  statement  showing  the  quantity  and  kind  of  all 
goods  included  in  the  1918  inventory  which  have  been  {a)  sold  at  a loss  in  the 
taxable  year  1919,  {b)  sold  at  a profit  during  the  taxable  year  1919,  or  {c)  not 
sold  or  otherwise  disposed  of  during  the  taxable  year  1919,  together  with  such 
other  information  in  respect  of  such  goods  as  the  Commissioner  may  require. 
A claim  filed  with  the  return  for  a loss  not  then  realized  by  sale  will  be  passed 
upon  in  the  light  of  any  sales  thereafter  made  during  the  taxable  year  1919. 
A claim  filed  with  the  return  is  authorized  for  the  purpose  of  allowing  the  tax- 
payer to  utilize,  where  justified,  a preliminary  allowance  for  inventory  losses 
and  not  to  provide  a deduction  essentially  different  from  that  taken  by  way  of 
a claim  filed  at  the  end  of  the  taxable  year  1919. 

2963g  Art.  268.  Effect  of  Claim  in  Abatement. — In  the  cast  of  a claim 
in  abatement  filed  with  a return  payment  of  the  amount  of  the  tax  covered 
thereby  shall  not  be  required  until  the  claim  is  decided,  provided  the  taxpayer 
files  therewith  a bond  on  form  1124  in  double  the  amount  of  the  tax  covered 
by  the  claim,  conditioned  for  the  payment  of  any  part  of  such  tax  found  to  be  due 

363  TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  301. 


with  interest  at  the  rate  of  12  per  cent  per  annum.  The  bond  shall  be  executed 
by  a surety  company  holding  a certificate  of  authority  from  the  Secretary  of  the 
Treasury  as  an  acceptable  surety  on  federal  bonds  and  shall  be  subject  to  the  ap- 
proval of  the  Commissioner.  See  also  section  1320  of  the  statute.  If  abatement 
of  any  part  of  the  tax  covered  by  such  a claim  is  denied,  then  such  part  shall  be 
paid  by  the  taxpayer  with  interest  at  the  rate  of  12  per  cent  per  annum  from  the 
original  due  date  of  the  tax. 

[Art.  261.  Loss  In  Value  of  Inventory. — Losses  under  this  paragraph 
relate  only  to  a redetermination  of  the  value  of  inventories  taken  at  the 
close  of  the  taxable  year  1918.  Such  redetermination  of  value  may  be  made 
(a)  before  the  date  of  filing  a return  for  that  year,  in  which  case  the  c aim 
should  be  filed  with  the  return,  or  (b)  if  no  such  claim  is  filed  with  the  return, 
a claim  may  be  filed  subsequently  thereto  with  the  collector.  Each  claim 
should  state  the  name  and  address  of  the  taxpayer  and  should  contain  a concise 
statement  of  the  amount  of  the  loss  sustained  and  the  basis  upon  which  it  has 
been  computed,  together  with  all  pertinent  facts  necessary  to  enable  the 
Commissioner  to  determine  the  allowability  of  the  claim.  Each  claim 
should  be  supported  by  an  affidavit,  and  after  one  claim  has  been  allowed 
no  further  claim  can  be  considered.  To  be  allowed  such  inventory  loss  must 
be  substantial  in  amount  and  represent  either  (a)  a realization  by  sale  of 
goods  taken  in  the  inventory  or  (b)  a shrinkage  in  market  price  (and  such 
shrinkage  must  show  sound  evidence  of  permanency)  of  goods  taken  in  the 
inventory  and  unsold  at  the  date  of  the  claim.  In  determining  whether  a 
loss  has  been  realized  by  the  sale  of  goods  taken  in  the  inventory,  all  sales 
made  subsequent  to  the  date  of  the  inventory  will  be  deemed  to  have  been 
made  from  the  inventoried  stock  until  such  inventoried  stock  is  exhausted. 
No  claim  will  be  allowed  for  any  loss  of  anticipated  profits.  Claims  may  also 
be  made  for  a deduction  from  income  of  the  taxable  year  1918  of  the  amounts 
of  payments  actually  made  after  the  close  of  such  taxable  year  on  account 
of  rebates  in  pursuance  of  contracts  entered  into  during  such  year  upon 
sales  made  during  such  year.  In  any  case  where  payment  of  the  tax  has 
not  been  made  prior  to  the  filing  of  the  claim  no  such  payment  shall  be 
required  upon  the  income  covered  by  such  claim  until  the  claim  is  decided, 
but  in  such  case  the  taxpayer  shall  accompany  his  claim  with  a bond  in 
double  the  amount  of  the  tax  covered  by  the  claim,  with  sureties  satisfac- 
tory to  the  Commissioner,  conditioned  for  the  payment  of  any  part  of  such 
tax  found  to  be  due.  If  any  part  of  such  claim  is  disallowed,  then  the 
remainder  of  the  tax  due  shall  bear  interest  at  the  rate  of  one  per  cent 
per  month  from  the  time  the  tax  would  have  been  due  had  no  such  claim 
been  filed.  The  amount  allowed  by  the  Commissioner  in  respect  of  any 
such  claim  shall  be  deducted  from  the  net  income  for  the  taxable  year 
1918,  and  the  taxes  shall  be  recomputed  accordingly  and  the  excess  of  tax 
due,  if  any,  shall  be  credited  or  refunded  to  the  taxpayer.  See  section  252 
of  the  statute  and  articles  1031-1036.  In  computing  income  for  the  tax- 
able year  1919,  the  opening  inventory  must  be  properly  adjusted  by  the 
taxpayer  in  respect  of  any  claim  allowed  for  the  year  1918  under  this 
article.  Goods  taken  in  the  inventory  which  have  been  so  intermingled 
that  they  can  not  be  identified  with  specific  invoices  will  be  deemed  to  be 
the  goods  most  recently  purchased.] 

DEDUCTIONS  ALLOWED-NONRESIDENT  ALIEN  INDIVIDUAL 

2964  Art.  271.  Deductions  Allowed  Nonresident  Alien  Individuals. — 

149  In  the  case  of  a nonresident  alien  individual  the  deduction  for 

529  interest  paid  or  accrued  is  proportionate  to  his  income  from  sources 

within  the  United  States  (see  paragraph  (2)  of  subdivision  (a)  of 
INC.  364  TAX 


Ref:.  45,  Rev.  See  Note  on  page  301. 


section  214  of  the  statute);  for  losses  incurred  in  any  transaction  entered  into 
for  profit,  or  arising  from  casualty  or  theft,  is  confined  to  transactions  and 
property  within  the  United  States  (5),  (6);  for  charitable  contributions 
excludes  gifts  to  foreign  corporations  (11);  and  for  business  expenses,  taxes 
imposed  by  a foreign  country,  losses  in  trade,  bad  debts,  depreciation,  amor- 
tization, depletion,  and  loss  in  inventory  (1),  (3),  (4),  (7),  (8),  (9),  (10)  and 
(12),  is  allowed  only  if  and  to  the  extent  that  it  is  connected  vdth  income 
arising  from  a source  within  the  United  States.  See  articles  91  and  311-316. 
As  to  deductions  allowed  foreign  corporations^  see  section  234  {h)  of  the  statute 
and  article  573. 

ITEMS  NOT  DEDUCTIBLE. 

2965  Art.  291.  Personal  and  Family  Expenses.— Insurance  paid  on  a 
152  dwelling  owned  and  occupied  by  a taxpayer  is  a personal  expense. 

1024  Premiums  paid  for  life  insurance  by  the  insured  are  not  deductible. 

2881a  In  the  case  of  a professional  man  w'ho  rents  a property  for  resi- 
dential purposes,  but  incidentally  receives  there  clients,  patients  or  callers 
in  connection  with  his  professional  work  (his  place  of  business  being  else- 
where), no  part  of  the  rent  is  deductible  as  a business  expense.  //,  however, 
he  uses  part  of  the  house  for  his  office,  such  portion  of  the  rent  as  is  properly 
attributable  to  such  office  is  deductible.  The  father  is  legally  entitled  to  the 
services  of  his  minor  children,  and  allowances  which  he  gives  them,  whether 
said  to  be  in  consideration  of  services  or  otherwise,  are  not  allowable  deduc- 
tions in  his  return  of  income.  Alimony  and  an  allowance  paid  under  a separ- 
ation agreement  are  not  deductible  from  gross  income.  See  article  73.  The  cost 
of  the  equipment  of  an  army  officer  to  the  extent  only  that  it  is  specially  required, 
by  his  profession  and.  does  not  merely  take  the  place  of  articles  required  in  civilian 
life  is  deductible.  Accordingly,  the  cost  of  a sword  is  an  allozvable  deduction, 
but  the  cost  of  a uniform  is  not. 

2966  Art.  292.  Traveling  Ejq)enses. — Traveling  expenses,  as  ordinarily 
understood,  include  railroad  fares  and  meals  and  lodging.  If  the 

trip  is  undertaken  for  other  than  business  purposes,  such  roAlroad  fares  are 
personal  expenses  and  such  meals  and  lodging  are  living  expenses.  If  the  trip 
is  on  business,  the  railroad  fares  become  business  instead  of  personal  expenses 
but  the  meals  and  lodging  continue  to  be  living  expenses  and  are  not  deductible  in 
computing  net  income,  {a)  If,  then,  an  individual  whose  business  requires  him 
to  travel  receives  a salary  as  full  compensation  for  his  services,  without  reim- 
bursement of  traveling  expenses,  his  expenses  for  railroad  fares,  but  not  for  meals 
and  lodging,  are  deductible  from  gross  income,  (b)  If  such  an  individual  receives 
a salary  and  is  also  repaid  his  actual  traveling  expenses,  no  part  of  such  expenses, 
is  deductible  from  gross  income  aMd  no  part  of  such  repayment  is  returnable  as 
income,  {c)  If  such  an  individual  receives  a salary  and  also  an  allowance  for 
meals  and  lodging,  as,  for  example,  a per  diem  allowance  in  lieu  of  subsistence, 
any  excess  of  the  cost  of  such  meals  and  lodging  over  the  allowance  is  not  deductible, 
but  any  excess  of  the  allowance  over  the  actual  expenses  is  taxable  income.  Con- 
gressmen and  others  who  receive  a mileage  allowance  for  railroad  fares  should 
return  as  income  any  excess  of  such  allowance  over  their  actual  expenses  for  such 
fares.  A payment  for  the  use  of  a sample  room  at  a hotel  for  the  display  of  goods 
is  a business  expense.  [Living  Expenses. — Living  expenses  are  in  no  event 
allowable  deductions  even  though  incurred  in  the  carrying  on  of  business. 
Amounts  paid  out  for  expenses  for  meals  and  lodging  and  the  like  by  sales- 
men, actors,  and  others  traveling  in  the  course  of  their  employment  are  their 
living  expenses  and  can  not  be  deducted  from  gross  income.  Amounts  which 

365  TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  301. 


are  paid  out  for  expenses  incident  to  services  rendered  and  which  are  re- 
irnbursable  are  not  deductible  as  expenses,  nor  are  the  sums  received  as 
reimbursement  for  them  to  be  returned  as  income.  Any  excess  of  a per 
diem  allowance  in  lieu  of  subsistence  while  under  traveling  orders  over 
living  expenses  is  taxable  income.  Amounts  paid  from  a salary  received 
for  all  services  rendered  and  expenses  incurred  are  deductible  as  business 
expenses  when  the  expenditures  are  occasioned  by  the  services  in  respect 
of  which  the  salary  is  paid.  A salesman  who  has  to  pay  for  the  use  of  a 
sample  room  at  a hotel  for  the  display  of  his  goods  is  entitled  to  deduct 
such  payment  as  a business  expense,  and  a traveling  man  or  actor  is  en- 
titled to^  deduct  railroad  fares  paid  to  enable  him  to  move  about  in  carry- 
ing on  his  occupation.] 

2967  Art.  293.  Capital  Expenditures  . — Amounts  paid  for  increasing  the 
capital  value  or  for  restoring  the  depreciated  value  of  property  are 

not  deductible  from  gross  income.  See  section  214  {a)  (8)  of  the  statute  and  article 
161.  * Amounts  expended  for  securing  a copyright  and  plates,  which  remain  the 
property  of  the  person  making  the  payments,  are  investments  of  capital.  *The 
cost  of  defending  or  perfecting  title  to  property  constitutes  a part  of  the  cost  of 
property  and  is  not  a deductible  expense.  *The  amount  expended  for  architect's 
services^  is  part  of  the  cost  of  the  building.  *Commissions  paid  in  purchasing 
securities  are  a part  of  the  cost  price  of  such  securities.  *Commissions  paid  in 
selling  securities  are  an  offset  against  the  selling  price.  * Expenses  of  the  ad- 
ministration of  an  estate,  such  as  court  costs,  attorney's  fees  and  executoEs  com- 
missions, are  chargeable  against  the  corpus  of  the  estate  and  are  not  allowable 
deductions . * Amounts  to  be  assessed  and  paid  under  an  agreement  between  bond- 
holders or  stockholders  of  a corporation,  to  be  used  in  a reorganization  of  the 
^corporation,  are  investments  of  capital  and  not  deductible  for  any  purpose  in 
returns  of  income.  See  article  543.  An  assessment  paid  by  a stockholder  of  a 
national  bank  on  account  of  his  statutory  liability  is  similarly  not  deductible. 
As  to  items  not  deductible  by  corporations,  see  section  235  and  articles  581  and 
582.  [Amounts  expended  for  additions  and  betterments  or  for  furniture  and 
fixtures,  which  constitute  an  increase  in  capital  investment  and  add  to  the 
value  of  the  assets,  are  not  a proper  deduction,  but  such  expenditures  when 
capitalized  may  be  reduced  through  annual  depreciation  deductions.] 

*Verbatim  as  in  Art.  112,  preliminary  edition.  See  ^2894. 

.2967a  Art.  294.  Premiums  on  Business  Insurance. — Where  the  taxpayer 
155  pays  premiums  on  an  insurance  policy  on  the  life  of  an  officer,  employee 
1028  or  individual  financially  interested  in  the  taxpayers  business,  for  the 
purpose  of  protecting  himself  from  loss  in  the  event  of  the  death  of  any 
such  person,  such  premiums  are  not  deductible  from  his  gross  income.  But  if 
the  taxpayer  is  in  no  sense  a beneficiary  under  such  a policy,  except  as  he  may 
derive  advantage  from  the  increased  efficiency  of  the  employee,  and  pays  the 
premiums  purely  as  reasonable  additional  compensation  of  such  employee,  they 
are  allowable  deductions.  See  articles  33  and  105-108.  In  either  case  whether 
the  proceeds  of  such  policies  paid  upon  the  death  of  the  insured  may  be  excluded 
from  gross  income  or  must  be  included  therein  depends  upon  whether  the  bene- 
ficiary is  an  individual  or  a corporation.  See  section  213  {b)  (1)  and  articles 
72  and  541. 

CREDITS  ALLOWED. 

2968  Art.  301.  Credits  Against  Net  Income. — For  the  purpose  of  im- 

156  posing  the  normal  tax  the  taxpayer’s  net  income  as  computed 

1124  pursuant  to  section  212  of  the  statute  and  articles  21-26  is  first 

reduced  by  the  sum  of  the  allowable  credits.  These  include  divi- 

366  TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  301. 


dends  (as  defined  in  section  201  [of  the  statute]  and  articles  1541-1549)  re- 
ceived other  than  from  foreign  [domestic  or  resident]  corporations  having  no 
income  from  sources  within  the  United  States;  interest  not  entirely  exempt 
from  tax  received  upon  obligations  of  the  United  States  and  bonds  of  the  War 
Finance  Corporation  [bonds];  a personal  exemption;  and  a credit  for  de- 
pendents. Consequently^  the  normal  tax  does  not  apply  to  dividends  from 
domestic  corporations  or  from  foreign  corporations  deriving  income  from  sources 
within  the  United  States,  or  to  interest  on  any  obligations  of  the  United  States. 
See  section  213  {b)  of  the  statute  and  articles  11-^2  and  1131.  For  the  purpose  of 
imposing  the  surtax  the  taxpayer’s  net  income  is  entitled  to  none  of  these 
credits.  As  to  credits  allowed  corporations,  see  section  236  and  article  591. 

2969  Art.  302.  Personal  Exemption  of  Head  of  Family. — A head  of  a 

160  family  is  a person  who  actually  supports  and  maintains  in  one 

1129  household  one  or  more  individuals  who  are  closely  connected  with 

him  by  blood  relationship,  relationship  by  marriage,  or  by  adop- 
tion, and  whose  right  to  exercise  family  control  and  provide  for  these 
dependent  individuals  is  based  upon  some  moral  or  legal  obligation.  In 
the  absence  of  continuous  actual  residence  together,  whether  or  not  a per- 
son with  dependent  relatives  is  a head  of  a family  within  the  meaning  of 
the  statute  must  depend  on  the  character  of  the  separation.  If  a father  is 
absent  on  business  or  at  war,  or  a child  or  other  dependent  is  away  [only 
temporarily]  at  school  or  on  a visit,  the  common  home  being  still  main- 
tained, the  additional  exemption  applies.  If,  moreover,  through  force  of 
circumstances  a parent  is  obliged  to  maintain  his  dependent  children  with  rela-- 
tives  or  in  a boarding  house  zvhile  he  lives  elsewhere,  the  additional  exemption  may 
still  apply.  If,  however,  without  necessity  the  dependent  continuously  makes 
his  home  elsewhere,  his  benefactor  is  not  the  head  of  a family,  irrespective  of 
the  question  of  support.  A resident  alien  with  children  abroad  is  not  the 
head  of  the  family. 

2970  Art.  303.  Personal  Exemption  of  Married  Person. — In  the  case 
160  of  a married  man  or  married  woman  the  joint  exemption  replaces 

1129  the  individual  exemption  only  if  the  man  lives  with  his  wife  or 
the  woman  lives  with  her  husband.  In  the  absence  of  continuous 
actual  residence  together,  whether  or  not  a man  or  woman  has  a wife  or 
husband  living  with  him  or  her  within  the  meaning  of  the  statute  must 

depend  on  the  character  of  the  separation.  If  merely  occasionally  and 

temporarily  a wife  is  away  on  a visit  or  a husband  is  away  on  business, 
the  joint  home  being  maintained,  the  additional  exemption  applies.  The 
unavoidable  absence  of  a wife  or  husband  at  a sanatorium  or  asylum  on 
account  of  illness  does  not  preclude  claiming  the  exemption.  If,  however, 
the  husband  voluntarily  and  continuously  makes  his  home  at  one  place  and 
the  wife  hers  at  another,  they  are  not  living  together  for  the  purpose  of 
the  statute,  irrespective  of  their  personal  relations.  A resident  alien  with 
a wife  residing  abroad  is  not  entitled  to  \\\(z  joint  [$2,000]  exemption. 

2971  Art.  304.  Credit  for  Dependents. — A taxpayer  receives  a credit 

168  of  $2Q0  for  each  person  (other  than  husband  or  wife),  whether 

1138  related  to  him  or  not  and  whether  living  with  him  or  nor,  dependent 

upon  and  receiving  his  chief  support  from  the  taxpayer,  provided 
tlie  dependent  is  either  (a)  under  18  or  (b)  incapable  of  self-support  because 
defective.  The  credit  is  based  upon  actual  financial  dependency  and  not 
mere  legal  dependency.  It  may  accrue  to  a taxpayer  who  is  not  the  head 
of  a family.  But  a father  whose  children  receive  half  or  more  of  their  sup- 
port from  a trust  fund  or  other  separate  source  is  not  entitled  to  the  credit. 

INC.  367  TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


297 1 a Art.  305.  Date  Determining  Exemption. — The  status  of  the  taxpayer 

1140  on  the  last  day  of  his  taxable  year  determines  his  right  to  an  addi- 

1141  tional  exemption  and  to  a credit  for  dependents.  If  then  he  is  the 
3245  head  of  a family,  the  personal  exemption  of  $2,000  may  he  taken. 

If  then  he  is  the  chief  support  of  a dependent  who  is  under  eighteen 
years  of  age  or  incapable  of  self-support  because  mentally  or  physically  defective, 
the  credit  of  $200  may  be  taken.  But  an  unmarried  individual  or  a married 
individual  not  living  with  husband  or  wife,  who  during  the  taxable  year  has 
ceased  to  be  the  head  of  a family  or  to  have  dependents,  is  entitled  only  to  the 
personal  exemption  of  $1,000  allowed  a single  person.  A husband  and  wife 
living  together  at  the  end  of  the  taxable  year  may  receive  but  one  personal  exemption 
of  $2,000,  divisible  as  they  please,  against  their  aggregate  net  income.  If  an 
individual  dies  during  the  taxable  year,  his  executor  or  administrator  in  7naking 
a return  for  him  is  entitled  to  claim  his  full  personal  exemption  according  to  his 
status  at  the  time  of  his  death.  See  also  section  219  {c)  of  the  statute  and  articles 
346  and  421.  If  a husband  or  wife  so  dies  and  the  joint  personal  exemption  is 
used  by  the  executor  or  administrator  in  making  a return  for  the  decedent,  an 
undiminished  personal  exemption  according  to  the  status  of  the  survivor  at  the 
end  of  the  taxable  year  may  be  claimed  in  the  survivor^ s return.  If  a taxpayer 
makes  a return  for  a period  other  than  a taxable  year,  the  last  day  of  such  period 
shall  be  treated  as  the  last  day  of  the  taxable  year  for  the  purpose  of  this  article. 
See  section  226  and  articles  431  and  1013. 

2972  Art.  306  [Art.  305].  Credits  to  Nonresident  Alien  Individual. — A 

164  nonresident  alien  individ.ual,  similarly  to  a citizen  or  resident,  is 
537  entitled  for  the  purpose  of  the  normal  tax  to  credit  dividends  from 
domestic  or  resident  foreign  corporations,  interest  on  obligations  of  the 
United  States,  a personal  exemption,  and  $200  for  each  dependent,  except  that 
if  he  is  a citizen  or  subject  of  a country  which  imposes  an  income  tax  a personal 
exemption  or  credit  for  dependents  is  alloived  him  ^‘only  if  such  country  allows  a 
similar  credit  to  citizens  of  the  United  States  not  residing  in  such  country 
^Af  such  country  allows  a similar  credit''’  means  if  such  country  in  imposing  its 
income  tax  allozvs  a personal  exemption  or  a credit  for  dependents,  as  the  case 
may  be,  and  allows  it  without  discrimination  to  citizens  of  the  United  States 
not  residing  in  such  country.  For  the  meaning  of  '‘^country'’  see  article  382. 
To  satisfy  the  requirement  of  a similar  credit  it  is  not  necessary  that  the  personal 
exemption  or  credit  for  dependents,  as  the  case  may  be,  should  be  the  same  as  that 
allowed  by  the  United  States  statute.  The  status  as  to  residence  of  an  alien 
individual  on  the  last  day  of  his  taxable  year  determines  his  right  to  be  treated  as  a 
resident  or  as  a nonresident  for  such  year.  [A  nonresident  alien  individual, 
similarly  to  a citizen  or  resident,  is  entitled  for  the  purpose  of  the  normal  tax 
to  credit  corporate  dividends,  interest  on  obligations  of  the  United  States, 
a personal  exemption,  and  $200  for  each  dependent,  except  that  in  the  last  two 
cases  if  he  is  a citizen  or  subject  of  a country  which  imposes  an  income  tax 
the  credit  is  allowed  only  if  his  country  allows  a similar  credit  to  citizens  of  the 
United  States  not  residing  in  such  country.  By  “similar  credit”  is  meant  the 
same  personal  exemption  or  credit  for  dependents  to  citizens  of  the  United 
States  as  is  allowed  citizens  of  such  country,  not  necessarily  the  same  amount 
as  in  the  United  States  statute.] 

297 2. a Art.  307.  V/hen  Nonresident  Alien  Individual  Entitled  to  Personal 
3274  Exemption. — {a)  The  following  is  an  incomplete  list  of  countries 
which  either  impose  no  income  tax  or  in  imposing  an  income  tax  allow 
both  a personal  exemption  and  a credit  for  dependents  which  satisfy  the  similar 
credit  requirement  of  the  statute:  Argentina;  Bosnia;  Brazil;  Canada;  Carinthia; 
China;  Cuba;  Dalma'ia;  Denmark;  France;  Herzegovina;  I stria;  Mexico; 

INC.  368 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


Montenegro;  Persia;  Portugal;  Rouniania;  Russia;  Serbia;  Union  of 
South  Africa,  {b)  The  following  is  an  incomplete  list  of  countries  which  in 
imposing  an  income  tax  allow  a personal  exemption  which  satisfies  the  similar 
credit  requirements  of  the  statute , but  do  not  allow  a credit  for  dependents:  Bachka; 
Banat  of  Temesvar;  Croatia;  Italy;  Slavonia,  (c)  The  following  is  an  in- 
complete list  of  countries  which  in  imposing  an  income  tax  do  not  allow  to 
citizens  of  the  United  States  not  residing  in  such  country  either  a personal 
exemption  or  a credit  for  dependents  and.,  therefore,  fail  entirely  to  satisfy  the 
similar  credit  requirement  of  the  statute:  Australia;  Great  Britain  and  Ire- 
land; Japan;  New  Zealand;  Spain.  The  former  names  of  certain  of  the  terri- 
tories are  here  used  for  convenience,  in  spite  of  an  actual  or  possible  charge 
in  name  or  sovereignty.  A nonresident  alien  individual  who  is  a citizen  or 
subject  of  any  country  in  the  first  list  is  entitled  for  the  purpose  of  the  normal 
tax  to  such  credit  for  a personal  exemption  and  for  dependents  as  his  family 
status  may  warrant.  If  he  is  a citizen  or  subject  of  any  country  in  the  second 
list  he  is  entitled  to  a credit  for  a personal  exemption,  but  to  none  for  dependents. 
If  he  is  a citizen  or  subject  of  any  country  in  the  third  list  he  is  not  entitled  to 
credit  for  either  a personal  exemption  or  for  dependents.  If  he  is  a citizen  or 
subject  of  a country  which  is  in  none  of  the  lists,  then  to  secure  credit  for  either 
a personal  exemption  or  for  dependents  he  must  prove  to  the  satisfaction  of  the 
Commissioner  that  his  country  does  not  impose  an  income  tax  or  that  in  imposing 
an  income  tax  it  grants  the  similar  credit  required  by  the  statute. 

NONRESIDENT  ALIENS— ALLOWANCE  OF  DEDUCTIONS  AND 

CREDITS. 

2973  Art.  311  [315].  Allowance  of  Deductions  and  Credits  to  Nonresident 
165  Alien  Individual. — Unless  a nonresident  alien  individual  shall  render 
538  a return  of  income  as  required  in  article  404,  the  tax  shall  be  collected 

on  the  basis  of  his  gross  income  (not  his  net  income)  from  sources 
within  the  United  States.  Where  a nonresident  alien  has  various  sources 
of  income  within  the  United  States,  so  that  from  any  one  source  or  from 
all  sources  combined  the  amount  of  incomm  shall  call  for  the  assessment 
of  a surtax,  and  a return  of  income  shall  not  be  filed  by  him  or  on  his  behalf 
the  Commissioner  will  cause  a return  of  income  to  be  made  and  include 
therein  the  income  of  such  nonresident  alien  from  all  sources  concerning 
which  he  has  inform.ation,  and  he  will  assess  the  tax  and  collect  it  from  one 
or  more  of  the  sources  of  income  within  the  United  States  of  such  non- 
resident alien,  without  allowance  for  deductions  or  credits.  The  benefit 
of  the  credits  allowed  against  net  income  for  the  purpose  of  the  normal 
tax  may  not  be  received  by  a nonresident 'alien  by  filing  a claim  with  the 
withholding  agent,  but  only  by  claiming  them  upon  filing  a return  of  income, 
except  as  permitted  in  article  316.  See  section  216  of  the  statute  and  articles 
306  and  307. 

297 sa  Art.  312  [Art.  311].  Who  is  a Nonresident  Alien  Individual. — 

“Nonresident  alien  individual”  means  an  individual  (a)  whose 
residence  is  not  within  the  United  States  and  (b)  who  is  not  a citizen  of  the 
United  States.  Any  alien  living  in  the  United  States  who  is  not  a mere 
transient  is  a resident  of  the  United  States  for  purposes  of  the  income  tax. 
Whether  he  is  a transient  or  not  is  determined  by  his  intentions  with  regard 
to  his  stay.  If  he  lives  in  the  United  States  and  has  no  definite  intention  as  to 
his  stay,  he  is  a resident.  The  best  evidence  of  his  [such]  intention [j]  is  afforded 
bv  the  conduct,  acts  and  declarations  of  the  alien.  The  typical  transient  is  one 
who  stops  for  a short  time  in  the  course  of  a journey  through  the  United 
States,  sometimes  performing  labor,  sometimes  not,  or  one  who  enters  the 

INC.  369  TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


United  States  intending  only  to  stop  long  enough  to  carry  out  some  purpose^ 
object  or  plan  not  involving  an  extended  stay.  A mere  floating  intention, 
indefinite  as  to  time,  to  return  to  another  country  is  not  sufficient  to  con- 
stitute him  a transient. 

• 

2974  Art.  313  [Art.  312].  Proof  of  Residence  of  Alien. — An  alien's  state- 
ments as  to  his  intention  with  regard  to  residence  are  not  conclusive 

but  when  unequivocal  will  determine  the  question  of  his  intention,  unless  his 
conduct,  acts,  or  other  surrounding  circumstances  contradict  the  state- 
ments. It  sometimes  occurs  that  an  alien  who  genuinely  intends  his  stay 
to  be  transient  may  put  off  his  departure  from  time  to  time  by  reason  of 
changed  conditions,  remaining  a transient  .though  living  in  the  United 
States  for  a considerable  time.  The  fact  that  an  alien's  family  is  abroad 
does  not  necessarily  indicate  that  he  is  a transient  rather  than  a resident. 
An  alien  who  enters  this  country  intending  to  make  his  home  in  a foreign 
country  as  soon  as  he  has  accumulated  a sum  of  money  sufficient  to  pro- 
vide for  his  journey  abroad  is  to  be  considered  a transient,  provided  his 
expectation  in  this  regard  may  reasonably,  considering  the  rate  of  his  sav- 
ing, be  fulfilled  within  a comparatively  short  time. 

2975  Art.  314  [Art.  313].  Loss  of  Residence  by  Alien. — It  will  be  pre- 
sumed that  an  alien  who  has  established  a residence  in  the  United 

States,  as  outlined  above,  continues  to  be  a resident  until  he  or  his  family 
evidence  an  intention  to  change  their  residence  to  another  country  by  starting 
to  remove.  Thus,  alien  residents  who,  following  the  armistice  agreement  of 
November,  1918,  take  steps  toward  returning  to  their  native  countries, 
as  by  applying  for  passports,  may  for  the  purpose  of  withholding  [are  to]  be 
regarded  as  residents  for  that  portion  of  the  taxable  year  which  elapsed  up 
to  the  time  such  step  was  taken.  But  the  status  of  the  alien  on  the  last  day 
of  his  taxable  year  or  period  determines  his  liability  to  tax  for  such  year  or 
period  as  a resident  or  nonresident.  See  articles  305  and  306. 

2976  Art.  315.  [Art.  314].  Duty  of  Employer  to  Determine  Status  of  Alien 

Employeer-Aliens  employed  in  the  United  States  are  prima  facie 
regarded  as  nonresidents.  If  wages  are  paid  without  withholding  the  tax 
except  as  permitted  in  the  followhig  article,  the  employer  should  be  provided 
with  written  proof  of  facts  which  overcome  the  presumption  that  such  alien 
is  a nonresident.  Such  facts  include  the  following:  (a)  If  an  alien  has  been 
living  in  the  United  States  for  as  much  as  one  year  immediately  prior  to  the 
time  he  entered  the  employment  of  the  withholding  agent,  or  if  he  has  been 
regularly  employed  by  a resident  individual  or  corporation  in  the  same 
county  for  as  much  as  three  months  immediately  prior  to  any  payment  by 
the  employer  he  m.ay  be  treated  as  a resident  in  the  absence  of  facts  known 
to  the  employer  showing  that  he  is  in  fact  a transient,  such  as  one  of  the 
types  mentioned  under  article  312.  The  facts  with  regard  to  the  length  of 
time  the  alien  has  thus  lived  in  the  country  or  county  and  has  been  so  regularly 
employed  may  be  established  by  the  certificate  of  the  alien,  (b)  The 
employer  may  also  obtain  evidence  to  overcome  the  prima  facie  presumption 
of  nonresidence  by  securing  from  the  alien  form  1078  (revised)  [properly 
executed,]  or  an  equivalent  certificate  of  the  alien  establishing  residence. 
Having  secured  such  evidence  from  the  alien,  the  employer  may  rely  thereon 
unless  the  statement  of  the  alien  was  false  and  the  employer  has  reasonable 
cause  to  believe  it  false,  and  may  continue  to  rely  thereon  until  the  alien 
ceases  to  be  a resident'  under  the  provisions  of  article  314.  An  employer 
who  seeks  to  account  for  failure  to  withhold  in  the  past,  if  he  did  not  at  the- 

370  TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  301. 


time  secure  form  1078  (revised)  or  its  equivalent  [at  the  time],  is  permitted 
to  prove  the  former  status  of  the  alien  by  any  material  evidence. 

2976a  [Art.  315.  Allowance  of  Deductions  and  Credits  to  Nonresident 
Alien. ^291 2>\. 

2977  Art.  316.  Allowance  of  Personal  Exemption  to  Nonresident  Alien 

541  Employee. nonresident  alien  employee^  provided  he  is  entitled  under 

3275  section  216  of  the  statute  and  articles  301-307  to  credit  for  a personal 
exemption  or  for  dependents  or  both,  may  claim  the  benefit  of  such  credit 
by  filing  with  his  employer  form  1115,  duly  filled  out  and  executed  under  oath. 
See  particularly  the  lists  of  foreign  countries  in  article  307.  On  the  filing  of  such 
a claim  the  employer  shall  examine  it.  If  on  such  examuiation  it  appears  that 
the  claim  is  in  due  form,  that  it  contains  no  statement  which  to  the  knowledge  of 
the  employer  is  untrue,  that  such  employee  on  the  face  of  the  claim  is  entitled  to 
credit,  and  that  such  credit  has  not  yet  been  exhausted,  such  employer  need  not 
until  such  credit  be  in  fact  exhausted  withhold  any  tax  from  payments  of  salary 
or  wages  made  to  such  employee.  Every  employer  with  whom  affidavits  of  claim 
on  form  1115  are  filed  by  employees  shall  preserve  such  affidavits  until  the  follow- 
ing calendar  year,  and  shall  then  file  them,  attached  to  his  annual  withholding 
return  on  form  1042  {revised),  with  the  collector  on  or  before  March  1.  In  case, 
however,  when  the  following  calendar  year  arrives  such  employer  has  no  with- 
holding to  return,  he  shall  forward  all  such  affidavits  of  claim  directly  to  the 
Commissioner  {Sorting  Division),  zvith  a letter  of  transmittal,  on  or  before 
March  15.  Where  any  tax  is  withheld  the  employer  in  every  instance  shall 
show  on  the  pay  envelope  or  shall  furnish  some  other  memorandum  showing 
the  name  of  the  employee,  the  date  and  the  amount  withheld.  This  article  applies 
only  to  payments  of  compensation  by  an  employer  to  an  employee.  See  f urther 
section  221  and  articles  361-376. 

PARTNERSHIPS  AND  PERSONAL  SERVICE  CORPORATIONS. 

2977a  NOTE. — The  revised  regulations  bearing  on  partnerships  and 
personal  service  corporations  (^2978  to  ^2990)  are  much  the  same  as  the 
corresponding  regulations  in  the  preliminary  edition  except  as  to  arrangement, 
in  which  regard,  however,  the  changes  are  so  extensive  that  to  have  indicated 
these  by  the  use  of  brackets  and  italics,  as  elsewhere  in  the  revision,  would 
have  proved  annoying  rather  than  helpful.  Hence  the  use  of  regular  Roman 
type  in  ^2978  to  ^2990. 

2978  Art.  321.  Partnerships. — [See  note  at  ^2977a.]  Partnerships  as 

168  such  are  not  subject  to  taxation  under  the  statute,  but  are  required 

169  to  make  returns  of  income.  See  section  224  of  the  statute  and  articles 
411  and  412.  Individuals  carrying  on  business  in  partnership  are, 

however,  taxable  upon  their  distributive  shares  of  the  net  income  of  such 
partnerships,  whether  distributed  or  not,  and  are  required  to  include  such 
distributive  shares  in  their  returns.  The  net  income  of  a partnership  shall  be 
computed  in  the  same  manner  and  on  the  same  basis  as  the  net  income  of  an 
individual,  except  that  the  deduction  of  contributions  or  gifts  is  not  per- 
mitted. See  section  212  and  articles  21-26.  As  to  the  excess  profits  tax 
on  partnerships  with  fiscal  years  ending  in  1918  see  section  335  (c). 

2978a  Art.  322.  Distributive  Shares  of  Partners.— [See  note  at  l[2977a.] 
The  distributive  share  of  the  net  income  of  a partnership  which  a 
partner  is  required  to  include  in  his  return  is  his  proportionate  share  of  the 

INC.  371 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


net  income  of  the  partnership,  either  (a)  for  the  taxable  year  upon  the  basis, 
of  which  the  partner’s  net  income  is  computed,  or  (Z?)  if  the  partner’s  net 
income  is  computed  upon  the  basis  of  a taxable  year  different  from  that  upon 
the  basis  of  . which  the  net  income  of  the  partnership  is  computed,  for  the 
taxable  year  of  the  partnership  ending  within  the  taxable  year  upon  the 
basis  of  which  the  partner’s  net  income  is  computed.  Amounts  earned  and 
distributed  to  a partner  by  a partnership  after  the  end  of  its  taxable  year  and 
before  the  end  of  his  corresponding  taxable  3'ear  should  be  accounted  for 
both  by  the  partnership  and  by  the  partner  in  their  returns  for  their  next 
succeeding  taxable  years. 

2S78b  Art.  323.  Credits  Allowed  Partners.— [See  note  at  ®|2977a.]  In 
addition  to  the  credits  ordinarily  allowed  to  an  individual,  a partner 
is  entitled  to  the  following  credits:  (a)  a credit  against  net  income  for  the 
purpose  of  the  normal  tax  only  of  his  proportionate  share  of  such  dividends 
from  corporations  subject  to  tax  and  of  such  interest  not  entirely  exempt 
from  tax  upon  obligations  of  the  United  States  and  bonds  of  the  War  Finance 
Corporation  as  are  received  by  the  partnership;  and  (b)  a credit  against 
income  tax  of  the  partner’s  proportionate  share  of  any  income,  war  profits 
and  excess  profits  taxes  of  the  partnership  paid  or  accrued  during  the  taxable 
year  to  a foreign  country  upon  income  derived  from  sources  therein,  or  to 
any  possession  of  the  United  States,  subject  to  the  limitations  of  section  222 
of  the  statute.  See  section  216  and  articles  301  and  381-384. 

2979  Art.  324.  Taxation  of  Partners  in  Partnership  with  Fiscal  Year 
G3  Ending  in  1918. — [See  note  at  Tf2977a.]  If  the  fiscal  year  of  a part- 
72  nership  began  in  the  calendar  year  1917  and  ended  in  the  calendar 

1674  year  1918,  the  rates  of  tax  for  the  calendar  year  1917  apply  to  the 

1678  amount  of  each  partner’s  distributive  share  of  the  net  income  of  the 
partnership  for  such  fiscal  year  attributable  to  the  calendar  year 
1917,  and  the  rates  for  the  calendar  year  1918  to  the  amount  of  each  partner’s 
distributive  share  of  such  net  income  of  the  partnership  attributable  to  the 
calendar  year  1918.  (a)  The  amount  of  each  partner’s  distributive  share  of 

the  net  income  of  the  partnership  for  such  fiscal  year  attributable  to  the 
calendar  3^ear  1917  is  found  by  determining  the  net  income  of  the  partnership 
for  its  entire  fiscal  year  in  accordance  with  the  law  applicable  to  the  calendar 
year  1917  (see  Title  I of  the  Revenue  Act  of  1916  and  Titles  I and  XII  of  the 
Revenue  Act  of  1917)  and  the  distributive  share  thereof  of  each  partner,  and 
then  taking  such  proportion  of  that  distributive  share  as  the  part  of  the  fiscal 
year  falling  within  the  calendar  year  1917  bears  to  the  full  fiscal  year,  (b) 
The  amount  of  each  partner’s  distributive  share  of  the  net  income  of  the 
partnership  for  such  fiscal  year  attributable  to  the  calendar  year  1918  is 
found  by  determining  the  net  income  of  the  partnership  for  its  entire  fiscal 
year  in  accordance  with  the  law  applicable  to  the  calendar  year  1918  and  the 
distributive  share  thereof  of  each  partner,  and  then  taking  such  proportion 
of  that  distributive  share  as  the  part  of  the  fiscal  year  falling  within  the 
calendar  year  1918  bears  to  the  full  fiscal  year.  See  section  205  (c)  of  the 
statute  and  article  1621. 

2980  Art.  325.  Application  of  Different  Tax  Rates  in  the  Case  of  Fiscal 
72  Year  of  Partnership  Ending  in  1918. — [See  note  at  ^2977a.]  Any 

1678  deductions,  exemptions  or  credits  to  which  the  partner  in  a partner- 
ship with  a fiscal  year  ending  in  1918  is  entitled  shall  first  be  applied 
against  his  income  subject  to  the  rates  for  the  calendar  year  1918,  unless  of  a 
kind  plainly  and  properly  chargeable  against  income  taxable  at  the  rates  for 


INC. 


372 


TAX 


Reg.  45,  Rev.  See  Note  on  page  SOI. 


the  calendar  year  1917.  The  proportionate  share  of  a partner  of  any  excess 
profits  tax  imposed  upon  the  partnership  under  the  Revenue  Act  of  1917 
with  respect  to  that  part  of  the  fiscal  year  falling  within  the  calendar  year 

1917  is  plainly  and  properly  chargeable  against  income  taxable  at  the  rate 
for  that  year  and  shall  b'e  credited  against  such  income  of  the  partner.  In 
determining  the  rates  of  tax  applicable  to  the  amounts  of  the  distributive 
shares  of  the  partners  attributable  to  the  calendar  years  1917  and  1918, 
respectively,  the  amounts  subject  to  the  rates  for  the  calendar  year  1918 
shall  be  placed  in  the  lower  brackets  of  the  rate  schedule  provided  in  the 
present  statute  and  the  amounts  attributable  to  the  calendar  year  1917  in 
the  next  higher  brackets  of  the  rate  schedule  applicable  to  that  year.  See 
section  206  of  the  statute  and  article  1641,  and  also  section  1 of  Title  I of  the 
Revenue  Act  of  1916  and  sections  1 and  2 of  Title  I of  the  Revenue  Act  of 

1917. 

2981  Art.  326.  Taxation  of  Partners  in  Partnership  with  Fiscal  Year 
68  Ending  in  1919. — [See  note  at  iy2977a.j  If  the  fiscal  year  of  a part- 
72  nership  began  in  the  calendar  year  1918  and  ends  in  the  calendar 
1674  year  1919,  the  rates  of  tax  for  the  calendar  year  1918  apply  to  the 
1678  amount  of  each  partner’s  distributive  share  of  the  net  income  of  the 
partnership  for  such  fiscal  year  attributable  to  the  calendar  year 

1918,  and  the  rates  for  the  calendar  year  1919  to  the  amount  of  each  partner’s 

distributive  share  of  such  net  income  of  the  partnership  attributable  to  the 
calendar  year  1919.  (<3)  The  amount  of  each  partner’s  distributive  share 

of  the  net  income  of  the  partnership  for  such  fiscal  year  attributable  to  the 
calendar  year  1918  is  found  by  determining  the  net  income  of  the  partnership 
for  its  entire  fiscal  year  in  accordance  with  the  law  applicable  to  the  calendar 
year  1918  and  the  distributive  share  thereof  of  each  partner,  and  then  taking 
such  proportion  of  that  distributive  share  as  the  part  of  the  fiscal  year  falling 
within  the  calendar  year  1918  bears  to  the  full  fiscal  year,  {b)  The  amount 
of  each  partner’s  distributive  share  of  the  net  income  of  the  partnership  for 
such  fiscal  year  attributable  to  the  calendar  year  1919  is  found  by  determining 
the  net  income  of  the  partnership  for  its  entire  fiscal  year  in  accordance  with 
the  law  applicable  to  the  calendar  year  1919  and  the  distributive  share  thereof 
of  each  partner,  and  then  taking  such  proportion  of  that  distributive  share  as 
the  part  of  the  fiscal  year  falling  within  the  calendar  year  1919  bears  to  the 
full  fiscal  year.  See  section  205  (c)  of  the  statute  and  article  1621. 

2S82  Art.  327.  Application  of  Different  Tax  Rates  in  the  Case  of  Fiscal 
72  Year  of  Partnership  Ending  in  1919. — [See  note  at  '|[2977a.]  Any 
1678  deductions,  exemptions  or  credits  to  which  the  partner  in  a partner- 
ship with  a fiscal  year  ending  in  1919  is  entitled  shall  first  be  applied 
against  his  income  subject  to  the  rates  for  the  calendar  year  1919,  unless  of  a 
kind  plainly  and  properly  chargeable  against  income  taxable  at  the  rates  for 
the  calendar  year  1918.  In  determining  the  rates  of  tax  applicable  to  the 
amounts  of  the  distributive  shares  of  the  partners  attributable  to  the  calendar 
years  1918  and  1919,  respectively,  the  amounts  subject  to  the  rates  for  the 
calendar  year  1919  shall  be  placed  in  the  lower  brackets  of  the  rate  schedule 
provided  in  the  statute,  and  the  amounts  attributable  to  the  calendar  year 

1918  in  the  next  higher  brackets  of  the  rate  schedule  applicable  to  that  year. 
See  section  206  of  the  statute  and  article  1641. 

2383  Art.  328.  Personal  Service  Corporations. — [See  note  at  1|2977a.] 
177  Personal  service  corporations  are  defined  in  section  200  of  the  statute. 
1305  See  articles  1523-1532.  Such  corporations  are  not  subject  to  tax  as 
corporations,  unless  they  make  returns  for  fiscal  years  beginning  in 

373 


INC. 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


1917,  but  they  are  required  to  make  returns  of  income.  See  sections  231, 
239  and  304  of  the  statute  and  the  articles  thereunder.  An  individual  stock- 
holder of  a personal  service  corporation  is,  however,  subject  to  tax  much  like 
a member  of  a partnership  upon  his  distributive  share  of  the  net  income  of 
the  corporation.  The  net  income  of  a personal  service  corporation,  as  in  the 
case  of  a partnership,  shall  be  computed  in  the  same  manner  and  on  the 
same  basis  as  the  net  income  of  an  individual,  except  that  the  deduction  of 
contributions  or  gifts  is  not  permitted.  See  section  212  and  articles  21-26. 
A corporation  which  is  taxable  under  section  303  is  not  a personal  service 
corporation  and  its  stockholders  are  taxed  like  stockholders  in  an  ordinary 
corporation. 

2984  Art.  329.  Personal  Service  Corporation  with  Fiscal  Year  Ending  in 

60  1918. — [See  note  at  ^2977a.]  If  the  fiscal  year  of  a personal  service 

1666  corporation  began  in  the  calendar  year  1917  and  ended  in  the  calendar 
year  1918,  it  is  subject  to  tax  as  a corporation  for  the  part  of  such 
fiscal  year  which  falls  within  the  calendar  year  1917.  The  amount  for  which 
such  a corporation  is  liable  is  such  proportion  of  the  tax  for  the  entire  fiscal 
year  computed  in  accordance  with  Title  I of  the  Revenue  Act  of  1916  as 
amended  and  with  Title  I of  the  Revenue  Act  of  1917  as  the  portion  of  such 
fiscal  year  falling  within  the  calendar  year  1917  is  of  the  entire  period.  An 
amount  previously  paid  by  the  corporation  on  account  of  the  income  tax  for 
such  fiscal  year  shall  be  credited  toward  the  payment  of  the  tax  for  the  portion 
of  the  fiscal  year  falling  within  the  calendar  year  1917,  and  any  excess  shall 
be  credited  or  refunded  in  accordance  with  the  provisions  of  section  252  of 
the  statute.  See  section  205  (a)  and  article  1621.  As  to  the  excess  profits 
tax  see  section  335  (c). 

2985  Art.  330.  Distributive  Shares  of  Stockholders  in  Personal  Service 
179  Corporation. — [See  note  at  1f2977a.]  A stockholder  of  a personal 

1307  service  corporation  is  required  to  include  in  his  gross  income  for  the 
taxable  year  (a)  any  dividends  paid  by  the  corporation  in  such  year 
out  of  earnings  or  profits  accumulated  since  February  28,  1913,  and  before 
January  1,  1918;  (b)  his  share  of  any  distribution  made  by  the  corporation  in 
such  year  out  of  earnings  or  profits  accumulated  since  December  31,  1917, 
and  since  the  close  of  its  taxable  year  ending  with  or  during  his  next  preceding 
taxable  year;  and  (c)  his  distributive  share  of  the  undistributed  net  income 
of  the  corporation  for  its  taxable  year  ending  with  or  during  his  taxable  year 
provided  he  was  at  the  close  of  its  taxable  year  a stockholder  in  the  corpora- 
tion, notwithstanding  he  might  since  have  ceased  to  be  a stockholder.  See 
section  201  of  the  statute  and  articles  1541-1543.  In  the  case  of  personal 
service  corporations  with  taxable  years  other  than  the  calendar  year,  however,, 
such  distributive  shares  or  distributions  may  be  subject  to  different  rates 
of  tax. 

2986  Art.  331.  Credits  Allowed  Stockholders  of  Personal  Service  Cor- 
poration.— [See  note  at  ^2977a.]  A stockholder  of  a personal 

service  corporation  is  entitled  to  credit  for  the  purpose  of  the  normal  tax 
only  for  amounts  received  in  distribution  of  earnings  or  profits  of  the  cor- 
poration accumulated  since  February  28,  1913,  and  prior  to  January  1,  1918. 
See  sections  201  and  216  of  the  statute  and  articles  1541  and  301.  In  addi- 
tion to  the  credits  ordinarily  allowed  to  an  individual  a stockholder  of  a 
personal  service  corporation  is  entitled  to  the  following  credits:  (a)  a credit 
against  net  income  for  the  purpose  of  the  normal  tax  only  of  his  proportionate 
share  of  such  dividends  from  a corporation  subject  to  tax  and  of  such  interest 

374  TAX 


INC. 


Reg.  45,  Rev,  See  Note  on  page  301. 


not  entirely  exempt  from  tax  upon  obligations  of  the  United  States  and 
bonds  of  the  War  Finance  Corporation  as  are  received  by  the  personal  service 
corporation,  and  {b)  a credit  against  income  tax  of  the  stockholder’s  pro- 
portionate share  of  income,  war  profits  and  excess  profits  taxes  of  the  personal 
service  corporation  paid  or  accrued  during  the  taxable  year  to  a foreign 
country  upon  income  derived  from  sources  therein,  or  to  any  possession  of 
the  United  States,  subject  to  the  limitations  of  section  222  of  the  statute. 
See  articles  381-384. 

2987  Art.  332.  Taxation  of  Stockholders  of  Personal  Service  Corporation 
68  with  Fiscal  Year  Ending  in  1918.  [See  note  at  *S2977a.]  A stock- 
72  holder  of  a personal  service  corporation  with  a fiscal  year  beginning 

1674  in  1917  and  ending  in  1918  is  taxed  at  the  rates  for  the  calendar  year 

1678  1918  {a)  on  any  dividends  received  in  such  calendar  year  out  of 

earnings  or  profits  accumulated  since  February  28,  1913,  and  before 
January  1,  1918  (except  as  provided  under  {d)  below);  {b)  on  any  distribution 
made  in  such  calendar  year  out  of  earnings  or.  profits  accumulated  since 
December  31,  1917;  and  {c)  on  his  distributive  share  of  the  undistributed 
net  income  of  the  corporation  for  its  fiscal  year  attributable  to  the  calendar 
year  1918.  {d)  On  his  distributive  share  of  the  undistributed  net  income 
of  the  corporation  for  its  fiscal  year  attributable  to  the  calendar  year  1917, 
however,  the  stockholder  is  liable  to  surtax  at  the  rates  for  the  calendar 
year  1917,  but  to  no  normal  tax,  and  any  distribution  by  the  corporation 
subsequently  to  the  close  of  its  fiscal  year  out  of  such  undistributed  net 
income  so  taxed  to  the  stockholders  is  free  from  any  tax.  The  part  of  the 
net  income  of  a corporation  for  its  fiscal  year  attributable  to  the  calendar 
year  1918  is  found  by  determining  the  net  income  of  the  corporation  for  its 
fiscal  year  in  the  same  manner  as  if  the  fiscal  year  were  the  calendar  year 
1918,  and  then  taking  the  proportion  thereof  which  the  part  of  such  fiscal 
year  falling  within  such  calendar  year  bears  to  the  full  fiscal  year.  The  part 
of  the  net  income  of  a corporation  for  its  fiscal  year  attributable  to  the  calendar 
year  1917  is  found  by  determining  the  net  income  of  the  corporation  for  its 
fiscal  year  in  accordance  with  the  law  applicable  to  the  calendar  year  1917, 
and  then  taking  the  proportion  thereof  which  the  part  of  such  fiscal  year 
falling  within  the  calendar  year  1917  bears  to  the  full  fiscal  year.  See  section 
205  (c)  of  the  statute  and  article  1621. 

2988  Art.  333.  Application  of  Different  Tax  Rates  in  the  Case  of  Fiscal 
72  Year  of  Personal  Service  Corporation  Ending  in  1918.  [See  note  at 

1678  1[2977a.]  Any  deductions,  exemptions  or  credits  to  which  the  stock- 

holder of  a personal  service  corporation  with  a fiscal  year  ending  in 
1918  is  entitled  shall  first  be  applied  against  his  income  subject  to  the  rates 
for  the  calendar  year  1918,  unless  of  a kind  plainly  and  properly  chargeable 
against  income  taxable  at  the  rates  for  the  calendar  year  1917.  The  propor- 
tionate share  of  a stockholder  of  any  excess  profits  tax  imposed  upon  the 
corporation  under  the  Revenue  Act  of  1917  with  respect  to  that  part  of  the 
fiscal  year  falling  within  the  calendar  year  1917  is  plainly  and  properly 
chargeable  against  income  taxable  at  the  rates  for  that  year  and  shall  be 
credited  against  such  income  of  the  stockholder.  In  determining  the  rates 
of  tax  applicable  to  the  amounts  of  the  distributive  shares  of  the  stockholders 
attributable  to  the  calendar  years  1917  and  1918,  respectively,  the  amounts 
subject  to  the  rates  for  the  calendar  year  1918  shall  be  placed  in  the  lower 
brackets  of  the  rate  schedule  provided  in  the  present  statute  and  the  amounts 
attributable  to  the  calendar  year  1917  in  the  next  higher  brackets  of  the 
rate  schedule  applicable  to  that  year.  See  section  206  of  the  statute  and 


INC. 


375  TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


article  1641,  and  also  section  1 of  Title  I of  the  Revenue  Act  of  1916  and 
sections  1 and  2 of  Title  I of  the  Revenue  Act  of  1917. 

298©  Art.  334.  Taxation  of  Stockholders  of  Personal  Service  Corporation 
68  v/ith  Fiscal  Year  Ending  in  1919.  [See  note  at  ^2977a.j  Such  part 
72  of  a stockholder’s  distributive  share  of  the  net  income  of  a personal 
1674  service  corporation  for  its  fiscal  year  ending  in  1919  as  is  attributable 
1678  to  the  calendar  year  1919  is  taxable  at  the  rates  for  such  calendar 
year,  and  such  part  of  such  distributive  share  as  is  attributable  to  the 
calendar  year  1918  is  taxable  at  the  rates  for  such  calendar  year.  The  part 
of  a stockholder’s  distributive  share  of  the  net  income  of  a corporation  for 
its  fiscal  year  attributable  to  the  calendar  year  1919  is  found  by  determining 
his  distributive  share  of  the  net  income  of  the  corporation  for  its  fiscal  year, 
whether  distributed  or  not,  in  the  same  manner  as  if  the  fiscal  year  were  the 
calendar  year  1919,  and  then  taking  the  proportion  thereof  which  the  part  of 
such  fiscal  year  falling  within  such  calendar  year  bears  to  the  full  fiscal  year. 
The  part  of  a stockholder’s^distributive  share  of  the  net  income  of  a corpora- 
tion for  its  fiscal  year  attributable  to  the  calendar  year  1918  is  found  by 
determining  his  distributive  share  of  the  net  income  of  the  corporation  for 
its  fiscal  year,  whether  distributed  or  not,  in  the  same  manner  as  if  the  fiscal 
year  were  the  calendar  year  1918,  and  then  taking  the  proportion  thereof  which 
the  part  of  such  fiscal  year  falling  within  such  calendar  year  bears  to  the  full 
fiscal  year.  The  stockholder  is  also  liable  to  tax  on  dividends  received  out 
of  earnings  or  profits  accumulated  since  February  28,  1913,  and  before 
January  1,  1918.  See  sections  201  and  205  (c)  of  the  statute  and  articles 
1541-1543  and  1621. 

2990  Art.  335.  Application  of  Different  Tax  Rates  in  the  Case  of  Fiscal 
72  Year  of  Personal  Service  Corporation  Ending  in  1919. — [See  note  at 

1678  ^2977a.]  Any  deductions,  exemptions  or  credits  to  which  the  stock- 

holder of  a personal  service  corporation  with  a fiscal  year  ending  in 
1919  is  entitled  shall  first  be  applied  against  his  income  subject  to  the  rates 
for  the  calendar  year  1919,  unless  of  a kind  plainly  and  properly  chargeable 
against  income  taxable  at  the  rates  for  the  calendar  year  1918.  In  deter- 
mining the  rates  of  tax  applicable  to  the  amounts  of  the  distributive  shares  of 
the  stockholders  attributable  to  the  calendar  years  1918  and  1919,  respectively, 
the  amounts  subject  to  the  rates  for  the  calendar  year  1919  shall  be  placed 
in  the  lower  brackets  of  the  rate  schedule  provided  in  the  statute  and  the 
amounts  attributable  to  the  calendar  year  1918  in  the  next  higher  brackets 
of  the  rate  schedule  applicable  to  that  year.  See  section  206  of  the  statute 
and  article  1641. 

ESTATES  AND  TRUSTS 

2991  Art.  341.  Estates  and  Trusts. — While  certain  estates  and  trusts  are 
180  subject  to  tax  as  such  and  others  are  not,  the  fiduciary  in  every  case  is 

1217  required  to  make  a return  of  income.  See  section  225  of  the  statute 
and  articles  421-425.  The  net  income  of  an  estate  or  trust  shall  be  com- 
puted in  the  same  manner  and  on  the  same  basis  as  the  net  income  of  an  individual, 
except  that  in  place  of  the  deduction  allowed  individuals  of  certain  gifts  or  con- 
tributions there  may  be  deducted  from  the  gross  income  any  part  of  it  which 
during  the  taxable  year  is  pursuant  to  the  will  or  trust  deed  paid  to  or  perma- 
ne^itly  set  aside  for  the  United  States,  a State,  a Territory,  or  any  political  sub- 
division thereof,  the  District  of  Columbia,  or  any  corporation  or  association  of 
the  kind  described  in  section  231  (6)  of  the  statute  and  article  517.  See  section 

376 


INC. 


TAX 


Reg.  45,  Rev.  See  Note  on  page  SOI. 


212  and  articles  21-26.  The  income  of  a revocable  trust  must  be  included  in 
the  gross  income  of  the  grantor. 

2991a  Art.  342  [Art.  341].  Estates  and  Trusts  Taxed  to  Fiduciary. — In  the 
case  of  {a)  estates  of  decedents  before  final  settlement  and  of  {b) 
trusts,  whether  created  by  will  or  deed,  for  accumulation  of  income,  whether  for 
unascertained  persons  or  persons  with  contingent  interests  or  otherwise  [for 
accumulation]  of  income,  the  income  is  taxed  to  the  fiduciary  as  to  any  single 
individual,  except  that  from  the  income  of  a decedent’s  estate  thei^e  may  first 
be  deducted  any  amount  of  income  properly  paid  or  credited  to  a beneficiary. 
See  section  200  of  the  statute  and  articles  1521  and  1522.  Where  under  the 
terms  of  the  will  or  deed  the  trustee  may  in  his  discretion  distribute  the  income  or 
accumulate  it,  the  income  is  taxed  to  the  trustee,  irrespective  of  the  exercise  of  his 
discretion.  The  imposition  of  the  tax  is  not  affected  by  the  fact  that  an  ultimate 
beneficiary  may  be  a person  exempt  from  tax.  A statutory  allowance  paid  a 
widow  out  of  the  corpus  of  the  estate  is  not  deductible  from  gross  income.  As  an 
intestate’s  real  estate  does  not  pass  to  his  administrator,  upon  a sale  by  the 
heirs,  whether  before  or  after  settlement  of  the  estate,  each  heir  is  taxed 
individually  on  any  profit  derived. 

2992  Art.  343  [Art.  342].  Decedent’s  Estate  During  Administration. — The 

“period  of  administration  or  settlement  of  the  estate”  is  the 
period  required  by  the  executor  or  administrator  to  perform  the  ordinary 
duties  pertaining  to  administration,  in  particular  the  collection  of  assets 
and  the  payment  of  debts  and  legacies.  It  is  the  time  actually  required 
for  this  purpose,  whether  longer  or  shorter  than  the  period  specified  in 
the  local  statute  for  the  settlement  of  estates.  Where  an  executor,  who 
is  also  named  as  trustee,  fails  to  obtain  his  discharge  as  executor,  the  period 
of  administration  continues  up  to  the  time  when  the  duties  of  administra- 
tion are  complete  and  he  actually  assumes  his  duties  as  trustee,  whether 
pursuant  to  an  order  of  the  court  or  not.  No  taxable  income  is  realized 
from  the  passage  of  property  to  the  executor  or  administrator  on  the  death 
of  the  decedent,  even  though  it  may  have  appreciated  in  value  since  the 
decedent  acquired  it.  In  the  event  of  delivery  of  property  in  kind  to  a 
legatee  or  distributee,  no  income  is  realized.  Where,  however,  the  executor 
sells  property  of  the  estate  for  more  than  its  value  at  the  death  of  the 
decedent,  the  excess  is  income  taxable  to  the  estate.  See  article  1562. 

2993  Art.  344  [Art.  343].  Incidence  of  Tax  on  Estate  or  Trust. — Liability 
for  payment  of  the  tax  attaches  to  the  person  of  an  executor  or  admin- 
istrator up  to  and  after  his  discharge,  where  prior  to  distribution  and  discharge 
he  had  notice  of  his  tax  obligations  or  failed  to  exercise  due  diligence  in 
determining  whether  or  not  such  obligations  existed.  Liability  for  the  tax 
also  follows  the  estate  itself,  and  when  by  reason  of  the  distribution  of  the 
estate  and  discharge  of  the  executor  or  adniinistrator  it  appears  that  collec- 
tion of  the  tax  can  not  be  made  from  the  executor  or  administrator,  the 
legatees  or  distributees  must  account  for  their  proportionate  share  of  the 
tax  due  and  unpaid.  The  same  considerations  apply  to  other  trusts.  Where 
the  tax  has  been  paid  on  the  net  income  of  an  estate  or  trust  by  the  fiduciary, 
such  income  is  free  from  tax  when  distributed  to  the  beneficiaries. 

2994  Art.  345  [Art.  314].  Estates  and  Trusts  Taxed  to  Beneficiaries. — In 
the  case  of  {a)  a trust  the  income  of  which  is  distributable  periodically, 

{b)  an  ordinary  guardianship  of  a minor,  and  (c)  an  estate  of  a decedent 
before  final  settlement  as  to  any  income  properly  paid  or  credited  as  such 


INC. 


377 


TAX 


Reg,  45,  Rev.  See  Note  on  page  301. 

to  a beneficiary,  the  income  is  taxable  directly  to  the  beneficiary  or  bene- 
ficiaries. Each  beneficiary  must  include  in  his  return  his  distributive  share 
of  the  net  income,  even  though  not  yet  paid  him,  but  if  the  taxable  year 
on  the  basis  of  which  he  makes  his  returns  fails  to  coincide  with  the  annual 
accounting  period  of  the  estate  or  trust,  then  he  need  only  include  in  his  return 
his  distributive  share  for  [any]  such  accounting  period  ending  within  his 
taxable  year.  The  regulations  governing  partnerships  are  generally  applicable 
to  such  an  estate  or  trust.  See  articles  32 1-327.  [For  the  purpose  of  the  normal 
tax  a beneficiary  is  allowed  as  a credit  against  net  income  his  proportionate 
share  of  the  amount  received  by  the  estate  or  trust  as  dividends  out  of  taxed  or 
taxable  income  of  a corporation,  or  as  interest  not  entirely  exempt  from  tax 
upon  obligations  of  the  United  States  or  bonds  issued  by  the  War  Finance 
Corporation.  See  section  216  of  the  statute  and  article  301.  For  matter  cut 
out  here  see  next  paragraph.^ 

2994a  Art.  346.  Credits  to  Trust  or  Beneficiary. — {a)  In  the  case  of  an 
estate  or  trust  taxed  to  the  fiduciary  it  is  allowed  the  same  credits  against 
net  income  as  a single  person.,  including  a personal  exemption  o/ $1,000,  but  no 
credit  for  dependents,  {b)  In  the  case  of  an  estate  or  trust  taxed  to  the  beneficiaries 
£ach  beneficiary  is  allowed  for  the  purpose  of  the  normal  tax,  in  addition  to  his 
individual  credits,  his  proportionate  share  of  such  dividends  from  domestic  and 
resident  foreign  corporations  and  of  such  interest  not  entirely  exempt  from  tax 
upon  obligations  of  the  United  States  and  bonds  of  the  War  Finance  Corporation 
■as  are  received  by  the  estate  or  trust.  Each  beneficiary  is  entitled  to  but  one 
personal  exemption,  no  matter  from  how  many  trusts  he  may  receive  income. 
See  section  2\6  of  the  statute  and  articles  301-307. 

PROFITS  OF  CORPORATIONS  TAXABLE  TO  STOCKHOLDERS. 

2995  Art.  351.  Profits  of  Corporations  Taxable  to  Stockholders.— 

197  Where  a domestic  or  foreign  corporation  permits  its  gains  and 

746  profits  to  accumulate  for  the  purpose  of  preventing  the  imposition 
of  the  surtax  upon  such  income  if  distributed  to  its  stockholders. 
It  shall  not  be  subject  to  the  income  tax  as  a corporation,  but  its  stock- 
holders shall  be  subject  to  tax  in  the  same  way  as  the  stockholders  of  a 
personal  service  corporation,  except  that  the  war  profits  and  excess  profits 
tax  on  the  corporation  shall  first  be  deducted  from  its  net  income  before 
computing  the  proportionate  shares  of  the  stockholders.  See  section  218 
of  the  statute  and  articles  328-335.  In  any  case  the  Commissioner  or  a col- 
lector may  require  a corporation  to  furnish  a statement  of  its  gains  and 
profits  and  of  the  names,  addresses,  and  shareholdings  of  the  stockholders 
If  upon  the  basis  of  such  statement  or  other  evidence  the  Commissioner 
certifies  that  in  his  opinion  its  accumulation  of  profits  is  unreasonable  for 
the  purposes  of  the  business,  hut  only  if  he  so  certifies,  the  corporation  and 
its  stockholders  shall  make  their  returns  accordingly. 

• 

2995a  Art.  352.  Purpose  to  Escape  Surtax. — The  application  of  section  220 
of  the  statute  depends  upon  the  two  elements  of  {a)  purpose  to  escape 
the  surtax  and  (b)  unreasonable  accumulation  of  gains  and  profits.  Prima 
facie  evidence  of  (a)  exists  where  a corporation  has  practically  no  business  except 
holding  stocks,  securities  or  other  property  and  collecting  the  income  therefrom, 
or  where  a corporation  other  than  a mere  holding  company  permits  its  gains  and 
profits  to  accumulate  beyond  the  reasonable  needs  of  the  business.  The  business 
of  a corporation  is  not  limited  to  that  which  it  has  previously  carried  on,  but  in 
general  includes  any  line  of  business  which  it  may  legitimately  undertake. 
However,  a radical  change  of  business  when  a considerable  surplus  has  been 


INC. 


378 


TAX 


Reg,  45,  Rev.  See  Note  on  page  301. 


accumulated  may  afford  evidence  of  a purpose  to  escape  the  surtax.  When  one 
corporation  owns  the  stock  of  another  corporation  in  the  sarne  or  a related  line 
of  business  and  in  effect  operates  the  other  corporation.,  the  business  of  the  latter 
may  be  considered  in  substance  the  business  of  the  first  corporation.  Gains  and 
profits  of  the  first  corporation  put  into  the  second  through  the  purchase  of  stock 
or  otherwise  may  therefore , if  a subsidiary  relationship  is  established,  constitute 
employment  of  the  income  in  its  own  business.  To  establish  that  the  business  of 
one  corporation  can  be  regarded  as  including  the  business  of  another  it  is  ordinar- 
ily essential  that  the  first  corporation  own  substantially  all  of  the  stock  of  the 
second.  Investment  by  a corporation  of  its  income  in  stock  and  securities  of 
another  corporation  is  not  without  more  to  be  regarded  as  employment  of  the 
income  in  its  business. 

2995b  Art.  353.  Unreasonable  Accumulation  of  Profits. — An  accumulation 
of  gains  and  profits  is  unreasonable  if  it  is  not  required  for  the  purposes 
of  the  business,  considering  all  the  circumstances  of  the  case.  No  attempt  can  be 
made  to  enumerate  all  the  ways  in  which  gains  and  profits  of  a corporation  may 
be  accumulated  for  the  reasonable  needs  of  the  business.  Undistributed  income 
is  properly  accumulated  if  invested  in  increased  inventories  or  additions  to  plant 
reasonably  needed  by  the  business.  It  is  properly  accumulated  if  retauied  for 
working  capital  required  by  the  business  or  in  accordance  with  contract  obligatio?is 
placed  to  the  credit  of  a sinking  fund  for  the  purpose  of  retiring  bonds  issued  by 
the  corporation.  In  the  case  of  a banking  institution  the  business  of  which  is 
to  receive  and  loan  money,  using  capital,  surplus  and  deposits  for  that  purpose, 
undistributed  income  actually  represented  by  loans  or  reasonably  retained  for 
future  loans  is  not  accumulated  beyond  the  reasonable  needs  of  the  business. 
The  nature  of  the  investment  of  gains  and  profits  is  immaterial  if  they  are  not 
in  fact  needed  in  the  business. 

PAYMENT  OF  TAX  AT  SOURCE. 

2996  Art.  361.  Withholding  Tax  At  Source. — In  general  withholding 

201  is  required  (a)  of  a tax  of  8 per  cent  in  the  case  of  fixed  or  deter- 

332  minable  annual  or  periodical  income  (other  than  dividends  from 

553  corporations  liable  to  the  income  tax  and  interest  upon  corporate 

572  bonds  containing  a tax-free  covenant  clause)  payable  to  a non- 

resident alien  individual;  (b)  of  a tax  of  10  per  cent  in  the  case  of 
fixed  or  determinable  annual  or  periodical  income  (other  than  dividends 
from  corporations  liable  to  the  income  tax  and  interest  upon  corporate 
bonds  containing  a tax-free  covenant  clause)  payable  to  a foreign  corpora- 
tion not  engaged  in  trade  or  business  within  the  United  States  and  not 
having  any  office  or  place  of  business  therein;  and  (c)  of  a tax  of  2 per  cent 
in  the  case  of  interest  payable  to  an  individual  or  a partnership,  whether 
resident  or  nonresident,  or  to  a foreign  corporation  not  engaged  in  trade 
or  business  within  the  United  States  and  not  having  any  office  or  place  of 
business  therein,  upon  bonds  or  other  obligations  of  domestic  or  resident 
foreign  corporations  containing  a so-called  tax-free  covenant  clause.  With- 
holding in  all  cases  at  the  highest  applicable  rate  is  also  required  from  interest 
on  bonds  or  other  securities  where  the  owner  of  such  securities  is  unknown 
to  the  withholding  agent.  Bonds  issued  under  a trust  deed  containing  a 
tax-free  covenant  are  treated  as  if  they  contained  such  a covenant.  A 
foreign  corporation  having  a fiscal  agency  in  this  country  is  required  to 
withhold  a tax  of  2 per  cent  upon  the  interest  on  its  tax-free  covenant  bonds. 
See  further  section  200,  217,  237  and  256  of  the  statute  and  articles  1533, 
311-316,  601,  1071-1080. 


INC. 


379  TAX 


Reg.  45,  Rev.  See  Note  or.  page  301. 


29S6a  Art.  362.  Fixed  or  Determinable  Annual  or  Periodical  Income. — Only 
{a)  fixed  or  determinable  {b)  annual  or  'periodical  income  is  subject  to 
withholding.  Among  such  income.,  giving  an  idea  of  the  general  character  of  \ 

income  intended.,  the  statute  specifies  interest^  rent.,  salaries^  wages.,  premiums, 
annuities,  compensations,  rem^unerations  and  emoluments.  But  other  kinds  of 
income  may  be  included,  (a)  Income  is  fixed  when  it  is  to  be  paid  in  amounts 
definitely  predetermined.  On  the  other  hand,  it  is  determinable  whenever  there 
is  a basis  of  calculation  by  which  the  amount  to  be  paid  may  be  ascertained,  {b) 

The  income  need  not  be  paid  annually  if  it  is  paid  periodically,  that  is  to  say, 
from  time  to  time,  whether  or  not  at  regular  intervals.  That  the  length  of  time 
during  which  the  payments  are  to  be  made  may  be  increased  or  diminished  in 
accordance  with  someone^ s will  or  with  the  happening  of  an  event  does  not  make 
the  paym.ents  any  the  less  determinable  or  periodical.  A salesman  working  by 
the  month  for  a commission  on  sales  which  is  paid  or  credited  monthly  receives 
determinable  periodical  income. 

2997  Art.  363  [Alt.  362],  Exemption  from  Withholding. — Withholding  from 
interest  on  bonds  or  other  obligations  containing  a tax-free  covenant 

shall  not  be  required  in  the  case  of  a citizen  or  resident  alien  individual  if 
he  files  with  the  withholding  agent  when  presenting  interest  coupons  for 
payment,  or  not  later  than  February  first  following  the  taxable  year,  an 
ownership  certificate  on  form  1001  (revised)  claiming  a personal  exemption 
or  credit  for  dependents.  See  section  216  of  the  statute  and  articles  301- 
305.  To  avoid  inconvenience  a resident  alien  individual  should  file  a certifi- 
cate of  residence  on  form  1078  (revised)  Vv^ith  withholding  agents,  who  shall 
forward  such  certificates  to  the  Commissioner  (Sorting:  Division)  with  a let- 
ter of  transmittal.  See  Article  315.  [Notv/ithstanding  the  provisions  of 
section  217  of  the  statute,]  Withholding  is  required  from  income  of  a non- 
resident individual,  except  as  provided  in  article  316.  No  withholding  from 
corporate  dividends  {other  than  distributions  by  a personal  service  corporation) 
is  required  in  any  case.  The  income  of  domestic  and  resident  foreign  corpora- 
tions is  free  from  withholding. 

2998  Art.  364  [Art.  363].  Ownership  Certificates  for  Interest  Coupons. — 

The  owners  of  bonds  or  other  obligations,  whether  or  not  containing 

a tax-free  covenant,  issued  by  domestic  or  resident corporations,  when 
presenting  interest  coupons  for  payment  shall  file  a certificate  of  ownership 
for  each  issue  of  bonds,  showing  the  name  and  address  of  the  debtor  corpora- 
tion, the  name  and  address  of  the  owner  of  the  bonds,  whether  the  payee  is 
married  or  the  head  of  a family  [or  has  other  dependents],  the  nature  of  the 
obligations,  the  amount  of  interest  and  its  due  date,  and  the  amount  of  any 
tax  withheld.  No  ownership  certificate  need  be  filed  in  the  case  of  interest 
payments  on  bonds  the  income  from  which  is  not  included  in  gross  income, 
nor  in  the  case  of  any  obligations  of  the  United  States.  See  section  213 
(J))  of  the  statute  and  articles  74-82.  Where  in  connection  with  the  sale  of 
its  property  payment  of  the  bonds  or  other  obligations  of  a corporation  is 
assumed  by  the  assignee,  such  assignee,  whether  an  individual,  partnership, 
corporation,  or  a State  or  political  subdivision  thereof,  must  deduct  and 
withhold  such  taxes  as  would  have  been  required  to  be  withheld  by  the 
assignor  had  no  such  sale  and  transfer  been  made. 

2999  Art.  365  [Art.  364].  Form  of  Certificate  Where  Withholding  Required. 

— Form  1000  (revised)  shall  be  used  (a)  by  citizens  or  residents  of 
the  United  States  when  no  personal  exemption  or  credit  is  claimed  against 
interest  on  bonds  containing  a tax-free  covenant;  (b)  by  nonresident  alien 


INC. 


380  TAX 


Reg.  45,  Rev,  See  Note  on  page  301. 


individuals  and  foreign  corporations  not  engaged  in  trade  or  business  within 
the  United  States  and  not  having  any  office  or  place  of  business  therein, 
whether  or  not  such  bonds  contain  a tax-free  covenant;  (c)  by  partnerships, 
resident  or  nonresident,  in  the  case  of  bonds  containing  a tax-free  covenant, 
[and  (d)  where  coupons  are  received  not  accompanied  by  certificates  c f 
ownership.  The  first. bank  receiving  coupons  not  accompanied  by  owner- 
ship certificates  will  make  a certificate,  crossing  out  owner”  and  inserting 
‘‘payee,”  and  will  enter  the  amount  of  interest  in  the  space  provided  for 
unknown  ownership.  For  matter  cut  out  here  see  Art.  368,  \3001a.] 

3000  Art.  366  [Art.  365].  Form  of  Certificate  Where  No  Withholdmg  Re- 
quired.— Form  1001  (revised)  shall  be  used  (a)  by  citizens  or  residents 

of  the  United  States  when  personal  exemption  is  claimed  against  interest  on 
bonds  containing  a tax-free  covenant  and  when  presenting  coupons  from 
bonds  not  containing  a tax-free  covenant;  (b)  by  domestic  corporations; 
(c)  by  partnerships,  resident  or  nonresident,  in  the  case  of  bonds  not  con- 
taining a tax-free  covenant;  and  (d)  by  foreign  corporations  engaged  in 
trade  or  business  within  the  United  States  or  having  an  office  or  place  of 
business  therein,  whether  or  not  such  bonds  contain  a tax-free  covenant. 
In  case  a citizen  or  resident  alien  individual  receives  interest  on  bonds  con- 
taining a tax-free  covenant  in  excess  of  the  amount  of  personal  exemption 
which  the  individual  may  claim,  any  such  ex-^ess  must  be  reported  on  form 
1000  (revised). 

3001  Art.  367  [Art.  366].  Use  of  Substitute  Certificates. — Resident  collect- 
ing agents  and  responsible  banks  and  bankers,  receiving  interest  cou- 
pons for  collection  with  ownership  certificates  attached,  may  present  the 
coupons  with  the  original  certificates  to  the  debtor  corporation  or  its  duly 
authorized  withholding  agent  for  collection  or  may  detach  and  forward  the 
original  certificates  directly  to  the  Commissioner,  provided  each  such  collect- 
ing agent  shall  substitute  for  such  original  certificates  its  own  certificates 
(form  1058  (revised)  or  form  1059  (revised)  ) and  shall  keep  a complete  record 
of  each  transaction,  showing  (a)  serial  number  of  item  received;  (b)  date 
received;  (c)  name  and  address  of  person  from  v/hom  received;  (d)  name  of 
debtor  corporation;  (e)  class  of  bonds  from  which  coupons  were  cut  (whether 
containing  a tax-free  covenant  or  not);  and  (f)  face  amount  of  coupons.  For 
the  purpose  of  identification  the  substitute  certificates  shall  be  numbered 
consecutively  and  corresponding  numbers  given  the  original  certificates  of 
ownership.  The  use  of  substitute  certificates  by  collecting  agents,  banks 
and  bankers  is  not  permitted,  however,  in  the  case  of  ownership  certificates  ' 
presented  with  coupons  for  collection  by  nonresident  alien  individuals, 
partnerships,  or  corporations. 

3001a  Art.  368.  Interest  Coupons  Without  Ownership  Certificates. — 

651  Where  interest  coupons  are  received  unaccompanied  by  certificates  of 
ownership  the  first  bank  shall  require  of  the  payee  a7i  affidavit  showing 
the  name  and  address  of  the  payee,  the  name  and  address  of  the  debtor  corporation* 
the  date  of  the  maturity  of  the  interest,  the  name  and  address  of  the  person  from 
whom  the  coupons  were  received,  the  amount  of  the  interest,  and  a statement  that 
the  owner  of  the  bonds  is  unknown  to  the  payee.  Such  affidavit  shall  be  for- 
warded to  the  collector  with  the  monthly  return  on  form  1012  {revised).  The  first 
hank  receiving  such  coupons  shall  also  prepare  a certificate  on  form  1000  (revised) 
crossing  out  ^^owneF^  and  inserting  ^*payee^*  and  entering  the  amount  of  interest 
in  the  space  provided  for  a foreign  corporation  having  no  office  or  place  of  business 


INC. 


381  TAX 


Reg,  45,  Rev.  See  Note  on  page  SOI. 


within  the  United  States^  and  shall  stamp  or  write  across  the  face  of  the  certificate 
Affidavit  furnished,”  adding  the  name  of  the  bank. 

300 lb  Art.  369.  Interest  on  Registered  Bonds. — Where  a bondholder  files 
645  no  ownership  certificate  in  the  case  of  payments  of  interest  on  registered 
bonds  the  withholding  agent  shall  make  out  such  a certificate  in  each 
instance  {a)  on  form  1000  {revised)  if  the  bondholder  is  a citizen  or  resident  of 
the  United  States  or  a resident  or  nonresident  partnership  and  the  bonds  contain 
a tax-free  covenant,  or  if  the  bondholder  is  a nonresident  alien  individual  or  a 
foreign  corporation  not  engaged  in  trade  or  business  within  the  United  States 
and  not  having  any  office  or  place  of  business  therein,  and  (b)  on  form  1001 
{revised)  in  all  other  cases.  When  so  used  forms  1000  {revised),  and  1001 
{revised)  need  not  be  signed. 

3002  Art.  370  [Art.  357].  Return  of  Tax  Withheld. — (a)  Every  withholding 
agent  shall  make  an  annual  return  to  the  collector  of  the  tax  withheld 

from  interest  on  corporate  bonds  or  other  obligations  on  or  before  March  1 
on  form  1013  (revised).  He  shall  also  make  a monthly  return  on  form  1012 
(revised)  on  or  before  the  20th  day  of  the  month  following  that  for  which 
the  return  is  made.  The  original  ownership  certificates,  or  the  substitute 
certificates  where  authorized,  must  be  forwarded  to  the  collector  with  the 
monthly  return,  (b)  Every  person  required  to  deduct  and  withhold  any 
tax  from  income  other  than  such  bond  interest  shall  make  an  annual  return 
thereof  to  the  collector  on  or  before  March  1 on  form  1042  (revised),  ac- 
companied b}^  a separate  report  on  form  1098  (revised)  for  each  nonresident 
alien  individual  or  foreign  corporation  not  engaged  in  trade  or  business 
within  the  United  States  and  not  having  any  office  or  place  of  business 
therein,  to  whom  income  other  than  bond  interest  was  paid  during  the  pre- 
vious taxable  year.  In  every  case  of  both  classes  the  tax  withheld  must  be 
paid  on  or  before  June  15  of  each  year  to  the  collector.  For  penalties  attach- 
ing upon  failure  to  make  such  returns  or  such  payment,  see  section  253  of 
the  statute  and  article  1041. 

3003  Art.  371  [Art.  368].  Withholding  in  1913. — In  the  case[j-]  of  payments 
made  prior  to  February  25,  1919,  [the  date  of  the  passage  of  the 

Revenue  Act  of  1918,]  where  a withholding  agent  pursuant  to  the  Revenue 
Acts  of  1916  and  1917  withheld  only  2 per  cent  from  the  income  of  non- 
resident alien  individuals,  he  need  return  only  such  sum.  In  all  such  cases 
where  a withholding  agent  withheld  the  tax  pursuant  to  the  Revenue  Acts 
'of  1916  and  1917  from  the  income  of  foreign  corporations'  not  engaged  in 
trade  or  business  within  the  United  States  and  not  having  any  office  or 
place  of  business  therein  he  need  return  only  the  sum  withheld,  to  an  amount 
not  in  excess  of  the  aggregate  sum  required  to  be  withheld  by  the  terms  of 
the  Revenue  Act  of  1918  from  the  income  paid  over  by  the  withholding 
agent.  In  the  case  of  every  payment  made  after  February  24,  1919,  the  with- 
holding agent  must  withhold  at  the  rates  prescribed  by  the  present  statute  from 
the  whole  payment,  not  merely  from  that  part  which  applies  to  the  period  after 
February  24,  1919. 

30  04  Alt.  372  [Art.  369].  Release  of  Excess  Tax  Withheld. — Any  sum 
withheld  for  tax  since  December  31,  1917,  in  excess  of  the  aggregate 
amount  required  under  the  terms  of  [described  by]  the  Revenue  Act  of  1918, 
shall  be  released  by  the  withholding  agent  and  paid  over  to  the  person  from 
whom  it  was  withheld  or  his  proper  representative.  With  reference  to  how 
a debtor  corporation  may  release  and  pay  over  the  amount  of  tax  so  withheld 


INC. 


382 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


in  a case  where  a bank  or  other  collection  agency  detached  the  ownership 
certificate  which  accompanied  an  interest  coupon  and  substituted  its  own 
certificate  (form  1059),  which  does  not  disclose  the  name  and  address  of  the 
) bond  owner,  in  such  cases  the  withholding  agent  shall  request  the  bank  or 

collection  agency  to  disclose  the  name  and  address  of  the  owner  of  the  bonds, 
as  shown  by  the  original  certificate,  and  it  shall  be  the  duty  of  the  bank  or  col- 
lection agency  to  make  such  disclosure  to  the  withholding  agent.  Where 
withholding  agents  have  so  released  any  excess  of  tax,  an  itemized  statement 
showing  the  names,  addresses  and  amounts  refunded  should  be  attached  to  the 
annual  list  return  (form  1013),  in  order  to  reconcile  any  discrepancy  be- 
) tween  the  aggregate  amount  of  taxes  returned  as  shown  by  the  monthly 

list  returns  (form  1012)  and  the  aggregate  amount  as  shown  by  the  annual 
list  return. 

3005  Art.  373  [Art.  370].  Use  of  Information  Return  Where  No  Actual 
Withholding. — Where  a debtor  corporation  or  its  duly  authorized 
withholding  agent  has  made  payments  of  interest  on  its  bonds^  but  in  certain 
instances  has  been  required  to  withhold  no  tax^  the  ownership  certificates  on  form 
1001  {revised)  filed  in  connection  with  such  payments  shall  be  transmitted  directly 
to  the  CommAssioner  {Sorting  Division),  accompanied  by  a return  on  form  1096 
showing  the  number  of  ownership  certificates  thus  transmitted  and  the  total 
amount  of  interest  paid.  This  return  shall  be  made  by  the  20th  day  of  each 
month  follozuing  that  for  which  the  return  is  made  and  need  not  be  sworn  to.  An 
annual  return  shall  be  forwarded  to  the  Commissioner  not  later  than  March  15 
of  each  year  on  form  1096  B.,  on  which  shall  be  given  a summary  of  the  monthly 
returns.  To  the  extent  that  there  has  been  actual  withholding  of  the  tax  returns 
should  be  made  in  accordance  with  article  370.  [no  payments  of  interest  to 
nonresident  alien  individuals  or  foreign  corporations  not  engaged  in  trade  or 
business  within  the  United  States  and  not  having  any  office  or  place  of 
business  therein,  or'to  unknown  persons,  and  has  withheld  no  tax  from  interest 
payable  to  citizens  or  residents  of  the  United  States,  individuals  or  partner- 
ships, whether  or  not  the  bonds  upon  which  such  interest  accrued  contained 
a tax-free  covenant  clause,  the  ownership  certificates  filed  in  connection  with 
such  interest  payments  shall  not  be  forwarded  to  collectors,  accompanied 
by  a return  on  form  1012  (revised),  but  shall  be  transmitted  directly  to  the 
Commissioner  (Sorting  Division),  accompanied  by  a letter  of  transmittal. 
This  return  shall  be  m.ade  monthly  and  need  not  be  sworn  to.  The  number 
of  ownership  certificates  thus  transmitted  and  the  total  amount  of  interest 
paid  shall  be  entered  in  the  return.] 

300G  Art.  374  [Art.  371].  Ownership  Certificates  in  the  Case  of  Fiduci- 
aries and  Joint  Owners. — When  fiduciaries  have  the  control  and 
custody  of  more  than  one  estate  or  trust,  and  such  estates  and  trusts  have  as 
assets  bonds  of  corporations  and  other  securities,  a certificate  of  ownership 
shall  be  executed  for  each  estate  or  trust,  regardless  of  the  fact  that  the  bonds 
are  of  the  same  issue.  JVhen  bonds  are  owned  jointly  by  several  persons.,  a 
separate  ownership  certificate  must  be  executed  in  behalf  of  each  of  the  owners. 
[When  bonds  are  owned  jointly  by  several  persons,  one  of  the  owners  may 
execute  an  ownership  certificate  in  behalf  of  the  other  owners  and  indorse 
on  the  back  thereof  their  names  and  addresses  and  the  proportionate  owner- 
ship of  each.] 

3007  Art.  375  [Art.  372].  Withholding  in  the  Case  of  Enemies.— Payments 
made  after  October  6,  1917,  to  the  alien  property  custodian  are  in  the 
same  category  as  payments  made  to  or  for  citizens  or  residents  of  the  United 


INC. 


383 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


States.  Withholding  at  the  source  is  accordingly  unnecessary  except  in  the 
case  of  interest  payments  on  corporate  bonds  or  other  obligations  contain- 
ing a tax-free  covenant  where  no  exemption  is  claimed.  The  alien  property 
custodian  should  use  form  1000  (revised)  in  collecting  interest  on  bonds 
containing  a tax-free  covenant  and  in  all  other  cases  should  use  form  1001 
(revised).  -No  distinction  is  to  be  made  between  payments  directly  to  the 
alien  property  custodian  and  to  his  depositaries  and  between  interest  on 
registered  bonds  and  interest  on  coupon  bonds.  In  the  case  of  enemies  or 
allies  of  enemies  holding  a license  granted  under  the  provisions  of  the 
Trading  with  the  Enemy  Act,  withholding  is  required  as  in  the  case  of  any 
nonresident  alien  not  an  enemy  or  ally  of  enem.y.  See  article  446. 

3007a  Art.  376.  Return  of  Income  from  which  Tax  Withheld. — The  entire 

222  amount  of  the  income  from  which  the  tax  was  withheld  shallbe  included 
730  in  gross  income  without  deduction  for  such  payment  of  the  tax.  But  any 

tax  actually  so  withheld  shall  he  credited  against  the  total  tax  as  com^ 
puted  in  the  taxpayers  return.  If  the  tax  is  paid  by  the  recipient  of  the  income 
or  by  the  withholding  agent  it  shall  not  be  recollected  from  the  other,  regardless  of 
the  original  liability  therefor,  and  in  such  event  no  penalty  will  be  asserted  against 
either  person  where  no  fraud  or  purpose  to  evade  payment  is  involved. 

CREDIT  FOR  TAXES 

3008  Art.  381.  Analysis  of  Credit  for  Taxes.— (1)  In  the  case  of  a 
226  citizen  of  the  United  States,  whether  resident  or  nonresident,  the 
1059  basis  of  the  credit  for  taxes  is  as  follows:  (a)  ‘‘The  amount  of  any 
income,  war-profits  and  excess-profits  taxes  paid,”  or  accrued, 

“during  the  taxable  year  * * * to  any  possession  of  the  United  States”; 

(b)  “the  amount  of  any”  such  taxes  paid  or  accrued,  “during  the  taxable 
year  to  any  foreign  country,  upon  income  derived  from  sources  therein”; 
and  (c)  the  “proportionate  share  of”  any  “such  taxes  of”  a partnership  of 
which  he  is  a partner  or  of  an  estate  or  trust  of  which  he  is  a beneficiary  ’ paid 
or  accrued,  “during  the  taxable  year  to  a foreign  country  or  to  any  posses- 
sion of  the  United  States,  as  the  case  may  be.” 

(2)  In  the  case  of  an  alien  resident  of  the  United  States  the  basis 
30C9  of  the  credit  for  taxes  is  as  follows:  (a)  “The  am^ount  of  any  income, 

223  war-profits  and  excess-profits  taxes  paid,”  or  accrued,  “during  the 

1062  taxable  year  * * * possession  of  the  United  States” 

(identical  with  (1)  (a)  above);  (b)  “the  amount  of  any  such  taxes 
paid”  or  accrued  “during  the  taxable  year  to”  the  country  of  .which  he  is  a ( 

citizen  or  subject,  “upon  income  derived  from  sources  therein,  if  such 
country,  in  imposing  such  taxes,  allows  a similar  credit  to  citizens  of  the 
United  States  residing  in  such  country”;  and  (c)  the  “proportionate  share 
of”  any  “such  taxes  of”  a partnership  of  which  he  is  a partner  or  of  an 
estate  or  trust  of  which  he  is  a beneficiary  paid  or  accrued  “during  the 
taxable  year  to”  the  country  of  which  he  is  a citizen  or  subject  (“if  such 
country,  in  imposing  such  taxes,  allows  a similar  credit  to  citizens  of  the 
United  States  residing  in  such  country”),  “or  to  any  possession  of  the 
United  States,  as  the  case  may  be.”  As  to  credits  for  taxes  in  the  case  of 
corporations  see  section  238  of  the  statute  and  article  611. 

3010  Art.  382.  Meaning  of  Terms.— “Amount  of  * * * taxes 

paid  during  the  taxable  year”  means  taxes  proper  (no  credit  being 
given  for  amounts  representing  interest  or  penalties)  paid  or  accrued  during 
the  taxable  year  on  behalf  of  the  individual  claiming  credit.  “Foreign 


INC. 


384  TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


country’’  includes  within  its  meaning  any  foreign  sovereign  state  or  self-governing 
colony  (for  example ^ the  Dominion  of  Canada)^  but  does  not  include  a foreign 
municipality  (for  example^  Montreal)  unless  itself  a sovereign  State  (for  example, 
Hamburg)  [means  any  governmental  authority,  not  that  of  the  United 
States  or  any  part  or  possession  thereof,  having  power  to  impose  such  taxes, 
and  it  therefore  includes  a self-governing  colony,  such  as  the  Dominion  of 
Canada].  “Any  possession  of  the  United  States”  includes,  among  others, 
Porto  Rico,  the  Philippines  and  the  Virgin  Islands.  As  to  the  meaning  of 
sources  see  articles  91~93.  See  also  section  1 of  the  statute  [and  articles 
91  and  311]. 

301 1 Art.  383.  Conditions  of  Allowance  of  Credit.—  (a)  When  credit  is 
sought  for  income,  war  profits  or  excess  profits  taxes  paid  other 

than  to  the  United  States,  the  income  tax  return  of  the  individual  must  be 
accompanied  by  form  1116,  carefully  filled  out  with  all  the  information 
there  called  for  and  with  the  calculations  of  credits  there  indicated,  and 
duly  signed  and  sworn  to  or  affirmed.  When  credit  is  sought  for  taxes 
already  paid  the  form  must  have  attached  to  it  the  receipt  for  each  such 
tax  payment.  When  credit  is  sought  for  taxes  accrued  the  form  must 
have  attached  to  it  the  return  on  which  each  such  accrued  tax  was  based. 
This  receipt  or  return  so  attached  must  be  either  the  original,  a duplicate 
original,  a duly  certified  or  authenticated  copy,  or  a sworn  copy.  In  case 
only  a sworn  copy  of  a receipt  or  return  is  attached,  there  must  be  kept 
readily  available  for  comparison  on  request  the  original,  a duplicate  original 
or  a duly  certified  or  authenticated  copy,  (b)  In  the  case  of  a credit  sought 
for  a tax  accrued  but  not  paid,  the  Commissioner  may  require  as  a condition 
precedent  to  the  allowance  of  credit  a bond  from  the  taxpayer  in  addition 
to  form  1116.  If  such  a bond  is  required,  form  1117  shall  be  used  for  it. 
It  shall  be  in  such  penal  sum  as  the  Commissioner  may  prescribe,  and  shall 
be  conditioned  for  the  payment  by  the  taxpayer  of  any  amount  of  tax 
found  due  upon  any  redetermination  of  tax  made  necessary  by  such  credit 
proving  incorrect,  with  such  further  conditions  as  the  Commissioner  may 
require.  This  bond  shall  be  executed  by  the  taxpayer,  his  agent  or  repre- 
sentative, as  principal,  and  by  sureties  satisfactory  to  and  approved  by 
the  Commissioner.  See  also  section  1320  of  the  statute. 

3012  Art.  384.  Re  determination  of  Tax  When  Credit  Proves  Incorrect. 
— In  case  credit  has  been  given  for  taxes  accrued,  or  a proportionate 

share  thereof,  and  the  amount  that  is  actually  paid  on  account  of  such  taxes, 
or  a proportionate  share  thereof,  is  not  the  same  as  the  amount  of  such 
credit,  or  in  case  any  tax  payment  credited  is  refunded  in  whole  or  in  part, 
the  taxpayer  shall  immediately  notify  the  Commissioner.  The  Commis- 
sioner will  thereupon  redetermine  the  amount  of  the  income  tax  of  such 
taxpayer  for  the  year  or  years  for  which  such  incorrect  credit  was  granted. 
The  amount  of  tax,  if  any,  due  upon  such  redetermination  shall  be  paid  by 
the  taxpayer  upon  notice  and  demand  by  the  collector.  The  amount  of 
tax,  if  any,  shown  by  such  redetermination  to  have  been  overpaid  shall  be 
credited  against  any  income,  war  profits  or  excess  profits  taxes,  or  install- 
ment thereof,  then  due  from  such  taxpayer  under  any  other  return,  and 
any  balance  of  such  amount  shall  be  immediately  refunded  to  him.  See 
section  252  of  the  statute  and  articles  1031-1038. 

INDIVIDUAL  RETURNS 

3013  Art.  401.  Individual  Returns. — Every  individual  whose  net  income 
233  as  defined  in  section  212  of  the  statute  and  articles  21-26,  is  $1,000  or 

1142  over  for  the  taxable  year  must  make  a return  of  income  unless  married 
and  living  with  husband  or  wife  as  defined  in  article  303.  The  return 
INC.  385  TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


shall  he  for  his  taxable  year,  whether  calendar  or  fiscal.  Whether  or  not  an 
individual  is  the  head  of  a family  or  has  dependents  is  immaterial  in  determining 
his  liability  to  render  a return.  If  an  individual  is  a married  person  living 
with  husband  or  wife,  no  return  need  be  made  where  their  aggregate  net  income 
is  less  than  $2,000;  but  a separate  return  must  be  made  by  each  of  them,  regardless 
of  the  amount  of  the  individual  income  of  each,  where  their  aggregate  net  income 
is  $2,000  or  over,  unless  they  join  in  a single  return.  The  husband  shall  include 
in  his  return  the  income  derived  fro?n  services  rendered  by  the  wife  or  from  the 
sale  of  products  of  her  labor  if  she  does  not  file  a separate  return  or  join  with  him 
in  a return  setting  forth  her  income  separately.  For  returns  by  partnerships 
see  section  224  and  articles  41 1 and  412;  by  fiduciaries  see  section  225  and  articles 
421-425;  by  personal  service  corporations  see  section  239  and  article  624;  and 
by  other  corporations  see  sections  239  and  240  and  articles  621-626  and  631-638. 
See  also  sectio7i  227  and  articles  441-448.  [Every  individual  having  a net 
income  for  the  taxable  year  of  $1,000  or  over  must  make  a return,  except  only 
that  if  married  and  living  with  husband  or  wife  as  defined  in  article  303  he 
need  not  do  so  unless  their  aggregate  income  is  $2,000  or  over,  and  except 
that  a husband  and  wife  living  together  may  make  a single  joint  return. 
Unless  the  wife  files  a separate  return  of  income  or  joins  with  her  husband  in 
a return  which  shall  set  forth  her  income  separately,  her  husband  should 
include  in  his  return  the  income  accruing  to  the  wife  from  services  rendered 
by  her  or  the  sale  of  products  of  her  labor.] 

3013a  Art.  402. — formerly  part  of  Art.  401.  Form  of  Return. — The  return 
shall  be  on  form  1040  (revised),  except  that  it  may  be  on  short  form 
1040  A (revised)  where  the  net  income  does  not  exceed  $5,000  and  the  net 
income  subject  to  the  normal  tax,  that  is,  after  applying  the  personal  exemp- 
tion and  other  credits,  does  not  exceed  $4,000.  The  forms  are  provided  by 
the  Commissioner  and  may  be  had  from  the  collectors  of  the  several  districts. 
In  the  case  of  a person  owning  State,  municipal.  United  States,  far^n  loan  or 
W ar  Finance  Corporation  bonds,  his  return  shall  contain  a statement  showing 
the  number  and  amount  of  such  obligations  owned  by  him,  the  income  received 
therefrom,  and  the  other  information  called  for  in  the  form.  See  section  213 
(b)  (4)  of  the  statute.  The  return  may  be  made  by  an  agent  when  by  reason 
of  illness,  absence  or  nonresidence  the  person  liable  for  the  return  is  unable 
to  make  it,  the  agent  assuming  the  responsibility  for  making  the  return  and 
incurring  liability  to  the  specific  penalties  provided  for  erroneous,  false  or 
fraudulent  returns.  See  section  253  and  article  1041. 

3014  Art.  403  [Art.  402].  Return  of  Income  of  Minor. — An  individual 
under  21  years  of  age  or  under  the  statutory  age  of  majority  where  he 
lives,  whatever  it  may  be,  is  required  to  render  a return  of  income  if  he  has  a 
net  income  of  his  own  of  $1,000  or  over  for  the  taxable  year.  If  he  is  married 
• see  article  401.  If  the  aggregate  of  the  net  income  of  a minor  from  any  prop- 
erty which  he  possesses,  and  from  any  funds  held  in  trust  for  him  by  a trustee 
or  guardian,  and  from  any  earnings  for  his  own  use,  is  at  least  $1,000,  a return 
as  in  the  case  of  any  other  individual  must  be  made  by  him  or  by  his  guardian 
or  some  other  person  charged  with  the  care  of  his  person  or  property  for  him. 
See  article  422.  If,  however,  a minor  is  dependent  upon  his  parent,  who 
appropriates  or  may  appropriate  his  earnings,  such  earnings  are  income  of  the 
parent  and  not  of  the  minor  for  the  purpose  of  the  normal  tax  and  surtax. 
In  the  absence  of  proof  to  the  contrary  a parent  will  be  assumed  not  to  have 
emancipated  his  minor  child  and  must  include  in  his  return  any  earnings  of 
the  minor. 


INC. 


386 


TAX 


Keg.  4o,  Rev.  Sec  Note  on  page  SOI. 


3015  Art.  404  [Art.  403].  Return  of  Income  of  Nonresident  Alien. — A 

165  nonresident  alien  individual  shall  make  or  have  made  a full  and 
538  accurate  return  on  form  1040  (revised)  or  form  1040  J {revised)  of  his 
income  received  from  sources  within  the  United  States,  regardless  of 
amount,  unless  the  tax  on  such  income  has  been  fully  paid  at  the  source. 
See  section  217  of  the  statute  and  articles  311-316.  The  responsible  repre- 
sentatives of  nonresident  aliens  in  connection  with  any  sources  of  income 
which  such  nonresident  aliens  may  have  within  the  United  States  shall 
make  a return  of  such  income,  and  shall  pay  any  and  all  tax,  normal  and  addi- 
tional, assessed  upon  the  income  received  by  them  in  behalf  of  their  non- 
resident alien  principals,  in  all  cases  where  the  tax  on  income  so  in  their 
receipt,  custody  or  control  shall  not  have  been  withheld  at  the  source.  The 
agent  of  a nonresident  alien  is  responsible  for  a correct  return  of  all  income 
accruing  to  his  principal  within  the  purview  of  the  agency.  The  agency 
appointment  will  determine  how  completely  the  agent  is  substituted  for  the 
principal  for  tax  purposes.  Where,  upon  filing  a return  of  income  it  appears 
that  a nonresident  alien  is  not  liable  for  tax,  but  nevertheless  a tax  shall  have 
been  withheld  at  the  source,  in  order  to  obtain  a refund  on  the  basis  of  the 
showing  made  by  the  return  there  should  be  attached  to  it  [the  return]  a 
statement  showing  accurately  the  amounts  of  tax  withheld,  with  the  names 
and  post-office  addresses  of  all  withholding  agents.  See  article  376. 

3016  Art.  405  [Art.  404].  Return  of  Corporate  Dividends. — Dividends  on 
stock  of  domestic  corporations  or  resident [alien]  corporations 

are  prima  facie  income  of  the  record  owner  of  the  stock,  and  such  record  owner 
will  be  liable  for  any  additional  tax  based  thereon,  unless  a disclosure  of  the 
actual  ownership  is  made  to  the  Commissioner  on  form  1087  (revised) 
which  shall  show  that  the  record  owmer  is  not  the  actual  owner  and  who  the 
owner  is  and  his  address.  In  all  cases  where  the  actual  owner  is  a non- 
resident alien  individual  and  the  record  o'wner  is  a person  in  the  United 
States,  the  record  owner  will  be  considered  for  tax  purposes  to  have  the 
receipt,  custody,  control  and  disposal  of  the  dividend  income  and  will  be 
required  to  make  return  for  the  actual  owner,  regardless  of  the  amount  of 
the  incom.e,  and  to  pa}'^  any  surtax  found  b}^  such  return  to  be  due. 

3017  Art.  406  [Ait.  405].  Verification  of  Returns. — All  income  tax  returns 
must  be  verified  under  oath  or  affirmation.  Persons  in  the  naval  or 

military  sen^ice  of  the  United  States  may  verify  their  returns  before  any 
official  authorized  to  administer  oaths  for  the  purposes  of  those  services. 
Income  tax  returns  executed  abroad  may  be  attested  free  of  charge  before 
United  States  consular  officers.  Where  a foreign  notary  or  other  official 
having  no  seal  shall  act  as  attesting  officer,  the  authority  of  such  attesting 
officer  should  be  certified  to  by  some  judicial  official  or  other  proper  officer 
having  knowledge  of  the  appointmient  and  official  character  of  the  attesting 
officer. 

301  7a  Art.  407.  Use  of  Prescribed  Forms.  Formerly  Art.  626  and  same  in 
1421  effect. — Copies  of  the  prescribed  return  forms  will  so  far  as  possible 
be  furnished  taxpayers  by  collectors.  Failure  on  the  part  of  any 
taxpayer  to  receive  a blank  form  will  not,  hov/ever,  excuse  him  from  making 
a return.  Taxpayers  not  supplied  with  the  proper  forms  should  make  appli- 
cation therefor  to  the  collector  in  ample  time  to  have  their  returns  prepared, 
verified  and  filed  with  the  collector  on  or  before  the  last  due  date.  Each  tax- 
payer should  carefully  prepare  his  return  so  as  fully  and  clearly  to  set  forth 

387  'V  tax 


INC. 


R eg.  45,  Rev.  See  Note  on  page  301. 


the  data  therein  called  for.  Imperfect  or  incorrect  returns  will  not  be  accepted 
as  meeting  the  requirements  of  the  statute.  In  lack  of  a prescribed  form  a 
statement  made  by  a taxpayer  disclosing  his  gross  income  and  the  deductions 
therefrom  may  be  accepted  as  a tentative  return,  and  if  filed  within  the 
prescribed  time  a return  so  made  will  relieve  the  taxpayer  from  liability  to 
penalties,  provided  that  without  unnecessary  delay  such  a tentative  return  is 
replaced  by  a return  made  on  the  proper  form.  See  further  articles  443-446. 

partnership:returns 

3018  Art.  411.  Partnership  Returns. — Every  partnership  must  make  a 

238  return  of  income  regardless  of  the  amount  of  its  [gross  or]  net  income. 
1298  The  return  shall  be  on  form  1065  (revised)  and  shall  be  sworn  to 

by  one  of  the  partners.  Such  return  shall  be  made  for  the  taxable 
year  of  the  partnership,  that  is,  for  its  annual  accounting  period  (fiscal  year 
or  calendar  year  as  the  case  may  be),  irrespective  [regardless]  of  the  taxable 
years  of  the  partners.  See  sections  [200,  212  and]  218  of  the  statute  and 
articles  321-327.  If  the  partnership  m.akes  any  change  in  its  accounting 
period,  it  shall  make  its  return  in  accordance  with  the  provisions  of  section 
226  [of  the  statute]  and  article  431.  See  also  article  424. 

3018a  Art.  412. — Formerly  part  of  Art.  411. — Contents  of  Partnership 
Return. — ^The  return  of  a partnership  shall  state  specifically  (a)  the 
items  of  its  gross  income  enumerated  in  section  213  of  the  statute;  (b)  the 
deductions  enumerated  in  section  214  [of  the  statute],  other  than  the  deduc- 
tion provided  in  paragraph  (11)  of  subdivision  (a)  of  that  section;  (c)  the 
amounts  specified  in  subdivisions  (a)  and  (b)  of  section  216  [of  the  statute] 
received  by  the  partnership;  (d)  the  amount  of  any  income,  war  profits  and 
excess  profits  taxes  of  the  partnership  paid  during  the  taxable  year  to  a 
foreign  country  or  to  any  possession  of  the  United  States,  and  the  amount  of 
any  such  taxes  accrued  but  not  paid  during  the  taxable  year;  (e)  the  names 
and  addresses  of  the  individuals  who  would  be  entitled  to  share  in  the  net 
income  of  the  partnership  if  distributed;  (f)  the  amount  of  the  distributive 
share  of  such  net  income  of  each  such  individual;  and  (g)  such  other  facts  as 
are  required  by  form  1065  (revised).  See  also  sections  222  and  227  and 
articles  381-384  and  441-448.  [of  the  statute.  A receiver  in  charge  of  the 
business  of  a partnership  shall  make  a return  for  it  on  form  1065  (revised). 
See  article  424,  113022.] 

FIDUCIARY  RETURNS 

3019  Art.  421.  Fiduciary  Returns. — Every  fiduciary,  or  at  least  one  of 

239  joint  fiduciaries,  must  make  a return  of  income  (a)  for  the  individual 
1168  whose  income  is  in  his  charge,  if  the  net  income  of  such  individual  is 

$2,000  or  over  if  married  and  living  with  husband  or  wife  or  is 
$1,000  or  over  in  other  cases,  or  (b)  for  the  estate  or  trust  for  which  he  acts, 
if  the  net  income  of  such  estate  or  trust  is  $1,000  or  over  or  if  any  beneficiary 
of  such  estate  or  trust  is  a nonresident  alien.  The  return  in  case  (a)  and 
also  in  case  (b)  if  the  tax  is  payable  by  the  fiduciary  shall  be  on  form  1040 
(revised),  except  that  it  may  be  on  short  form  1040  A (revised)  where  the 
net  income  does  not  exceed  $5,000.  The  return  shall  be  on  form  1041  (re- 
vised) in  case  (b)  if  the  tax  is  payable  by  the  beneficiaries.  In  such  a case  the 
fiduciary  shall  include  in  the  return  a statement  of  each  beneficiary'^ s distributive 
share  of  the  net  income,  whether  or  not  distributed  before  the  close  of  the  taxable 
year  for  which  the  return  is  made.  See  section  219  of  the  statute  and  articles 


INC. 


388  TAX 


Reg.  45,  Rev.  See  Note  on  page  30 J, 


341-346.  If  the  net  income  of  a decedent  from  the  beginning  of  the  taxable 
year  to  the  date  of  his  death  was  $1,000,  if  unmarried,  or  $2,000,  if  married, 
the  executor  or  administrator  shall  make  a return  for  such  decedent. 
article  305. 

3020  Art.  422.  Return  by  Guardian  or  Committee. — A fiduciary  acting 
as  the  guardian  of  a minor  having  a net  income  of  $1,000  or  $2,000, 

according  to  the  marital  status  of  such  person,  must  make  a return  for  such 
minor  on  form  1040  (revised)  or  1040  A (revised)  and  pay  the  tax,  unless 
such  minor  himself  makes  a return  or  causes  it  to  be  made.  A fiduciary 
^ acting  as  the  committee  of  an  insane  person  having  an  income  of  $1,000  or 

$2,000,  according  to  the  marital  status  of  such  person,  must  make  a return 
for  such  incompetent  on  form  1040  (revised)  or  1040  A (revised)  and  pay 
the  tax.  [In  either  case,  if  the  fiduciary  is  also  acting  for  other  beneficiaries, 
such  a return  shall  be  rendered  in  addition  to  the  returns  required  by  the 
preceding  article.] 

3021  Art.  423.  Returns  Where  Two  Trusts.— In  the  case  of  two  or 
more  trusts  the  income  of  which  is  taxable  to  the  beneficiaries, 

which  were  created  by  the  same  person  and  are  in  charge  of  the  same  trustee, 
the  trustee  shall  make  a single  return  on  form  1041  (revised)  for  all  such 
trusts,  notwithstanding  that  they  may  arise  from  different  instruments. 
When,  however,  a trustee  holds  trusts  created  by  different  persons  for  the 
benefit  of  the  same  beneficiary,  he  shall  make  a return  on  form  1041  (re- 
vised) for  each  trust  separately. 

3022  Art.  424.  Return  by  Receiver. — A receiver  who  stands  in  the  stead 
of  an  individual  or  corporation  must  render  a return  of  income  and 

pay  the  tax  for  his  trust,  but  a receiver  of  only  part  of  the  property  of  an 
individual  or  corporation  need  not.  If  the  receiver  acts  for  an  individual 
the  return  shall  be  on  form  1040  (revised)  or  1040  A (revised).  When  acting 
for  a corporation  a receiver  is  not  treated  as  a fiduciary,  and  in  such  a case  the 
return  shall  be  made  as  if  by  the  corporation  itself.  See  section  239  of  the 
statute  and  article  622.  A receiver  in  charge  of  the  business  of  a partnership 
shall  render  a return  on  form  1065  (revised).  A receiver  of  the  rents  and 
profits  appointed  to  hold  and  operate  a mortgaged  parcel  of  real  estate,  but 
not  in  control  of  all  the  property  or  business  of  the  mortgagor,  and  a receiver 
in  partition  proceedings,  are  not  required  to  render  returns  of  income.  In 
gfmeral,  statutory  receivers  and  common  law  receivers  of  all  the  property 
Of  business  of  an  individual  or  corporation  must  make  returns.  See  also 
section  256  of  the  statute  and  articles  1071-1080.  [Every  receiver  for  an 
individual,  partnership,  or  corporation,  whether  or  not  of  all  the  property 
or  business,  must  render  a return  of  information  under  section  256  of  the 
statute.] 

3023  Art.  425.  Return  for  Nonresident  Alien  Beneficiary. — Where  a 

► citizen  or  resident  fiduciary  has  the  distribution  of  trust  income  for 

which  there  is  a nonresident  alien  beneficiary,  the  fiduciary  must  make  a 
return  on  form  1040  (revised)  or  1040  A (revised)  for  such  nonresident 
alien  and  pay  the  tax.  If  there  are  two  or  more  beneficiaries,  the  fiduciary 
shall  render  a return  on  form  1041  (revised)  and  also  a return  on  form  1040 
(revised)  or  1040  A (revised)  for  each  nonresident  alien  beneficiary. 


INC. 


389  TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


RETURNS  WHEN  ACCOUNTING  PERIOD  CHANGED 

3024  Art.  431.  Returns  when  Accounting  Period  Changed.— No 

247  return  can  be  made  for  a period  of  more  than  12  months.  A 

1479  separate  return  for  a fractional  part  of  a year  is,  therefore,  required 

wherever  there  is  a change,  with  the  approval  of  the  Commissioner, 
in  the  basis  of  computing  net  income  from  one  taxable  year  to  another  taxable 
year  or  wherever  a taxpayer  making  [makes]  his  first  return  of  income  does  so 
on  the  basis  of  a fiscal  year.  The  periods  to  be  covered  by  such  separate 
returns  in  the  several  cases  are  stated  in  the  statute.  The  requirements  with 
respect  to  the  filing  of  a separate  return  and  the  payment  of  tax  for  a part  of 
a year  are  the  same  as  for  the  filing  of  a return  and  the  payment  of  tax  for  a 
full  taxable  year  closing  at  the  same  time.  See  sections  227  and  250  of  the 
statute  and  articles  441-448  and  1001.  The  tax  on  net  income  computed 
on  the  basis  of  the  [a]  period  for  which  a separate  return  is  made  shall  be  paid 
thereon  at  the  rate  for  the  calendar  year  in  which  such  period  is  included, 
and  the  credits  for  personal  exemption  and  dependents  shall  be  such  propor- 
tion of  the  full  credits  as  the  number  of  months  in  such  period  bears  to  12 
months.  See  section  216  and  articles  305.  See  further  section  212  and  articles 
25  and  26,  and  as  to  corporations  see  sections  232  and  239  and  articles  531  and 
626.  [See  as  to  corporations  sections  223  and  239  of  the  statute.] 

TIME  AND  PLACE  FOR  FILING  RETURN 

3025  Art.  441.  Time  for  Filing  Return. — Returns  of  income  must  be 

253  made  on  or  before  the  fifteenth  day  of  March  following  the  taxable 

1472  year,  except  that  returns  on  the  basis  of  a fiscal  year  other  than 

the  calendar  year  must  be  made  on  or  before  the  fifteenth  day  of 
the  third  month  following  the  close  of  the  fiscal  year.  Returns  on  the  basis 
of  fiscal  years  ending  in  1918  of  taxpayers  who  made  returns  on  the  calendar 
year  basis  for  the  year  1917  shall  be  made  on  or  before  the  fifteenth  day  of 
March,  1919.  See  also  sections  250  and  253  of  the  statute  and  articles  1001- 
1013  and  1041.  [Returns  of  individuals  can  not  be  accepted  prior  to  the 
close  of  the  taxable  year,  except  that  administrators  or  executors  may  im- 
mediately after  their  discharge  upon  final  accounting  file  with  the  collector 
a return  of  income  of  the  estate  for  the  year  in  which  the  administration  was 
closed,  and  should  pay  the  tax  found  by  such  return  to  be  due  immediately 
upon  receipt  of  notice  and  demand  for  the  amount  of  such  tax.  There 
should  be  attached  to  this  return  a certified  copy  of  the  ordfer  or  a certificate 
under  seal,  setting  forth  the  fact  of  final  accounting  and  the  discharge  of  the 
executor  or  administrator.  An  ancillary  administrator,  being  merely  an 
agent  of  the  domiciliary  administrator,  should  transmit  to  him  all  informa- 
tion as  to  the  income  of  the  estate  received  by  the  ancillary  administrator, 
to  the  end  that  the  original  administrator  may  make  a return  covering  the 
entire  income  of  the  estate.  In  connection  with  the  above,  cut  out  here,  see 
next  paragraph.] 

3025a  Art,  442.  Time  for  Filing  Return  upon  Death  or  Termination  of 
1223  Trust.  (For  former  provisions  see  part  cut  out  in  U3025  above). — 
As  soon  as  possible  after  his  appointment  and  qualification,  without 
waiting  for  the  close  of  the  taxable  year,  an  executor  or  administrator  shall  file  a 
return  of  income  for  the  decedent.  Upon  the  completion  of  the  administration 
of  an  estate  and  final  accounting  an  executor  or  administrator  shall  file  a return 
of  income  of  the  estate  for  the  portion  of  the  taxable  year  in  which  the  adminis^ 
tration  was  closed,  attaching  to  the  return  a certified  copy  of  the  order  for  his 

390  TAX 


INC. 


Reg,  45,  Rev.  See  Note  on  page  301. 


discharge.  An  ancillary  administrator  need  make  no  separate  return  if  the 
domiciliary  administrator  includes  in  his  return  the  entire  income  of  the  estate. 
Similarly,  upon  the  termination  of  any  other  trust  the  trustee  shall  make  a return 
vnthoui  waiting  for  the  close  of  the  taxable  year.  In  any  such  case  the  require- 
ments  with  respect  to  the  payment  of  the  tax  are  the  same  as  if  the  return  were 
for  a full  taxable  year  closing  at  the  end  of  the  month  during  which  the  decedent 
dies  or  the  estate  is  settled  or  the  trust  is  terminated,  as  the  case  may  be.  The 
payment  of  the  tax  before  the  end  of  the  taxable  year  in  such  circumstances  does 
not  relieve  the  taxpayer  from  liability  for  any  additional  tax  which  might  sub- 
sequently  be  imposed  upon  income  of  the  taxable  year. 

3026  Art.  443  [Art.  442].  Extension  of  Time  by  Collector. — It  is  important 

that  the  taxpayer  render  before  the  return  due  date  a return  as 
complete  and  final  as  it  is  possible  for  him  to  prepare.  However,  in  cases  of 
sickness  or  absence  collectors  are  authorized  to  grant  an  extension  of  not 
exceeding  30  days,  where  in  their  judgment  such  further  time  is  actually 
required  for  the  making  of  an  accurate  return.  See  article  1002.  The 
application  for  such  extension  must  be  made  prior  to  the  expiration  of 
the  period  for  which  the  extension  is  desired.  [Otherwise  the  return  will  be 
considered  delinquent  and  liability  to  penalty  will  attach.]  The  absence  or 
sickness  of  one  or  rriore  officers  of  a corporation  at  the  time  the  return  is  re- 
quired to-be  filed  will  not  be  accepted  as  a reasonable  cause  for  failure  to 
file  the  return  within  the  prescribed  time,  unless  it  is  satisfactorily  shown  that 
there  were  no  other  principal  officers  available  and  sufficiently  informed  as 
to  the  affairs  of  the  corporation  to  make  and  verify  the  return.  As  a condi- 
tion of  granting  an  extension  of  time  for  filing  a return  the  collector  may  require 
the  submission  of  a tentative  return  and  estimate  of  the  tax  on  form  1040  T in 

^ the  case  of  individuals,  or  on  form  1031  T in  the  case  of  corporations,  and  the 

payment  of  one-fourth  of  the  estimated  amount  of  tax.  \Fcr  remainder  of  the 
old  Art.  442,  see  next  paragraph.] 

3026a  Art.  444  [442].  Extension  of  Time  by  Commissioner. — If  before  the 
end  of  an  extension  of  30  days  granted  by  the  Collector  an  accurate  return 
can  not  be  made,  an  appeal  for  a further  extension  must  be  made  to  the  Com- 
missioner with  a full  recital  of  the  causes  for  the  delay,  [and]  The  Com- 
missioner will  not  grant  an  additional  extension  without  a clear  showing  that 
a complete  return  can  not  be  made  at  the  end  of  the  30  day  period.  The 
Commissioner  will  grant  no  such  extension [,  thus  requested,]  beyond  the 
original  due  date  of  the  third  [second]  installment  of  the  tax.  Either  a com- 
plete or  a tentative  return,  as  complete  as  possible  and  giving  a ground  for 
assessment  of  the  tax,  must  be  submitted  on  or  before  the  due  date  as  extended, 
and  the  tax  shown  to  be  due  must  be  paid  with  the  submission  of  the  return. 
If  a complete  return  can  not  be  made  at  that  time,  the  facts  must  be  sub- 
mitted to  the  Commissioner  for  such  further  action  as  he  deems  warranted. 
In  exceptional  circumstances  the  taxpayer  may  apply  originally  to  the  Com- 
missioner for  <an  extension  of  time.  [A  tentative  return  will  not  be  accepted 
as  a basis  for  a partial  or  preliminary  payment  of  tax  on  the  due  date,  if  it  be 
possible  for  the  taxpayer  to  submit  on  or  before  that  day  a complete  and 
final  return.] 

3027  Art.  445  [Art.  443].  Extension  of  Time  in  the  Case  of  Persons 
Abroad. — In  view  of  the  disturbed  conditions  abroad  and  the  conse- 
quent interference  with  the  usual  channels  of  communication,  an  extension 

^ of  time  for  filing  returns  of  income  for  1918  and  subsequent  years  and  for  pay- 

ing the  tax  is  hereby  granted  in  the  case  of  nonresident  alien  individuals  and 
nonresident  foreign  corporations,  or  their  proper  representatives  in  the  United 


INC. 


391 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


States,  and  of  American  citizens  residing  or  traveling  abroad,  including  persons 
in  military  or  naval  service  on  duty  outside  the  United  States,  for  such  period 
as  may  be  necessary,  not  exceeding  90  days  after  proclamation  by  the  Presi- 
dent of  the  end  of  the  war  with  Germany.  The  whole  tax  shown  to  be  due 
must  be  paid  at  the  time  of  filing  the  return.  In  all  such  cases  an  affidavit  must 
be  attached  to  the  return,  stating  the  causes  of  the  delay  in  filing  it,  in  order 
that  the  Commissioner  may  determine  whether  the  failure  to  file  the  return 
in  time  was  due  to  a reasonable  cause  and  not  to  wilful  neglect.  If  the 
showing  justifies  the  conclusion  that  the  failure  to  file  the  return  in  time  was 
excusable,  no  penalty  [by  way  of  addition  to  the  tax]  will  be  imposed. 

3028  Art.  446  [Art.  444].  Extension  of  Time  in  the  Case  of  Enemies. — 
An  extension  of  time  is  hereby  granted  for  such  period  as  may  be 

necessary,  not  exceeding  90  days  after  proclamation  by  the  President  of  the 
end  of  the  war  with  Germany,  for  filing  returns  of  income  for  1918  and  subse- 
quent years  and  for  paying  the  tax  by  or  for  nonresident  enemies  or  allies  of 
enemies,  as  defined  by  section  2 of  the  Trading  with  the  Enemy  Act  of  October 
6,  1917,  not  holding  licenses  granted  under  the  provisions  of  that  act.  The 
whole  tax  shown  to  be  due  must  be  paid  at  the  time  of  filing  the  return.  This  ex- 
tension, however,  does  not  authorize  any  delay  in  filing  returns  of  informa- 
tion. This  extension  is  also  subject  to  the  condition  that  all  persons  who 
on  October  6,  1917,  had  or  since  have  had  or  may  hereafter  have  control 
of  any  money  or  other  property  for  any  such  enemy  or  ally  of  enemy,  or  who 
on  October  6,  1917,  were  or  since  have  been  or  may  hereafter  be  indebted 
to  any  such  enemy  or  ally  of  enemy,  shall  hold  and  deliver  all  said  money 
and  property  in  all  respects  subject  to  the  Trading  with  the  Enemy  Act 
and  to  the  orders  of  the  President  and  of  the  alien  property  custodian 
thereunder,  and  shall  in  due  course  file  returns  of  income  in  respect  of  all 
such  money  and  property  for  such  period  as  may  elapse  or  have  elapsed 
prior  to  the  actual  delivery  of  such  money  and  property  to  the  alien  property 
custodian.  As  to  withholding  at  the  source,  see  article  375. 

3028a  Art.  447.  Last  Due  Date.  Formerly  Art.  652. — ^The  last  due  date 
1475  is  the  last  day  upon  which  a return  is  required  to  be  filed  in  accord- 
ance with  the  provisions  of  the  statute  or  the  last  day  of  the  period 
covered  by  an  extension  of  time  granted  by  the  collector  or  Commissioner. 
When  the  last  due  date  falls  on  Sunday  or  a legal  holiday,  the  last  due  date 
for  filing  returns  will  be  the  day  following  such  Sunday  or  legal  holiday.  If 
placed  in  the  mails  the  return  should  be  posted  in  ample  time  to  reach  the 
collector’s  office,  under  ordinary  handling  of  the  mails,  on  or  before  the  date 
on  which  the  return  is  required  to  be  filed.  If  a return  is  made  and  placed 
in  the  mails  in  due  course,  properly  addressed  and  postage  paid,  in  ample 
time  to  reach  the  office  of  the  collector  on  or  before  the  last  due  date,  no  pen- 
alty will  attach  should  the  return  not  be  actually  received  by  such  officer 
until  subsequently  to  that  date.  Where  a question  may  be  raised  as  to 
whether  or  not  the  return  was  posted  in  ample  time  to  reach  the  collector’s 
office  on  or  before  the  due  date,  the  envelope  in  which  the  return  was  trans- 
mitted will  be  preserved  by  the  collector  and  forwarded  to  the  Commissioner 
with  the  return. 

3029  Art..448  [Art.  445].  Place  for  Filing  Return. — Returns  of  income  must 
be  delivered  or  mailed  [made]  to  the  collector  for  the  district  of  the 

legal  residence  or  principal  place  of  business  of  the  person  making  the  return. 
[The  returns  will  be  forwarded  by  the  collector  by  registered  mail  or  express 
to  the  Commissioner  with  the  list  for  the  month  in  which  they  were  filed.] 


INC. 


392 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


Persons  having  no  domicile  or  place  of  business  in  the  United  States^  and  persons 
in  the  military  or  naval  service  of  the  United  States,  may  file  their  returns  of 
income  with  the  collector  [of  internal  revenue]  at  Baltimore. 

UNDERSTATEMENT  IN  RETURNS 

3030  Art.  451.  Understatement  of  Income. — If  a collector  suspects 
258  that  the  amount  of  any  income  is  understated  in  a return,  he  may 
1538  on  his  own  initiative  take  up  the  matter  with  the  taxpayer  and  upon 
becoming  satisfied  that  the  amount  was  understated  may  increase 
it  accordingly,  subject  to  the  right  of  the  taxpayer  to  appeal  to  the  Com- 
missioner. The  Commissioner,  however,  without  the  intervention  of  the 
collector  may  exercise  original  jurisdiction  in  cases  of  understatements  or 
other  errors  in  returns,  in  which  event  sections  250  and  1305  of  the  statute 
and  section  3176  of  the  Revised  Statutes,  as  amended  by  section  1317  of  the 
statute,  are  applicable  instead  of  section  228.  See  articles  1002,  1005,  and 
1711.  Section  3172  of  the  Revised  Statutes,  as  am^ended  by  section  1317 
of  the  Revenue  Act  of  1918,  provides; 

Sec.  3172.  Every  collector  shall,  from  time  to  time,  cause  his 
deputies  to  proceed  through  every  part  of  his  district  and  inquire  after 
and  concerning  all  persons  therein  who  are  liable  to  pay  any  internal- 
revenue  tax,  and  all  persons  owning  or  having  the  care  and  management 
of  any  objects  liable  to  pay  any  tax,  and  to  make  a list  of  such  persons 
and  enumerate  said  objects. 

See  also  section  3173  of  the  Revised  Statutes“as^amended|by~section]1317 
of  the  Revenue  Act  of  1918. 

END  OF  PART  I. 

PART  n-A. 

CORPORATIONS. 

[Beginning  on  page  411.1 

PART  III 

[OF  REGULATIONS  NO.  45.] 

ADMINISTRATIVE  PROVISIONS 

PAYMENT  OF  TAXES 

3031  Art.  1001.  Time  for  Payment  of  Tax.— The  tax,  unless  paid  at 

361  the  source,  is  to  be  paid  to  the  collector  in  four  equal  installments, 

2339  the  first  at  the  time  for  filing  the  return  and  the  others  at  intervals 

of  three  months  thereafter,  or  it  may  at  the  option  of  the  taxpayer 
be  paid  in  a single  payment  on  or  before  the  time  for  filing  the  return  or 
such  time  as  extended.  See  section  227  of  the  statute  and  articles  441-447. 
An  unconditional  extension  of  time  for  filing  a return  will  [may]  postpone 
the  date  for  payment  of  the  first  installment,  but  will  not  postpone  the 
date  of  payment  of  the  other  installments  unless  so  specified  in  each  case. 
Upon  failure  to  pay  an  installment  on  time,  all  of  the  tax  remaining  un- 
paid becomes  due  and  payable  upon  notice  and  demand.  Upon  recompu- 
tation of  the  tax,  if  the  amount  already  paid  exceeds  the  correct  amount 
of  the  installment  or  of  the  whole  tax,  the  excess  shall  be  credited  against 
subsequent  installments  or  other  similar  taxes  then  due  from  the  taxpayer 

INC.  393  TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


or,  if  there  is  no  such  installment  or  tax,  shall  be  refunded  to  him;  but 
if  the  amount  already  paid  is  less  than  the  correct  amount  of  the  install- 
ment or  tax  then  due,  the  dilference  shall  be  paid  upon  notice  and  demand 
with  interest.  See  section  252  [of  the  statute]  and  articles  1034-1036.  [When 
the  due  date  for  the  payment  of  taxes  falls  upon  Sunday  or  a legal  holiday, 
the  due  date  will  be  the  day  next  following  such  Sunday  or  legal  holiday.) 

3032  Art,  1002.  Payment  of  Tax  When  No  Proper  Return.— Section 

443  3176  of  the  Revised  Statutes,  as  amended  by  section  1317  of  the 

1549  Revenue  Act  of  1918,  provides  [1[443  and  ^1549]: 

Accordingly,  if  a return  is  not  made  on  tim.e  or  is  false,  and  the  collector  or 
Commissioner  makes  a return,  the  amount  of  tax  determined  to  be  due 
under  such  substitute  return  shall  be  paid  in  full  upon  notice  and  demand 
by  the  collector.  See  further  articles  443-446,  1004  and  1005. 

3033  Art.  1033.  Interest  on  Tax. — Where  the  tim_e  for  the  payment  of 
any  installment  of  the  tax  is  postponed  at  the  request  of  the  tax- 
payer, interest  at  the  rate  of  6 per  cent  per  annum  is  added  from  the  original 
due  date.  If  an  understatement  of  the  tax  in  the  return  is  due  to  the  negli- 
gence of  the  taxpayer,  but  without  intent  to  defraud,  interest  at  the  rate  of  12 
per  cent  per  annum  is  added  to  the  amount  of  the  deficiency  of  each  install- 
ment from  the  time  the  installment  was  due.'  If  any  tax  remains  due  and 
unpaid  for  ten  days  after  notice  and  demand  by  the  collector,  or  in  the  case 
of  the  first  installment  as  computed  by  the  taxpayer  remains  due  and  un- 
paid for  ten  days,  interest  at  the  rate  of  12  per  cent  per  annum  is  added 
from  the  due  date,  except  that  the  interest  on  any  amount  which  is  the 
subject  of  a bona  fide  claim  for  abatement  shall  be  at  the  rate  of  6 per  cent 
per  annum,  and  except  that  no  interest  is  added  in  the  case  of  estates  of  in- 
sane, deceased  or  insolvent  persons.  But  if  any  part  of  a claim  for  abate- 
ment on  the  ground  of  a loss  in  inventory  under  section  2i4(a)  (12)  or  section 
234(a)  (14)  of  the  statute  is  disallowed,  interest  from  the  original  due  date  at 
the  rate  of  12  per  cent  per  annum  will  be  added  to  the  tax  not  abated;  and 
interest  is  to  be  added  in  all  cases  in  which  the  demand  of  payment  is  made 
of  the  taxpayer  personally,  although  he  subsequently  dies,  or  becomes 
insane  or  insolvent,  so  that  collection  of  the  tax  is  m.ade  from  his  estate  in 
the  hands  of  his  representative.  See  further  articles  1005  and  1006. 

3034  Art.  1004.  Penalty  for  Failure  to  File  Return. — In  case  of  failure 
to  make  a return  on  time,  a penalty  of  25  per  cent  of  the  amount  of 

the  tax  is  added  to  it,  unless  the  return  is  later  filed  and  the  failure  to  file  it 
is  satisfactorily  shown  to  be  due  to  a reasonable  cause.  See  article  1002. 
Two  classes  of  delinquents  are  liable  to  the  penalty:  (a)  those  who  do  not  file 
returns  and  for  whom  returns  are  made  by  the  collector  or  Commiissioner; 
and  (b)  those  who  file  tardy  returns  and  are  unable  to  show  reasonable  cause 
for  the  delay.  Taxpayers  wishing  to  avoid  the  penalty  must  make  an  affirm- 
ative showing  of  the  facts  alleged  as  a reasonable  cause  for  failure  to  make  a 
return  on  time  in  the  form  of  an  affidavit  under  oath,  which  should  be  at- 
tached to  the  return.  [Where  an  overdue  return  is  filed  without  such  an 
affidavit,  the  collector  may  notify  the  taxpayer  that  unless  within  ten  days 
an  affidavit  is  filed  fully  explaining  the  cause  of  delinquency,  the  25  per  cent 
penalty  wiW  be  asserted.  If  the  explanation  is  not  then  furnished,  the 
25  per  cent  penalty  will  be  assessed  with  the  tax.)  If  such  an  [the]  explanation 
is  furnished  with  the  return  or  upon  the  collector’s  dem.and,  the  collector, 
unless  otherwise  directed  by  the  Commissioner,  will  forward  the  affidavit  with 
the  return,  and  if  the  Commissioner  determines  that  the  delinquency  was  [not] 


INC. 


394 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


due  to  a reasonable  cause  the  25  per  cent  penalty  will  not  be  assessed.  “Rea- 
sonable cause’’  is  such  a condition  of  fact  that  had  the  taxpayer  in  default 
exercised  ordinary  business  care  and  prudence  it  would  have  been  im- 
practicable or  impossible  for  him  to  file  a return  in  the  prescribed  time. 
See  also  section  253  of  the  statute  and  article  1041. 

3035  Art.  1005.  Penalty  for  Understated  Return. — (a)  If  an  under- 
statement of  the  amount  of  the  tax  in  a return  of  income  is  due  to 

negligence  on  the  part  of  the  taxpayer,  but  without  intent  to  defraud,  a 
penalty  of  5 per  cent  of  the  amount  of  the  deficiency  is  added;  but  (b)  if  the 
understatement  of  the  tax  is  false  with  intent  to  evade  the  tax,  a penalty  of 
50  per  cent  of  the  amount  of  the  deficiency  is  added,  (c)  In  case  a false  or 
fraudulent  return  is  willfully  made,  other  than  as  specified  in  (b)  above,  a 
penalty  of  50  per  cent  of  the  amount  of  the  tax  is  added.  See  articles  1002 
and  1003.  In  general,  negligence  is  attributable  to  the  taxpayer  if  he  com- 
putes the  tax  in  disregard  of  the  instructions  on  the  return  form  or  otherwise 
incorrectly,  unless  he  can  show  that  his  error  was  due  to  an  honest  mis- 
understanding of  the  facts  or  the  law  of  which  an  average  reasonable  man 
might  be  capable.  See  also  section  253  of  the  statute  and  article  1041. 

3036  Art.  1006.  Penalty  for  Nonpayment  of  Tax. — If  any  tax  or  in- 
stallment thereof  remains  due  and  unpaid  for  ten  days  after  notice 

and  demand  by  the  collector  (the  instructions  on  the  return  serve  as  notice 
and  demand  in  the  case  of  the  first  installment  as  computed  by  the  tax- 
payer), a penalt3/  of  5 per  cent  is  added.  When,  however,  upon  an  assess- 
ment of  a tax  and  demand  made  for  payment,  a bona  fide  claim  for  its 
abatement  is  filed  within  10  days  after  such  demand,  no  penalty  is  imposed. 
Upon  receipt  of  a notice  of  rejection  of  the  claim  (or  so  much  thereof  as  is 
not  allowed),  the  collector  v/ill  notify  the  claimant  and  demand  the  pay- 
ment of  the  tax.  If  the  tax  is  not  then  paid  within  10  days,  the  5 per  cent 
penalty  will  be  assessed  on  the  amount  of  tax  not  abated.  If  abatement  of 
the  entire  tax  assessed  is  not  demanded  in  a claim,  and  the  balance  of  the  tax 
is  not  paid  within  the  required  10  days,  the  5 per  cent  penalty  will  im- 
mediately accrue  on  such  balance.  See  also  article  1003.  The  estate  of  a 
deceased  person,  regardless  of  the  date  of  his  death,  or  of  an  insane  or 
insolvent  person,  cannot  be  charged  with  liability  to  the  5 per  cent  penalty 
on  account  of  his  or  the  fiduciary’s  delinquency  in  making  payment  of  taxes. 
Where  a warrant  of  distraint  is  served,  $5  is  added.  For  other  penalties 
see  section  253  of  the  statute  and  article  1041. 

3037  Art.  1007.  Notice  and  Demand  of  Payment. — The  service  of  a 
notice  and  demand  by  the  collector  on  form  17  is  complete  upon 

mailing  it,  and  the  time  within  which  the  tax  must  be  paid  runs  from  the 
date  of  mailing  the  notice  and  not  of  its  receipt  by  the  taxpayer.  But  pay- 
ment for  the  tax  must  actually  reach  the  collector  within  the  ten  day  period, 
and  merely  mailing  a remittance  before  the  expiration  of  the  ten  days  is  not 
sufficient.  So,  to  avoid  the  prescribed  penalties,  no  more  than  ten  days 
may  elapse  after  the  mailing  of  the  notice  before  the  payment  is  in  the 
collector’s  hands.  See  section  3184  of  the  Revised  Statutes.  By  reason, 
however,  of  absence  from  their  homes  or  places  of  business  in  foreign  coun- 
tries or  in  the  military  or  other  service  of  the  country  and  the  consequent 
delay  in  receiving  mail,  or  [in  the  case  of  a corporation,]  by  reason  of  the 
location  of  the  residence  of  an  individual  or  of  the  office  of  a corporation  [its 
office]  to  which  the  notice  was  addressed  at  a distance  from  the  collector’s  office, 
it  is  impossible  for  many  persons  to  receive  a notice  and  demand  and  to 


INC. 


395  TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


make  payment  of  the  tax  so  that  such  paym.ent  m.ay  be  received  by  the  col- 
lector within  the  ten  day  period  following  the  service  of  notice  and  dem.and, 
and  in  all  such  cases  the  collector  will  enter  on  the  notice  as  the  date  on 
which  the  tax  becomes  due  and  payable  a date  as  nearly  as  possible  ten  days 
after  the  tim.e  that  the  notice  should  be  received  in  the  ordinary  course  of  the 
mails  by  the  taxpayer.  In  such  cases  when  it  appears  that  a remittance  for 
the  tax  was  placed  in  the  mails  within  the  ten  day  period  after  the  date  spec- 
fied  in  the  notice,  and  in  cases  where  tardiness  is  occasioned  because  the 
notice  was  not  delivered  in  due  time  by  reason  of  delay  in  the  miail  and 
satisfactory  evidence  of  that  fact  is  furnished,  the  penalrc  and  interest  will 
not  be  collected. 

3038  Art.  1008.  Collection  of  Tax  by  Suit. — Taxes,  fines,  penalties 

489  and  forfeitures  may  be  sued  for  and  recovered  in  the  name  of  the 

2651  United  States  in  the  district  courts  of  the  United  States.  Suits 

for  the  collection  of  taxes  may  be  brought  at  any  time  within 

five  years  after  the  return  was  due  or  was  made,  whether  the  taxes  have  been 
assessed,  or  are  assessable,  or  not.  In  the  case  of  false  or  fraudulent  re- 
turns with  intent  to  evade  the  tax  no  statute  of  limitations  runs  against  the 
Government.  Section  3164  of  the  Revised  Statutes,  as  amended  by  sec- 
tion 1317  of  the  Revenue  Act  of  1918,  provides  [T[439  and  1[2651]: 
However,  no  suit  for  the  recovery  of  unpaid  taxes  or  of  any  fine,  penalty 
or  forfeiture  shall  be  com.menced  until  the  collector  shall  have  submitted  to 
the  Commissioner  a full  report  of  all  material  facts  and  circumstances  in  the 
case  and  shall  have  received  from  him  express  authority  to  proceed.  See 
sections  3212-3216  of  the  Revised  Statutes,  and  also  Regulations  No.  2 
(revised)  and  Regulations  No.  12  (revised). 

3039  Art.  1009.  Collection  of  Tax  by  Distraint. —If  any  person  liable 
to  pay  any  taxes  neglects  or  refuses  to  pay  them  within  ten  days 

after  notice  and  demand,  it  shall  be  lawful  for  the  collector  or  his  deputy 
to  collect  such  taxes  with  5 per  cent  additional  and  interest  at  12  per  cent 
per  annum  by  distraint  and  sale  of  the  goods,  chattels  or  effects,  including 
stocks,  securities  and  evidences  of  debt,  of  the  person  delinquent.  When 
goods,  chattels  or  effects  sufficient  to  satisfy  the  taxes  imposed  upon  any 
person  are  not  found  by  the  collector  or  deputy  collector,  he  is  authorized 
to  collect  such  taxes  by  seizure  and  sale  of  real  estate.  See  further  sections 
3186  (as  amended  by  the  Act  of  March  4,  1913),  3187-3196,  3197  (as 
amended  by  the  Act  of  March  1,  1879),  3198-3202,  3203  (as  amended  by 
the  Act  of  March  1,  1879),  3204-3207,  3208  (as  amended  by  the  Act  of 
March  1,  1879)  and  3209  of  the  Revised  Statutes  and  Regulations  No.  12 
(revised).  Distraint  may  also  be  used  against  a delinquent  collector.  See 
section  3217  of  the  Revised  Statutes. 

3040  Art.  1010.  Enforcement  of  Tax  Lien  by  Bill  In  Equity.— In  any 
case  w'here  there  has  been  failure  to  pay  the  tax  and  it  has  become 

necessary  to  seize  and  sell  real  estate  to  satisfy  it,  a bill  in  equity  may  be 
filed  in  a district  court  of  the  United  States  to  enforce  the  lien  of  the  United 
States  for  tax  upon  any  real  estate  in  which  the  delinquent  has  any  right, 
title  or  interest.  This  remedy  does  not  supersede  distraint,  but  is  cumu- 
lative. In  the  event  of  nonpayment  of  a tax  after  demand  it  becomes  a lien 
in  favor  of  the  United  States  from  the  time  when  the  assessment  list  was 
received  by  the  collector  upon  all  property  and  rights  to  property  belonging 
to  the  taxpayer,  except  that  the  lien  is  not  valid  as  against  any  mortgagee, 
purchaser  or  judgment  creditor  until  notice  thereof  is  filed  in  the  proper^pub- 

396  TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  301. 


lie  office  or  offices  on  form  668.  See  sections  3186  (as  amended  by  the  Act 
^ of  March  4,  1913)  and  3207  of  the  Revised  Statutes  and  Regulations  No.  12 

(revised) . 

3041  Art.  1011.  Compromise  of  Tax  Cases. — The  Commissioner,  with 
the  advice  and  consent  of  the  Secretary  of  the  Treasury,  may  com- 
promise any  civil  of  criminal  case  arising  under  the  internal  revenue  laws 
instead  of  commencing  suit  thereon,  and  with  the  advice  and  consent  of  the 

V Secretary  and  the  recommendation  of  the  Attorney-General  may  compromise 

any  such  case  after  suit  thereon  has  been  commenced  by  the  United  States. 
Accordingly,  the  power  to  compromise  extends  to  (a)  both  civil  and  crim- 
inal cases;  (b)  cases  whether  before  or  after  suit;  and  (c)  both  taxes  and 
penalties.  Refunds  can  not  be  made  of  accepted  offers  in  compromise  in 
cases  where  it  is  subsequently  ascertained  that  no  violation  of  law  was  in- 
volved. See  further  sections  3229  and  3469,  and  sections  5292  and  5293 
^ (as  amended  by  the  Act  of  February  27,  1877),  of  the  Revised  Statutes. 

3042  Art.  1012.  Assessment  of  Tax.— When  the  returns  are  received 
at  the  collectors’  offices,  they  are  examined  and  listed  before  being 

forwarded  to  the  Commissioner.  If  it  appears  that  the  tax  is  greater  or 
less  than  shown  in  the  return,  it  is  recomputed.  After  checking  the  figures 
the  Commissioner  assesses  the  tax  on  the  basis  of  the  collectors’  lists.  The 
collectors  then  send  out  bills  for  the  taxes,  either  as  computed  by  the  tax- 
payer or  as  recomputed.  If  a taxpayer  believes  that  he  has  been  overas- 
sessed, he  may  file  a claim  for  abatement  or  (after  payment  of  the  tax)  for 
a refund  of  the  excess.  See  section  252  of  the  statute  and  articles  1031- 
^ 1038.  As  soon  as  practicable  the  returns  are  carefully  audited  by  accoun- 

tants in  the  office  of  the  Commissioner  at  Washington,  assisted  where  neces- 
sary by  reports  of  the  examination  of  taxpayers’  books  and  records  made 
by  revenue  agents  in  the  field.  If  error  in  a return  is  detected,  the  tax- 
payer is  notified  accordingly  and  an  additional  assessment  is  made  against 
him  or  he  is  given  the  opportunity  to  file  a claim  for  a refund,  as  the  case 
may  be.  Any  assessment  must  be  made  within  five  years  after  the  return 
was  due  or  was  made,  except  in  the  case  of  false  returns  with  intent  to  evade 
the  tax.  See  sections  228,  1305  and  1318  of  the  statute  and  articles  451 
and  1711. 

3043  Art.  1013.  Declaration  of  Termination  of  Taxable  Period. — In 

383  the  case  of  a taxable  person  who  designs  by  immediate  departure 
2425  from  the  country  or  otherwise  to  avoid  payment  of  the  tax  for  the 
preceding  or  current  taxable  year,  the  Commissioner  may  so  find 
upon  evidence  satisfactory  to  him  and  may  declare  the  taxable  period  for 
such  person  terminated  at  the  end  of  the  month  last  past,  causing  the  service 
upon  him  of  a notice  and  demand  for  immediate  payment  of  the  tax  de- 
clared due  and  any  other  tax  unpaid.  In  such  a case  the  taxpayer  is  entitled 
to  a full  personal  exemption  and  credit  for  dependents.  See  section  2\6  of  the 
statute  and  article  305.  If  suit  is  necessar}^  to  collect  the  tax,  the  Commis- 
sioner’s finding  is  presumptive  evidence  of  the  taxpayer’s  design.  A person 
who  is  not  in  default  in  making  returns  or  in  pa}'ing  other  taxes  may  procure 
the  postponement  until  the  usual  time  of  the  payment  of  taxes  declared  or 
declarable  to  be  due  pursuant  to  this  article  by  depositing  with  the  Com- 
missioner United  States  bonds  of  a principal  amount  double  the  estimated 
amount  of  taxes  due  from  such  person  for  the  taxable  year  or  by  furnishing 
such  other  security  as  may  be  approved  by  the  Commissioner.  See  section 
1320. 


INC. 


397  . TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


RECEIPTS  FOR  TAXES. 

3044  Art.  1021.  Receipts  for  Tax  Payments.— Upon  request  a collector 
384  will  give  a receipt  for  each  tax  payment.  In  the  case  of  payments 
2465  made  by  check  or  money  order  the  cancelled  check  or  the  money 
order  receipt  is  usually  a sufficient  receipt.  In  the  case  of  payments 
in  cash,  however,  the  taxpayer  should  in  every  instance  require  and  the 
collector  should  furnish  a receipt. 

REFUNDS. 

Art.  1031.  Authority  for  Abatement,  Credit  and  Refund  of  Taxes. — 
Authority  for  the  credit,  refund  or  abatement  of  taxes  erroneously 
collected  or  assessed  is  contained  in  section  252  of  the  statute  and  in 
section  3220  of  the  Revised  Statutes,  as  amended  by  section  1316 
of  the  Revenue  Act  of  1918,  which  provides  436  and  ^ 24971: 
Section  3225  of  the  Revised  Statutes,  as  amended  by  section  1316 
of  the  Revenue  Act  of  1918,  however,  provides  437  and  H 2590]: 
Authority  for  the  abatement  of  uncollectible  taxes  due  from  per- 
sons absconded  or  insolvent  is  contained  in  section  3218  of  the  Revised 
Statutes.  These  provisions  apply  to  the  income  and  war  profits  and  excess 
profits  taxes  inrposed  by  the  present  statute  and  also  to  the  excise  tax  under 
the  Act  of  1909,  the  income  tax  under  the  Acts  of  1913  and  1916,  and  the  in- 
come and  excess  profits  taxes  under  the  Act  of  1917. 

3046  Art.  1032.  Claims  for  Abatement  of  Taxes  Erroneously  Assessed. 

— Claims  by  the  taxpayer  for  the  abatement  of  taxes  or  penalties 
erroneously  or  illegally  assessed  or  abatable  under  remedial  acts  shall  be 
made  on  form  47.  They  must  be  sustained  by  the  affidavits  of  the  parties 
against  whom  the  taxes  were  assessed,  or  of  other  parties  cognizant  of  the 
facts.  When  a tax  has  been  assessed  and  turned  over  to  the  collector,  the 
presumption  is  that  the  assessment  is  correct.  The  burden  of  proof  in  re- 
butting the  presumption  and  showing  that  it  was  improperly  or  illegally 
assessed,  or  that  relief  should  be  given  under  a remedial  statute,  rests  upon 
the  applicant  for  abatement.  The  affidavits  must  therefore  contain  full 
and  explicit  statements  of  all  the  material  facts  relating  to  the  claim  in 
support  of  which  they  are  offered  and  to  the  proper  consideration  of  which 
they  are  essential.  The  legality  of  the  claim  is  to  be  determined  by  the 
Commissioner  upon  the  facts  presented  by  the  affidavits.  The  filing  of  a 
claim  for  abatement  does  not  necessarily  operate  as  a suspension  of  the 
collection  of  the  tax  or  make  it  any  less  the  duty  of  the  collector  to  exercise 
due  diligence  to  prevent  the  collection  of  the  tax  being  jeopardized.  He 
should,  if  he  considers  it  necessary,  collect  the  tax  and  leave  the  taxpayer 
to  his  remedy  by  a claim  for  refund.  See  further  Regulations  No.  14  (re- 
vised). A collector  may  himself  present  once  a month  a blanket  claim  on 
form  47  for  the  abatement  of  taxes  coming  within  certain  classes  of  taxes 
erroneously  assessed. 

3047  Art.  1033.  Claims  for  Abatement  of  Uncollectible  Taxes.— When 
a tax  is  found  to  be  uncollectible,  the  collector  or  deputy  collector 

who  made  the  demand  for  payment  and  is  conversant  with  the  facts  may 
prepare  a claim  for  abatement  on  form  53.  See  Regulations  No.  14  (re- 
vised). Although  credits  allowed  on  account  of  insolvency  or  absconding 
release  the  collector  from  the  obligation  created  by  his  receipt  for  the  amount 
credited,  the  obligation  to  pay  still  remains  upon  the  person  assessed.  It 


3045 

386 

436 

437 
2488 
2497 
2590 


INC. 


398 


TAX 


is  the  duty  of  the  collector  to  use  the  same  diligence  to  collect  a tax  after 
it  has  been  abated  as  uncollectible  as  before  abatement.  Collectors  should 
therefore  keep  a record  of  all  taxes  thus  credited  and  of  the  persons  from 
whom  they  are  due,  and  should  enforce  payment  whenever  it  is  in  their 
power  to  do  so. 

3047a  Art.  1034.  Claims  for  Credit  of  Taxes  Erroneously  Collected. — Any 

aviount  of  income^  war  profits  or  excess  profits  tax  paid  in  excess  of 
that  properly  due  shall  be  credited  against  any  such  taxes  due  from  the  taxpayer 
under  any  other  return.  To  obtain  such  credit  the  taxpayer  should  proceed  as 
follows: 

3047b  (1)  Where  the  credit  demanded  is  equal  to  or  less  than  any  outstanding 

assessment  of  tax.,  a taxpayer  desiring  to  obtain  such  credit  shall  file 
with  the  collector  for  the  district  in  which  his  original  return  was  filed  a claim  on 
for7n  47  A,  which  shall  be  sworn  to  and  shall  contain  the  following  stateinents: 
{a)  business  engaged  in  by  claimant;  (b)  character  of  assessment;  (c)  amount  of 
tax  paid  a7id  for  what  taxable  year;  {d)  portion  of  tax  7inder  (c)  claimed  as  a 
credit',  (e)  uiipaid  assessment  against  which  credit  is  asked  and  for  what  taxable 
year;  and  (f)  all  facts  regarding  the  overpayment. 

3047C  (2)  Where  the  amout  claimed  as  a credit  is  greater  thaii  the  outsta?iding 

assessment  of  tax,  a taxpayer  desiring  to  obtain  such  credit  and  the 
refund  to  which  he  is  entitled  shall  file,  in  addition  to  the  claim  for  credit  required 
to  be  made  on  form  47  A for  the  amount  of  the  outstandmg  assessment,  a clawi 
for  refund  of  the  overpayment  in  excess  of  the  credit.  See  article  1036.  This 
claim  for  refund  may  be  attached  to  the  claim  for  credit  or  it  may  be  separately 
filed  with  the  Commissioner.  All  the  facts  regarding  the  total  overpayment  should 
be  stated  in  the  claim  for  refund  and  a reference  inade  to  such  claim  in  the  claim 
for  credit. 

3047d  Ait.  1035.  Action  on  Claims  for  Credit. — Upon  receipt  of  a claim 
for  credit  on  form  47  A the  collector  shall  certify  thereon  the  required 
information  concerning  all  outsta^iding  assessments  and  payments  covered  there^ 
by  and  shall  note  on  his  records  that  a claim  for  credit  has  been  filed.  He  shall 
thereupon  transmit  the  claim  to  the  Commissio7ier.  Due  notice  will  be  given  the 
collector  and  the  taxpayer  of  the  action  taken  on  the  claim.  A schedule  of  credit 
claims  on  form  7220  A will  be  transmitted  to  the  collector  once  a month  and 
formal  credit  shall  be  taken  by  the  collector  at  that  time.  If  a claim  is  allowed 
against  additional  taxes  due  for  other  years,  but  sitch  other  taxes  have  not  yet  been 
assessed,  only  the  amount  of  the  excess  of  such  taxes  over  the  overpayment  shall 
be  assessed,  or  the  excess  of  the  overpayment  over  such  other  taxes  due  shall  be 
refunded,  as  the  case  may  be.  A taxpayer  desiring  to  convert  a claim  for  ref  iuid 
previously  filed  into  a claim  for  credAt  7nay  file  zvith  the  collector  a claim  on  form 
47  A,  referring  in  it  to  such  claim  for  refund.  Upon  its  receipt  by  the  Com- 
missioner the  claim  for  credit  zuill  be  attached  to  the  claim  for  refund  and  zvill  be 
adjusted  in  the  same  manner  as  if  the  taxpayer  had  originally  filed  the  claun  for 
credit.  The  effective  date  of  filing  of  the  claim  for  credit  shall  be  the  actual  date  of 
filing  such  claim  with  the  collector.  The  filing  of  a claim  for  credit  against  a 
tax  due  under  another  return  shall  be  subject  to  the  same  rules  with  respect  to 
the  addition  of  interest  and  penalties  as  if  the  taxpayer  had  filed  a claim  for 
abate^nent  of  the  tax  against  which  credit  is  desired.  See  articles  1003  and  1006. 


Reg.  45,  Rev.  See  Note  on  page  301. 


3048  Art.  1036  [Art.  1034].  Claims  for  Refund  of  Taxes  Erroneously 
Collected. — Claims  by  the  taxpayer  for  the  refunding  of  taxes  and 

penalties  erroneously  or  illegally  collected  shall  be  made  on  form  46.  In  this 
case,  as  in  that  of  claims  for  abatement,  the  burden  of  proof  rests  upon  the 
claimant.  All  the  facts  relied  upon  in  support  of  the  claim  should  be  clearly 
set  forth  under  oath.  It  should  be  accompanied  by  the  collector’s  receipt 
or  the  cancelled  check  showing  payment  of  the  tax.  In  the  case  of  a tax- 
payer’s death,  certified  copies  of  the  letters  of  administration  or  letters  testa- 
mentary, or  other  similar  evidence,  should  be  annexed  to  the  claim  to  show 
the  authority  of  the  administrator  or  executor.  The  affidavit  may  be  made 
by  an  agent  of  the  person  assessed,  but  in  such  a case  a power  of  attorney 
must  accom.pany  the  claims.  [The  lodging  of  a claim  for  refund  made  out 
in  due  form  with  the  proper  collector  for  the  purpose  of  transmission  to  the 
Commissioner  in  the  usual  course  of  business  is  in  legal  effect  a presentation 
of  the  appeal  to  the  Commissioner.]  Warrants  in  paym.ent  of  claims  allowed 
will  be  drawn  in  the  names  of  the  persons  entitled  to  the  money  and  shall 
unless  otherwise  directed  be  sent  by  the  Treasurer  of  the  United  States 
directly  to  the  proper  persons  or  their  duly  authorized  attorneys  or  agents. 
See  further  Regulations  No.  14  (revised).  In  the  case  of  mere  overpayments 
by  taxpayers  the  collector  may  repay  the  excess,  subject  to  confirmation  by 
the  Commissioner  of  a claim  for  the  refunding  of  such  payments  made  by  the 
collector  on  form  751  (revised).  The  Commissioner  has  no  authority  to  refund 
on  equitable  grounds  -penalties  legally  collected. 

3049  Art.  1037  [Art.  1035].  Suits  for  Recovery  of  Taxes  Erroneously 

Collected. — No  suit  shall  be  maintained  in  any  court  for  the  re- 
covery of  any  tax  alleged  to  have  been  erroneously  or  illegally  assessed  or 
collected,  or  of  any  penalty  claimed  to  have  been  collected  without  authority, 
until  an  appeal  by  a claim  for  credit  or  refund  shall  have  been  duly  miade  to 
the  Commissioner  and  a decision  of  the  Comimissioner  has  been  had  therein, 
unless  such  decision  is  delayed  more  than  six  m.onths.  The  cause  of  action 
accrues  upon  an  unfavorable  decision  by  the  Commissioner  or  at  the  expir- 
ation of  six  months  after  an  appeal  v/ithout  action  thereon,  and  no  suit  may 
be  brought  after  two  years  from  the  tim.e  the  cause  of  action  accrued.  No 
suit  for  the  purpose  of  restraining  the  assessment  or  collection  of  any  tax  shall 
be  maintained  in  any  court.  Restraining^^  is  used  in  its  broad  popular  sense 
of  hindering  or  impeding,  as  well  as  prohibiting  or  staying,  and  the  provision 
is  not  limited  in  its  application  to  suits  for  injunctive  relief.  The  prohibition 
of  such  suits  cannot  be  waived  by  any  officer  of  the  Government.  See  sections 
3224,  3225  (as  amended  by  the  Revenue  Act  of  1918),  3226  (as  amended  by 
the  Act  of  February  27,  1877)  and  3227  of  the  Revised  Statutes. 

3050  Art.  1038  [Art.  1036].  Claims  for  Refund  of  Sums  Recovered  by  Suit. 
— (a)  Claims  by  taxpayers  for  the  amount  of  a judgment  representing 

taxes  or  penalties  erroneously  collected  should  be  made  on  form  46.  The 
claimant  should  state  the  grounds  of  his  claim  under  oath,  giving  the  names 
of  all  the  parties  to  the  suit,  the  cause  of  action,  the  date  of  its  commence- 
ment, the  date  of  the  judgment,  the  court  in  which  it  was  recovered,  and  its 
amount.  To  this  affidavit  there  should  be  annexed  a certified  copy  of  the 
final  judgment,  a certificate  of  probable  cause,  and  an  itemized  bill  of  the 
costs  paid  receipted  by  the  clerk  or  other  proper  officer  of  the  court,  together 
with  a certified  copy  of  the  docket  entries  of  the  court  in  the  case  or  so  much 
thereof  as  may  be  required  by  the  Commissioner.  When  a recovery  is  had 
in  any  suit  or  proceeding  against  a collector  or  other  officer  of  the  revenue 
for  any  act  done  by  him,  or  for  the  recovery  of  any  money  exacted  by  or  paid 

400  TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  401. 


to  him  and  by  him  paid  into  the  Treasury,  in  the  performance  of  his  official 
duty,  and  the  court  certifies  that  there  was  probable  cause  for  the  act  done 
by  the  collector  or  other  officer,  or  that  he  acted  under  the  directions  of  the 
Secretary  of  the  Treasury,  or  other  proper  officer  of  the  Government,  no 
execution  shall  issue  against  such  collector  or  other  officer,  but  the  amount 
so  recovered  shall,  upon  final  judgment,  be  provided  for  and  paid  out  of 
the  proper  appropriation  from  the  Treasury.  See  section  989  of  the  Revised 
Statutes,  (b)  If  the  judgment  debtor  shall  have  already  paid  the  amount 
recovered  against  him,  the  claim  should  be  made  in  his  name.  There  should 
also  be  a certificate  of  the  clerk  of  the  court  in  which  the  judgment  was  re- 
covered (or  other  satisfactory  evidence) , showing  that  the  judgment  has  been 
satisfied  and  specifying  the  exact  sum  paid  in  its  satisfaction,  with  a detail 
of  all  items  of  costs  which  were  paid  by  the  judgment  debtor  or  for  which 
he  is  liable.  See  further  article  1031  and  Regulations  No.  14  (revised). 

PENALTIES. 

3051  Art.  1041.  Specific  Penalties. — A penalty  of  not  more  than  $1,000 
388  attaches  for  failure  punctually  to  make  a required  return,  whether 
1572  of  income,  withholding  or  information,  or  to  pay  or  collect  a re- 
quired tax.  If  the  failure  is  willful,  however,  or  an  attempt  is  made 
to  defeat  or  evade  the  tax,  the  offender  is  liable  to  imprisonment  and  to  a 
fine  of  not  more  than  $10,000  and  costs.  See  also  the  Act  of  July  5,  1884. 
In  addition  to  these  specific  penalties  ad  valorem  penalties  are  imposed  in 
various  cases.  An  ad  valorem  penalty  is  assessed  and  collected  as  a part  of 
the  tax,  while  a specific  penalty  is  recoverable  only  by  suit.  See  section  250 
of  the  statute  and  articles  1004,  1005  and  1006. 

RETURNS  OF  PAYMENTS  OF  DIVIDENDS. 

3052  Art.  1051.  Return  of  Information  as  to  Payments  of  Dividends.— 
389  When  directed  by  the  Commissioner,  either  specially  or  by  general 
1393  regulation,  every  domestic  or  resident  foreign  corporation  and  every 
personal  service  corporation  shall  render  a return  on  form  1097 
of  its  payments  of  dividends  and  distributions  to  stockholders  for  such 
period  as  may  be  specified,  stating  the  name  and  address  of  each  stock- 
holder, the  number  and  class  of  shares  owned  by  him,  the  date  and  amount 
of  each  dividend  paid  him,  and  when  the  surplus  out  of  which  it  was  paid 
was  accumulated. 


RETURNS  OF  BROKERS. 

3053  Art.  1061.  Return  of  Information  by  Brokers.— When  directed 

390  by  the  Commissioner,  either  specially  or  by  general  regulation, 

1396  every  person  doing  business  as  a broker  shall  render  a return  on 

• form  1100,  showing  the  names  and  addresses  of  customers  to  whom 
payments  were  made  or  for  whom  business  was  transacted  during  the 
calendar  year  or  other  specified  period  next  preceding  and  giving  the  other 
information  called  for  by  the  form. 

INFORMATION  AT  SOURCE. 

3054  Art.  1071.  Return  of  Information  as  to  Payments  of  $1,000.— All 

391  persons  [including  disbursing  officers  and  employees  of  the  United 
1314  States  and  fiduciaries,]  making  payment  to  another  person  of  fixed 

or  determinable  income  of  $1,000  or  more  in  a taxable  year  must 

401 


INC. 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


render  a return  thereof  to  the  Commissioner  (Sorting  Division)  for  the  pre- 
ceding calendar  year  on  or  before  March  15  of  each  year,  except  as  specified 
in  articles  1073,  1074,  1075,  1076  and  1079.  The  return  shall  be  made  in  each 
case  on  form  1099  (revised),  accompanied  by  a letter  of  transmittal  on 
form  1096  (revised)  showing  the  number  of  returns  filed  and  the  aggregate 
amount  represented  by  the  payments.  The  street  and  number  where  the 
recipient  of  the  payment  lives  and  whether  he  is  single,  married  or  head  of  a 
family  should  be  stated,  if  possible.  Where  no  present  address  is  available, 
the  last  known  post-office  address  must  be  given.  Although  to  make  neces- 
sary  a return  of  information  the  income  must  be  fixed  or  determinable^  it  need  not 
be  annual  or  periodical.  See  article  362. 

3055  Art.  1072.  Return  of  Information  as  to  Pa5^ments  to  Employees. — 

The  names  of  all  employees  to  whom  payments  exceeding  $1,000  a 
year  are  made,  whether  such  total  sum  is  made  up  of  wages,  salaries,  com- 
missions or  compensation  in  any  other  form,  must  be  reported.  Heads  of 
branch  offices  and  subcontractors  employing  labor,  who  keep  the  only  com- 
plete record  of  payments  therefor,  should  file  returns  of  information  in  re- 
gard to  such  payments  directly  with  the  Commissioner.  When  both  main 
office  and  branch  office  have  adequate  records,  the  return  should  be  filed  by 
the  main  office.  In  the  case  of  an  employer  having  a large  number  of  em- 
ployees who  are  moved  from  place  to  place  as  the  exigencies  of  the  service 
require,  and  who  consequently  has  no  complete  record  of  annual  payments 
to  them  at  any  one  place,  the  salary  of  two  representative  months  may  be 
taken  to  establish  a fair  monthly  wage,  and  unless  the  yearly  payment 
based  on  this  estimate  in  the  case  of  an  employee  amounts  to  $1,000  or  more, 
no  return  of  payments  to  such  employee  is  required.  See  articles  32-34. 
[When  living  quarters  such  as  camps  are  furnished  for  the  convenience  of  the 
employer,  the  ratable  cost  need  not  be  added  to  the  cash  compensation  of  the 
employee  in  determining  whether  it  equals  $1,000  annually.  But  where  a 
person  receives  as  compensation  for  services  rendered  a salary  and  in  addition 
thereto  living  quarters,  the  value  to  such  person  of  the  quarters  furnished 
constitutes  income  subject  to  tax,  and  a return  of  information  is  required 
in  such  case  where  the  cash  compensation  received  plus  the  value  of  living 
quarters  furnished  equals  $1,000  for  the  year.] 

3055a  Art.  1073.  Return  of  Information  by  Partnerships,  Personal  Service 
1314  Corporations  and  Fiduciaries. — Partnerships  and  personal  service 
1348  corporations  shall  prepare  reports  on  form  1099  {revised)  for  each  mem- 
ber of  the  partnership  or  personal  service  corporation,  and  fiduciaries 
shall  prepare  such  reports  for  each  beneficiary  of  the  estate  or  trust,  showing  in 
every  case  the  distributive  shares  of  the  ^members  or  beneficiaries,  whether  or  not 
actually  distributed.  The  words  Partnership,^^  Personal  service  corporation^^ 
or  ^‘‘Fiduciary as  the  case  may  be,  should  be  entered  on  the  blank  line  of  the 
form  under  Kind  of  income  paid.'’’’  Such  reports  on  form  1099  {revised)  are 
to  be  filed  with  the  collector  with  the  returns  of  income  of  such  partnerships , personal 
service  corporations  or  fiduciaries,  instead  of  being  transmitted  to  the  Commis- 
sioner accompanied  by  form  1096  {revised). 

3056  Art.  1074  [Art.  1073].  Cases  Where  no  Return  of  Information  Re- 
quired.— Payments  of  the  following  character,  although  over  $1,000, 

need  not  be  reported  in  returns  of  information  on  form  1099  (revised):  (a) 
payments  of  interest  on  obligations  of  the  United  States;  (b)  dividends  paid 
by  domestic  or  resident  foreign  corporations  {other  than  distributions  by  personal 
service  corpovoAions)\  (c)  payments  by  a broker  to  his  customers;  (d)  pay- 


INC. 


402 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


ments  made  to  corporations;  (e)  bills  paid  for  merchandise,  telegrams,  tele- 
phone, freight,  storage  and  similar  charges;  (f)  payments  to  employees  for 
board  and  lodging  while  traveling  in  the  course  of  their  employment;  (g) 
annuities  representing  the  return  of  capital;  (h)  payments  of  rent  made  to 
real  estate  agents  (but  the  agent  must  report  payments  to  the  landlord 
if  they  amount  to  $1,000  or  more  annually);  (i)  payments  made  by  branches 
of  business  houses  located  in  foreign  countries  to  alien  employees  serving 
in  foreign  countries; -and  (j)  payments  made  by  the  United  States  Govern- 
ment to  sailors  and  soldiers  and  to  its  civilian  employees  [not  in  excess  of  $3,500], 

3057  Art.  1075  [Art.  1074].  Return  of  Information  as  to  Interest  on  Cor- 

398  porate  Bonds. — In  the  case  of  payments  of  interest,  regardless  of 
1350  amount,  upon  bonds  and  similar  obligations  of  domestic  or  resident 

foreign  corporations,  the  original  ownership  certificates,  when  duly 
filed,  shall  constitute  and  be  treated  as  returns  of  information.  If  a bond- 
holder files  no  ownership  certificate  in  the  case  of  payments  of  interest  on 
registered  bonds,  the  withholding  agent  shall  make  out  such  a certificate  in 
each  instance  and  file  it  with  his  monthly  return  [on  form  1012  (revised)]. 
See  sections  221  and  237  of  the  statute  and  articles  361-376. 

3058  Art.  1076  [Art.  1075].  Return  of  Information  as  to  Payments  to  Non- 
resident Aliens. — In  the  case  of  payments  of  annual  or  periodical 

income  to  nonresident  alien  individuals  or  to  foreign  corporations  not  engaged 
in  trade  or  business  within  the  United  States  and  not  having  any  office  or  place 
of  business  therein,  the  returns  by  withholding  agents  on  forms  1098  (revised) 
and  1042  (revised)  shall  constitute  and  be  treated  as  returns  of  information. 
See  sections  221  and  237  of  the  statute  and  articles  361-376. 

3 059  Art.  1077  [Art.  1376].  Source  of  Information  as  to  Foreign  Items. — 

399  The  term  ‘‘foreign  item,”  as  here  used,  means  any  dividend  upon  the 
1352  stock  of  a nonresident  foreign  corporation  or  any  item  of  interest  upon 

the  bonds  of  foreign  countries  or  nonresident  foreign  corporations, 
whether  or  not  such  dividend  or  interest  is  paid  in  the  United  States  or  by 
check  drawn  on  a domestic  bank,  (a)  Wherever  a foreign  country  or 
nonresident  foreign  corporation  issuing  bonds  has  appointed  paying  agent 
in  this  country,  charged  with  the  duty  of  paying  the  interest  upon  such 
bonds,  such  paying  agent  shall  be  the  source  of  information.  If  such 
foreign  country  or  foreign  corporation  has  no  such  agent,  then  the  last 
bank  or  collecting  agent  in  this  country  shall  be  the  source  of  information, 
(b)  In  the  case  of  dividends  on  the  stock  of  a nonresident  foreign  corpora- 
tion, however,  the  first  bank  or  collecting  agent  accepting  such  item  for 
collection  shall  be  the  source  of  information. 

3060  Art.  1078  [Art.  1077].  Ownership  Certificates  for  Foreign  Items. — 

{a)  Where  bonds  of  foreign  countries,  or  bonds  or  stocks  of  nonresident 
foreign  corporations,  are  owned  by  citizens  or  residents  of  the  United  States, 
individual  or  fiduciary,  or  by  domestic  or  resident /o/Tzgn  corporations  or  part- 
nerships, [or  by  nonresident  alien  individuals,  corporations  or  partnerships,] 
ownership  certificate  form  1001  A (revised)  shall  be  executed  by  the  actual 
owner  or  by  his  duly  authorized  agent  when  presenting  the  item  for  collec- 
tion, whether  such  item  is  a dividend  or  an  interest  payment,  except  in  the 
case  of  a foreign  country  or  a foreign  corporation  having  a fiscal  [paying]  agent 
in  this  country  and  issuing  bonds  which  contain  a tax-free  covenant  clause. 
In  such  a case  the  fiscal  [paying]  agent  is  required  to  withhold  the  normal  tax 
upon  the  interest  on  such  bonds  and  ownership  certificate  form  1000  (revised). 


INC. 


403 


TAX 


Reg,  45,  Rev.  See  Note  on  page  301. 


modified  to  show  the  name  and  address  of  the  fiscal  agent,  should  be  used,  unless 
the  owner  (if  so  entitled)  desires  to  claim  exemption,  in  which  case  form  1001  A 
(revised)  should  be  filed,  {h)  Where  such  foreign  bonds  or  stocks  are  owned  by 
nonresident  alien  individuals,  corporations  or  partnerships,  ownership  certificate 
form  1001  A {revised)  shall  be  used  on  behalf  of  such  owners  by  any  responsible 
bank  or  banker,  either  foreign  or  domestic,  having  knowledge  of  such  ownership. 
In  such  a case  the  bank  or  banker  need  not  fill  in  the  names  of  the  owners. 

306 1 Art.  1079  [Art.  1078].  Return  of  Information  as  to  Foreign  Items. — In 

the  case  of  collections  of  foreign  items,  regardless  of  amount,  the 
original  ownership  certificates,  when  duly  filed,  shall  constitute  and  be 
treated  as  returns  of  information,  (a)  In  the  case  of  dividends,  as  to  which 
the  first  bank  or  collecting  agent  is  the  source  of  information,  it  shall  detach 
the  ownership  certificate  and  indorse  on  the  item  the  words,  “Certificate 
detached  and  information  furnished,”  adding  its  name  and  address.  When 
foreign  items  have  been  indorsed  as  above  prescribed,  the  certificates  shall 
be  forwarded  to  the  Commissioner  (Sorting  Division)  on  or  before  the  20th 
day  of  the  month  following  that  during  which  the  items  were  accepted,  ac- 
companied by  a return  on  on  form  1096 A [letter  of  transmittal]  showing  the 
number  of  certificates  and  the  aggregate  a’mount  of  foreign  items  disclosed 
thereon.  An  annual  return  on  form  1096  B shall  be  forwarded  to  the  Com- 
missioner not  later  than  March  15  of  each  year,  on  which  shall  be  given  a sum- 
mary of  the  monthly  returns,  (b)  In  the  case  of  interest  items,  as  to  which 
the  paying  agent  or  the  last  bank  or  collecting  agent  in  this  country  is  the 
source  of  information,  the  ownership  certificate  shall  accompany  the  coupon 
to  such  agent  or  source  of  information,  who  shall  forward  the  ownership 
certificate  to  the  Commissioner  in  the  same  manner  as  above  provided  with 
respect  to  dividend  items.  Where  ownership  certificate  form  1000  (revised) 
is  used,  a monthly  return  shall  be  made  on  form  1012  (revised)  and  an  annual 
return  on  form  1013  (revised),  as  provided  in  articles  361-376.  Forms  1012 
{revised)  and  1013  {revised),  when  so  used,  should  be  modified  to  show  the  name 
and  address  of  the  paying  agent.  The  use  of  substitute  certificates  is  not  per- 
mitted in  the  collection  of  foreign  items. 

3062  Art.  1080  [Art.  1079].  Information  as  to  Actual  Owner. — When  the 
person  receiving  a payment  falling  within  the  provisions  of  the  statute 

for  information  at  the  source  is  not  the  actual  owner  of  the  income  received, 
the  name  and  address  of  the  actual  owner  shall  be  furnished  upon  demand 
of  the  individual,  corporation  or  partnership  paying  the  income,  and  in 
default  of  a compliance  with  such  demand  the  payee  becomes  liable  to  the 
penalties  provided.  See  section  253  of  the  statute  and  article  1041. 

RETURNS  TO  BE  PUBLIC  RECORDS. 

3063  Art.  1091.  Inspection  of  Returns. — The  returns  upon  which  the 
403  tax  has  been  determined  by  the  Commissioner,  although  public 
1636  records,  are  open  to  inspection  only  to  the  extent  authorized  by 
the  President,  except  as  otherwise  expressly  provided.  Pursuant 
to  a similar  provision  of  the  Act  of  October  3,  1913,  the  President  by  an 
executive  order  dated  July  28,  1914,  directed  that  returns  of  income  should 
be  subject  to  inspection  in  accordance  with  the  following  regulations  pre- 
scribed by  the  Secretary  of  the  Treasury  [^1651]: 

A person  having  the  privilege  of  inspection  will  not  be  furnished  a copy 
of  the  return,  but  may  make  a copy  or  take  notes  for  his  own  or  an  author- 
ized use.  Beneficiaries  of  an  estate  or  trust  are  not  entitled  as  such  to  an 


INC. 


404 


TAX 


inspection  of  returns  of  income  filed  by  the  fiduciary.  A receiver  of  a cor- 
poration is  entitled  to  have  access  to  its  returns.  See  also  sections  326  {a)  (2) 
and  328  {c)  of  the  statute. 

3064  Art.  1092.  Inspection  of  Returns  by  State. — By  express  exception 

405  in  the  statute  the  proper  officers  of  a State  imposing  an  income  tax 

1638  are  entitled  as  of  right  upon  the  request  of  its  governor  to  have 
access  to  the  returns  of  income  of  any  corporation  or  to  an  abstract 

thereof  showing  its  name  and  income.  Upon  v/ritten  application  by  the 
governor  of  a State  as  prescribed  in  paragraph  7 of  article  1091,  except  that 
the  application  may  be  made  directly  to  the  Commissioner  instead  of  to  the 
Secretary,  the  Commissioner  will  set  a convenient  time  for  inspection  of  the 
returns  (or  an  abstract  thereof  as  he  m.ay  determine)  of  corporations  organ- 
ized or  doing  business  in  such  State.  The  authority  to  inspect  returns 
granted  to  officers  of  a State  includes  authority  to  inspect  lists  furnished  to 
supplement  and  become  a part  of  the  returns. 

3065  Art.  1093.  Inspection  of  Returns  by  Stockholder. — By  express 

406  exception  in  the  statute  a bona  fide  stockholder  of  record  owning 

1639  one  per  cent  of  the  outstanding  stock  of  a corporation  is  entitled 
as  of  right  to  examine  the  returns  of  income  of  such  corporation 

and  its  subsidiaries.  A stockholder  desiring  the  privilege  of  inspection  shall 
apply  in  writing  to  the  Commissioner,  specifying  his  address,  the  name  of 
the  corporation,  its  outstanding  capital  stock,  the  number  of  shares  owned 
by  him,  the  date  of  their  acquisition  and  whether  or  not  he  has  the  beneficial 
as  well  as  the  record  title  to  such  shares,  and  in  other  respects  complying 
with  the  requirements  of  paragraph  4 of  article  1091.  A stockholder  who 
has  acquired  his  shares  for  the  purpose  of  inspection  of  the  income  returns 
of  the  corporation  is  not  a bona  fide  stockholder. 

3066  Art.  1094.  Penalties  for  Disclosure  of  Returns. — A stockholder 

407  who  examines  the  return  of  a corporation  and  reveals  without 

1640  express  authority  of  law  any  particulars  of  its  income  statemient  is 
guilty  of  a misdemeanor  and  liable  to  fine  and  imprisonment. 

Section  3167  of  the  Revised  Statutes,  as  amended  by  section  1317  of  the 
Revenue  Act  of  1918,  also  provides  [1f441  and  ^[2645]: 

An  internal  revenue  officer  discovering  in  the  course  of  his  duty  informa- 
tion leading  him  to  suspect  a possible  violation  of  any  law  with  the  enforce- 
ment of  which  he  is  not  directly  concerned  should  immediately  report  the 
matter  to  the  Commissioner,  who  is  authorized  to  communicate  with  the 
proper  department  involved. 

PUBLICATION  OF  STATISTICS 

3067  Art.  1101.  Statistics  of  Income. — The  Commissioner  will  publish 

409  annually  a volume  of  statistics  of  income,  showing,  among  other 

1641  things,  the  distribution  of  incomes  between  corporations  and  indi- 
viduals and  by  States,  by  classes  and  by  occupations. 

COLLECTION  OF  FOREIGN  ITEMS 

3068  Art.  nil.  License  to  Collect  Foreign  Items. — Banks  or  agents 

410  collecting  foreign  items,  as  defined  in  article  1077,  and  required  by 

1378  article  1079  to  make  returns  of  information  with  respect  thereto, 

must  obtain  a license  from  the  Commissioner  to  engage  in  such 


INC. 


405  TAX 


Reg,  45,  Rev.  See  Note  on  page  301. 


business.  Application  form  1017  for  such  license  may  be  procured  from 
collectors.  The  license  is  issued  without  cost  on  form  1010.  Foreign  items 
shall  not  be  accepted  for  collection  by  any  bank  or  collecting  agent  so 
licensed  unless  properly  indorsed  or  accompanied  by  proper  owneiship 
certificates  giving  all  the  information  called  for  by  such  certificate.  See 
section  256  and  articles  1077-1079. 

CITIZENS  OF  UNITED  STATES  POSSESSIONS 

3063  Art.  1121.  Status  of  Citizen  of  United  States  Possession. — A 
citizen  of  a possession  of  the  United  States,  who  is  not  otherwise 
505)  a citizen  or  a resident  of  the  United  States,  including  onlv  the 
States,  the  Territories  of  Alaska  and  Hawaii,  and  the  District  of 
Columbia,  is  treated  for  the  purpose  of  the  tax  as  if  he  were  a nonresident 
alien  individual.  See  articles  91-93,  271,  306,  307,  311,  316  2.nd  404.  His 
income  from  sources  within  the  United  States  is  subject  to  withholding.  See 
section  221  and  articles  361-376. 

PORTO  RICO  AND  PHILIPPINE  ISLANDS 

3070  Art.  1131.  Income  Tax  in  Porto  Rico  and  Philippine  Islands. — 

415  In  Porto  Rico  and  the  Philippine  Islands  the  Revenue  Act  of  1916, 

oil  as  amended,  is  in  force  and  the  Revenue  Act  of  1918  is  not.  See 

also  section  1400  of  the  statute.  No  credit  against  net  income  is 
allowed  individuals  and  no  deduction  from  gross  income  is  allowed  corpora- 
tions with  respect  to  dividends  received  from  a foreign  corporation  (foreign 
with  respect  to  the  United  States)  taxed  in  Porto  Rico  or  the  Philippines, 
but  having  no  income  from  sources  within  the  United  States. 

3071  Art.  1132.  Taxation  of  Individuals  between  United  States  and 
Porto  Rico  and  Philippine  Islands. — {a)  A citizen  of  the  United 

States  who  resides  in  Porto  Rico,  and  a citizen  of  Porto  Rico  who  resides  in 
in  United  States,  are  taxed  in  both  places,  but  the  income  tax  in  the  United 
States  is  credited  with  the  amount  of  any  income,  war  profits  and  excess 
profits  taxes  paid  in  Porto  Rico.  See  section  222  of  the  statute  and  articles 
381-384.  • {b)  A resident  of  the  United  States,  who  is  not  a citizen  of  Porto 
Rico,  is  taxable  in  Porto  Rico  as  a nonresident  alien  individual  on  any 
income  derived  from  sources  within  Porto  Rico,  but  the  income  tax  in  the 
United  States  is  credited  with  the  tax  paid  in  Porto  Rico,  (c)  A resident  of 
Porto  Rico,  who  is  not  a citizen  of  the  United  States,  is  taxable  in  the 
United  States  as  a nonresident  alien  individual  on  any  income  derived  from 
sources  within  the  United  States,  and  receives  no  credit.  See  also  section 
260  [of  the  statute]  and  article  1121.  The  same  principles  apply  in  the  case 
of  the  Philippine  Islands. 

307  2 Art.  1133.  Taxation  of  Corporations  between  United  States  and 
Porto  Rico  and  Philippine  Islands.— (^z)  A United  States  corpora- 
tion which  derives  income  from  sources  within  Porto  Rico,  {b)  a Porto  Rico 
corporation  which  derives  income  from  sources  within  the  United  States, 
and  (c)  a corporation  of  a foreign  country  wdiich  derives  income  both  from 
sources  within  Porto  Rico  and  from  sources  within  the  United  States,  are  all 
taxed  in  both  places.  In  the  case  of  the  United  States  corporation  the 
income,  war  profits  and  excess  profits  taxes  in  the  United  States  are  credited 
with  the  amount  of  any  income,  war  profits  and  excess  profits  taxes  paid  in 
Porto  Rico.  In  the  case  of  the  Porto  Rico  corporation  there  is  no  such  credit. 


INC. 


406 


TAX 


See  section  238  of  the  statute  and  article  611.  The  corporation  of  the  foreign 
country  deriving  income  from  both  places  is  subject  to  no  double  taxation' 
so  far  as  the  United  States  and  Porto  Rico  are  concerned.  For  the  purpose 
of  withholding  a Porto  Rico  corporation  is  a foreign  cprporation.  See  section 
237  [of  the  statute]  and  article  601.  The  same  principles  apply  in  the  case  of 
the  Philippine  Islands. 

END  OF  PART  III. 


PART  IV. 

[OF  REGULATIONS  45.] 

DEFINITIONS  AND  GENERAL  PROVISIONS. 

GENERAL  DEFINITIONS. 

3073  Art.  1501.  Person. — The  statute  recognizes  three  chief  classes 

2 of  persons,  to  wit,  individuals,  partnerships  and  corporations. 

762  Corporations  include  associations,  joint-stock  companies  and 

1686  insurance  companies,  but  not  partnerships  properly  so-called.  A 
taxpayer  is  any  person,  trust  or  estate  subject  to  tax. 

3074  Art.  1502.  Association. — Associations  and  joint-stock  com- 

3 panics  include  associations,  common  law  trusts  and  organizations 
1685  by  whatever  name  known,  which  act  [carry  on]  or  do  business  in  an 

organized  capacity,  whether  created  under  and  pursuant  to  State 
laws,  [trust]  agreements,  declarations  of  trust,  or  otherwise,  the  net  income 
of  which,  if  any,  is  distributed  or  distributable  among  the  members  or  share- 
holders on  the  basis  of  the  capital  stock  which  each  holds  or,  where  there  is 
no  capital  stock,  on  the  basis  of  the  proportionate  share  or  capital  which  each 
has  or  has  invested  in  the  business  or  property  of  the  organization. 

3076  Art.  1503.  Association  Distinguished  from  Partnership.— An 

organization  the  membership  interests  in  which  are  transferable 
without  the  consent  of  all  the  members,  however  the  transfer  may  be  other- 
wise restricted,  and  the  business  of  which  is  conducted  by  trustees  or  direc- 
tors and  officers  without  the  active  participation  of  all  the  members  as 
such,  is  an  association  and  not  a partnership.  A partnership  bank  con- 
ducted like  a corporation  and  so  organized  that  the  interests  of  its  members 
may  be  transrerred  without  the  consent  of  the  other  members  is  a joint- 
stock  company  or  association  within  the  meaning  of  the  statute.  A 
partnership  bank  the  interests  of  wTose  members  can  not  be  so  transferred 
is  a partnership. 

3076  Art.  1504.  Association  Distinguished  from  Trust. — Where  trustees 
hold  real  estate  subject  to  a lease  and  collect  the  rents^  doing  no  business 
other  than  distributing  the  income  less  taxes  and  similar  expenses  to  the  holders 
of  their  receipt  certificates^  who  have  no  control  except  the  right  of  filling  a vacancy 
among  the  trustees  and  of  consenting  to  a modification  of  the  terms  of  the  trust, 
no  association  exists  and  the  cestuis  que  trust  are  liable  to  tax  as  beneficiaries  of 
a trust  the  income  of  which  is  to  be  distributed  periodically,  whether  or  not  at 
regular  intervals.  But  in  such  a trust  if  the  trustees  pursuant  to  the  terms  thereof 
have  the  right  to  hold  the  income  for  future  distribution,  the  net  income  is  taxed 
to  the  trustees  instead  of  to  the  beneficiaries.  See  section  219  o/  the  statute  and 

407 


INC. 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


articles  341-346.  //,  however,  the  cestuis  que  trust  have  a voice  in  the  conduct 

of  the  business  of  the  trust,  whether  through  the  right  periodically  to  elect  trustees 
or  otherwise,  the  trust  is  an  association  within  the  meaning  of  the  statute.  [A 
Massachusetts  trust  in  which  the  trustees’  powers  and  functions  as  defined 
by  the  instrument  under  which  they  act  resemble  the  powers  and  functions 
ordinarily  exercised  by  the  managers  of  an  organization  so  constituted  as 
to  be  of  itself  a recipient  of  taxable  income  independently  of  the  individual 
beneficially  interested  in  the  property  from  which  it  is  derived,  and  an 
organization  according  to  whose  constitution  individuals  beneficially  inter- 
ested in  various  proportions  in  the  same  property  commit  its  control  and 
management  for  profit  to  trustees  free  from  their  own  immediate  control 
or  interference,  are  associations.  Where,  however,  the  interest  of  each  bene- 
ficiary in  the  income  of  trust  property,  as  received,  belongs  to  him  as  his 
separate,  individual  property,  and  the  trustee  is  required  to  make  prompt 
distribution  of  it  and  is  not  responsible  for  the  operation  of  the  property 
from  which  it  is  derived,  the  trustee  and  cestuis  que  trust  do  not  constitute 
an  association.] 

3077  Art.  1505.  Limited  Partnership  as  Partnership. — So-called  lim- 
ited partnerships  of  the  type  authorized  by  the  statutes  of  New 

York  and  most  of  the  States  are  partnerships  and  not  corporations  within 
the  meaning  of  the  statute.  Such  limited  partnerships,  which  can  not 
limit  the  liability  of  the  general  partners,  although  the  special  partners 
enjoy  limited  liability  so  long  as  they  observe  the  statutory  conditions, 
which  are  dissolved  by  the  death  or  attempted  transfer  of  the  interest  of  a 
general  partner,  and  which  can  not  take  real  estate  or  sue  in  the  partnership 
name,  are  so  like  common  law  partnerships  as  to  render  impracticable  any 
differentiation  in  their  treatment  for  tax  purposes.  Michigan  and  Illinois 
limited  partnerships  are  partnerships.  A California  special  partnership  is 
a partnership. 

3078  Art.  1506.  Limited  Partnership  as  Corporation. — On  the  other 
hand,  limited  partnerships  of  the  type  of  partnerships  with  limited 

liability  or  partnership  associations  authorized  by  the  statutes  of  Pennsyl- 
vania and  of  a few  other  States  are  only  nominally  partnerships.  Such 
so-called  limited  partnerships,  offering  opportunity  for  limiting  the  lia- 
bility of  all  the  members,  providing  for  the  transferability  of  partnership 
shares,  and  capable  of  holding  real  estate  and  bringing  suit  in  the  common 
name,  are  more  truly  corporations  than  partnerships  and  must  make  returns 
of  income  and  pay  the  tax  as  corporations.  The  income  received  by  the 
members  out  of  the  earnings  of  such  limited  partnerships  will  be  treated  in 
their  personal  returns  in  the  same  manner  as  distributions  on  the  stock  of 
corporations.  In  all  doubtful  cases  limited  partnerships  will  be  treated 
as  corporations  unless  they  submit  satisfactory  proof  that  they  are  not  in 
effect  so  organized.  Michigan  and  Virginia  partnership  associations  are 
corporations.  Such  a corporation  may  or  may  not  be  a personal  service 
corporation.  See  sections  200  and  218  of  the  statute  and  articles  1523-1532. 

3079  Art.  1507.  Joint  Ownership  and  Joint  Adventure.— Joint  invest- 
ment in  and  ownership  of  real  and  personal  property  not  used  in 

the  operation  of  any  trade  or  business  and  not  covered  by  any  partnership 
agreement  does  not  constitute  a partnership.  Co-owners  of  oil  lands  en- 
gaged in  the  joint  enterprise  of  developing  the  property  through  a common 
agent  are  not  necessarily  partners.  In  the  absence  of  special  facts  affirma- 
tively showing  an  association  or  partnership,  where  a vessel  is  owned  by 

INC.  408  TAX 


several  individuals  and  operated  by  a managing  owner  or  agent  for  the 
account  of  all,  the  relation  does  not  constitute  either  a joint-stock  associa- 
tion or  a partnership.  The  participation  of  two  United  States  corporations 
in  a joint  enterprise  or  adventure  does  not  constitute  them  partners. 

3079a  Art.  1508.  , Insurance  Company. — Insurance  companies  include 
both  stock  and  mutual  companies^  as  well  as  mutual  benefit  insurance 
companies.  A voluntary  unincorporated  association  of  employees  formed 
for  the  purpose  of  relieving  sick  and  aged  members  and  the  dependents  of  deceased 
members  is  an  insurance  company,  whether  the  fund  for  such  purpose  is  created 
wholly  by  membership  dues  or  partly  by  contributions  from  the  employer.  But  a 
corporation  which  merely  sets  aside  a fund  for  the  insurance  of  its  employees  is 
not  required  to  file  a separate  return  for  such  fund  if  the  income  and  disburse^ 
ments  therefrom  are  included  in  the  corporation^ s own  return.  See  sections  231, 
233,  234  and  239  of  the  statute  and  articles  521,  548,  549,  568-572,  623  and  870. 

3080  Art.  1509  [Art.  1508].  Domestic  and  Foreign  Persons. — A domestic 
4-6  corporation  or  partnership  is  one  organized  or  created  in  the  United 

2280  States,  including  only  the  States,  the  Territories  of  Alaska  and 

2331  Hawaii,  and  the  District  of  Columbia,  and  a foreign  corporation 

or  partnership  is  one  organized  or  created  outside  the  United 
States  as  so  defined.  The  nationality  or  residence  of  members  of  a partner- 
ship does  not  affect  its  status.  A partnership  created  by  articles  entered 
into  in  San  Francisco  between  residents  of  the  United  States  and  residents 
of  China  is  a domestic  partnership.  A foreign  corporation  engaged  in  trade 
or  business  within  the  United  States  or  having  an  office  or  place  of  business 
therein  is  sometimes  referred  to  in  the  regulations  as  a resident  foreign 
corporation  and  a foreign  corporation  not  engaged  in  trade  or  business 
within  the  United  States  and  not  having  any  olfice  or  place  of  business 
therein  as  a nonresident  foreign  corporation.  See  also  articles  4 and 
312-315. 

3080a  Art.  1510.  Government  Contract. — Government  contracts  may  in- 
1313  elude  (a)  a contract  with  the  United  States,  {b)  a contract  with  an 

agency  of  the  United  States,  {c)  a contract  with  an  agency  of  such 

agency,  and  {d)  a subcontract  with  a contractor  under  any  such  contract;  provided 
in  every  case  the  contract  or  subcontract  is  for  the  benefit  of  the  United  States. 
Unenforceable  contracts  subsequently  ratified  are  treated  as  though  made  when 
originally  executed.  The  Commissioner  may  require  any  contractor  to  file  with 
him  copies  of  his  Government  contracts  entered  into  on  or  after  April  6,  1917, 
and  shall  have  access  to  the  information  in  the  possession  of  the  Government 
relating  to  such  contracts.  See  section  1408  of  the  statute.  The  realization  by  a 
corporation  of  income  from  a Government  contract  may  affect  its  status  under 
the  consolidated  returns  provision  and  the  amount  of  its  war  profits  and  excess 
profits  tax.  See  sections  240,  301  (c),  311  {d),  327  {d)  and  200  and  articles 
635,  714,  719,  784,  and  1524.  The  agreements  for  the  operation  of  transpor- 
tation systems  while  under  federal  control  and  for  the  just  compensation  of  their 
owners  made  pursuant  to  the  act  of  March  21,  1918,  are  not  Government  contracts 
within  the  meaning  of  this  article.  See  sections  230  and  301  {e)  and  article  504. 

DEFINITIONS. 

3081  Art.  1521.  Fiduciary. — “Fiduciary”  is  a term  which  applies  to  all 
21  persons  that  occupy  positions  of  peculiar  confidence  toward  others, 

1169  such  as  trustees,  executors  and  administrators,  and  a fiduciary  for 
income  tax  purposes  is  a person  who  holds  in  trust  an  estate  to 
INC.  409  TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


which  another  has  the  beneficial  title  or  in  which  another  has  a beneficial 
interest,  or  receives  and  controls  income  of  another  as  in  the  case  of  receiv- 
ers. A committee  of  the  property  of  an  incompetent  person  is  a fiduciary. 
See  sections  219  and  225  of  the  statute  and  articles  341-344  and  421-425. 

3082  Art.  1522.  Fiducia^  Distinguished  from  Agent. — There  may  be  a 
fiduciary  relationship  between  an  agent  and  a principal,  but  the 

word  “agent”  does  not  denote  a fiduciary.  A fiduciary  relationship  can 
not  be  created  by  a power  of  attorney.  An  agent  having  entire  charge  of 
property,  with  authority  to  effect  and  execute  leases  with  tenants  entirely 
on  his  own  responsibility  and  without  consulting  his  principal,  merely  turn- 
ing over  the  net  profits  from  the  property  periodically  to  his  principal  by 
virtue  of  authority  conferred  upon  him  by  a power  of  attorney,  is  not  a 
fiduciary  within  the  meaning  of  the  statute.  In  cases  where  no  legal  trust 
has  been  created  in  the  estate  controlled  by  the  agent  and  attorney  the  lia- 
bility to  make  a return  rests  with  the  principal. 

3083  Art.  1523.  Personal  Service  Corporation. — The -term  “personal 
23  service  corporation”  means  a corporation,  not  expressly  excluded, 

1308  the  income  of  which  is  derived  from  a profession  or  business  {a) 
which  consists  principally  of  rendering  personal  servdce,  (b)  the 
earnings  of  which  are  to  be  ascribed  primarily  to  the  activities  of  the  princi- 
pal owners  or  stockholders,  and  (c)  in  which  the  employment  of  capital  is 
not  necessary  or  is  only  incidental.  No  definite  and  conclusive  tests  can 
be  prescribed  by  which  it  can  be  finall}^  determined  in  advance  of  an  ex- 
amination of  the  corporation’s  return  whether  or  not  it  is  a personal  ser^dce 
corporation.  In  the  following  articles  are  laid  down  the  general  principles 
under  which  such  determination  will  be  made.  See  cLso  section  303  of  the 
statute  cud  articles  741-743. 

3084  Art.  1524.  Personal  Service  Corporation:  Certain  Corporations 
Excluded. — The  following  classes  of  corporations  are  expressly 

excluded  from  classification  as  personal  ser^dce  corporations:  {a)  foreign 
corporations;  {h)  corporations  50  per  cent  or  more  of  whose  gross  income 
consists  of  gains,  profits  or  income  derived  from  trading  as  a principal; 
and  (c)  corporations  50  per  cent  or  more  of  whose  gross  income  consists  of 
gains,  profits,  commissions  or  other  income  derived  from  a Government 
contract  or  contracts  made  between  April  6,  1917,  and  November  11,  1918, 
inclusive.  See  article  1510.  A corporation  is  not  a personal  service  corporation 
merely  because  less  than  50  per  cent  of  its  gross  income  wo.s  derived  from  trading 
as  a principal  or  from  Government  contracts.  A corporation  can  not  be  considered 
a personal  service  corporation  when  another  corporation  owns  or  controls  sub- 
stantially all  of  its  stocky  or  when  substantially  all  of  its  stock  and  of  the  stock  of 
another  corporation  {not  itself  a personal  service  corporation)  forming  part  of 
the  same  business  enterprise  is  owned  or  controlled  by  the  same  interests.  See 
section  240  of  the  statute  and  articles  631-638. 

3085  Art.  1525.  Personal  Services  Rendered  by  Personal  Service 
Corporation. — In  order  that  a corporation  may  be  deemed  to  be  a 

personal  service  corporation  its  earnings  must  be  derived  principally  from 
compensation  for  personal  services  rendered  by  the  corporation  to  the 
persons  with  v^hom  it  does  business.  Merchandising  or  trading  either 
directly  or  indirectly  in  commodities  or  the  services  of  others  is  not  render- 
ing personal  service.  Conducting  an  auction,  agency,  brokerage  or  com.- 
mission  business  strictly  on  the  basis  of  a fee  or  commission  is  rendering 

INC.  410  TAX 


personal  service.  If,  however,  the  corporation  assumes  any  such  risks  as 
those  of  market  fluctuation,  bad  debts,  failure  to  accept  shipments,  etc.,  or 
if  it  guarantees  the  accounts  of  the  purchaser  or  is  in  any  way  responsible 
to  the  seller  for  the  payment  of  the  purchase  price,  the  transaction  is  one  of 
merchandising  or  trading,  and  this  is  true  even  though  the  goods  are  shipped 
directly  from  the  producer  to  the  consumer  and  are  never  actually  in  the 
possession  of  the  corporation.  The  fact  that  earnings  of  the  corporation  are 
termed  commissions  or  fees  is  not  controlling.  The  fact  that  a commission 
or  fee  is  based  on  a difference  in  the  prices  at  which  the  seller  sells  and  the 
buyer  buys  raises  a presumption  that  the  transaction  is  one  of  merchandising 
or  trading,  and  it  will  be  so  considered  in  the  absence  of  satisfactory  evidence 
to  the  contrary. 

3086  Art.  1526.  Personal  Services  Rendered  by  Personal  Service 
Corporation:  More  than  One  Business. — It  frequently  happens 

that  corporations  are  engaged  in  two  or  more  professions  or  businesses 
which  are  more  or  less  related,  one  of  which  does  not  consist  of  rendering 
personal  service.  Thus  an  engineering  concern  may  also  engage  in  con- 
tracting, which  amounts  to  trading  in  materials  and  labor,  a brokerage 
concern  may  guarantee  some  of  its  accounts,  a photographer  may  sell 
pictures,  frames,  art  goods  and  supplies  or  a dealer  in  a commodity  may 
furnish  expert  advice  or  services  with  respect  to  its  installation,  use,  etc. 
In  such  case  the  corporation  is  not  a personal  service  corporation  unless 
the  non-personal  service  element  is  negligible  or  merely  incidental  and  no 
appreciable  part  of  its  earnings  are  to  be  ascribed  to  such  sources.  See 
also  section  303  of  the  statute  and  articles  741-743. 

3087  Art.  1527.  Activities  of  Stockholders  of  Personal  Service  Corpora- 
tion.— In  determining  whether  a corporation  is  a personal  service 

corporation,  no  weight  can  be  given  to  the  fact  that  it  renders  personal 
services  unless  (a)  the  principal  owners  or  stockholders  are  regularly  en- 
gaged in  the  active  conduct  of  its  affairs  and  are  engaged  in  such  a manner 
that  the  earnings  are  to  be  ascribed  primarily  to  their  activities,  and  {h) 
its  affairs  are  conducted  principally  by  such  owners  or  stockholders. 

3088  Art.  1528.  Activities  of  Stockholders  of  Personal  Service  Corpora- 
tion: Conduct  of  Affairs. — Where  the  principal  owners  or  stock- 
holders do  not  render  the  principal  part  of  the  services,  but  merely  super- 
vise or  direct  a force  of  employees,  the  corporation  is  not  a personal  service 
corporation.  If  employees  contribute  substantially  to  the  services  rendered 
by  a corporation,  it  is  not  a personal  service  corporation  unless  in  every 
case  in  which  services  are  so  rendered  the  value  of  and  the  compensation 
charged  for  such  services  are  to  be  attributed  primarily  to  the  experience  or 
skill  of  the  principal  owners  or  stockholders  and  such  fact  is  evidenced  in 
some  definite  manner  in  the  normal  course  of  the  profession  or  business. 
The  fact  that  the  principal  owners  or  stockholders  give  personal  attention 
o»*  render  valuable  services  to  the  corporation  as  a result  of  which  its  earnings 
are  greater  than  those  of  a corporation  engaged  in  a like  or  similar  business, 
the  principal  owners  or  stockholders  of  which  do  not  devote  personal  atten- 
tion to  the  management  or  supervision  of  its  affairs,  does  not  of  itself 
constitute  the  corporation  a personal  service  corporation. 

3089  Art.  1529.  Activities  of  Stockholders  of  Personal  Service  Corpora- 

^ tion:  Stock  Interest  Required. — No  definite  percentage  of  stock 

or  interest  in  the  corporation  which  must  be  held  by  those  engaged  in  the 

410  A TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  301. 


active  conduct  of  its  affairs  in  order  that  they  may  be  deemed  to  be  the 
principal  owners  or  stockholders  can  be  prescribed  as  a conclusive  test, 
as  other  facts  may  affect  any  presumption  so  established.  No  corporation 
or  its  owners  or  stockholders  shall,  however,  make  a return  in  the  first 
instance  on  the  basis  of  its  being  a personal  service  corporation  unless  at 
least  80  per  cent  of  its  stock  is  held  by  those  regularly  engaged  in  the  active 
conduct  of  its  affairs. 

3090  Art.  1530.  Activities  of  Stockholders  of  Personal  Service  Corpora- 
tion: Change  in  Ownership. — The  fact  that  the  owners  or  stock- 
holders of  the  corporation  may  change  during  the  course  of  the  taxable  year 
does  not  take  a corporation  which  is  normally  in  the  personal  service  class 
out  of  that  class.  Frequent  changes  in  the  ownership  of  any  substantial 
interest  or  number  of  shares  are  [is],  however,  evidence  bearing  on  the  ques- 
tion as  to  whether  the  principal  owners  or  stockholders  are  actively  engaged  in 
the  conduct  of  the  affairs  of  the  corporation.  The  incapacity,  retirement  or 
death  of  a principal  owner  or  stockholder  who  has  been  actively  engaged  in 
the  conduct  of  its  affairs  will  not  be  deemed  to  make  any  change  in  the 
status  of  the  corporation  during  a reasonable  time  thereafter. 

3091  Art.  1531.  Capital  of  Personal  Service  Corporation. — In  de- 
termining whether  a corporation  is  a personal  service  corporation, 

no  weight  can  be  given  to  the  fact  that  the  invested  capital  of  the  corpora- 
tion/or the  purpose  of  the  war  profits  and  excess  profits  tax  [under  Title  III  of 
the  statute]  or  the  actual  investment  of  the  principal  owners  or  stockholders 
is  comparatively  small.  The  test  established  by  the  statute  with  respect  to 
capital  is  entirely  different.  That  test  is  the  nature  of  the  profession  or 
business  as  indicated  {a)  by  the  kind  of  services  it  renders  and  {b)  the  extent 
to  which  capital  is  required  to  carry  on  such  profession  or  business.  If  the  use 
of  capital  is  necessary  or  more  than  incidental,  capital  is  a material  income- 
producing  factor  and  the  corporation,  is  not  a personal  service  corporation. 
No  corporation  is  a personal  service  corporation  if  it  carries  on  business  of  a 
kind  which  ordinarily  requires  the  use  of  capital,  irrespective  of  whether  the 
owners  or  stockholders  have  actually  invested  a substantial  amount  of  capital. 

3092  Art.  1532.  Capital  of  Personal  Service  Corporation:  Inference 
from  Use. — The  term  “capital”  as  used  in  section  200  of  the  statute 

and  in  articles  1523-1532  means  not  only  capital  actually  invested  by  the 
owners  or  stockholders,  but  also  capital  secured  in  other  ways.  Thus  if 
capital  is  borrowed  either  directly  as  shown  by  bonds,  debentures,  certifi- 
cates of  indebtedness,  notes,  bills  payable  or  other  paper,  or  iudirectly  as 
shown  by  accounts  payable  or  other  forms  of  credit,  or  if  the  business  of  the 
corporation  is  in  any  way  financed  by  or  through  any  of  the  owners  or  stock- 
holders, these  facts  will  be  deemed  evi<lence  that  the  use  of  capital  is  neces- 
sary. If  a substantial  amount  of  capital  is  used  to  finance  or  carry  the 
accounts  of  clients  or  customers,  it  will  be  inferred  that  because  of  com- 
petition or  other  reasons  such  practice  is  necessary  in  order  to  secure  or 
hold  business  which  otherwise  would  be  lost,  and  that  the  corporation  is 
not  a personal  service  corporation.  If  a corporation  engaged  in  an  agency, 
brokerage  or  commission  business  regularly  employs  a substantial  amount 
of  capital  to  lend  to  principals,  to  buy  and  carry  goods  on  its  own  account, 
or  to  buy  and  carry  odd  lots  in  order  that  it  may  render  more  satisfactory 
service  to  its  principals  or  customers,  it  is  not  a personal  service  corpora- 
tion. In  general  the  larger  the  amount  of  the  capital  actually  used  the 
stronger  is  the  evidence  that  capital  is  necessary  and  is  a material  income- 

410  B TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  oOl. 


producing  factor  and  that  the  corporation  is  not  a personal  service  corpora- 
tion. 

3093  Art.  1533.  “Taxable  Year,”  “Withholding  Agent”  and  “Paid.”— 

18  The  taxable  year  is  the  time  unit  for  the  purpose  of  the  tax.  See 

22  section  212  of  the  statute  and  article  22.  A withholding  agent 

28  may  be  a corporation  with  bonds  outstanding,  a trustee  under 
a corporate  mortgage,  or  any  corporation,  partnership  or  private 

individual.  See  section  221  and  articles  361-376.  “Paid”  is  to  be  construed 
in  each  instance  in  the  light  of  the  method  used  in  computing  net  income, 
whether  on  an  accrual  or  a receipt  basis.  See  article  23. 

DIVIDENDS. 

3094  Art.  1541.  Dividends. — Dividends  for  the  purpose  of  the  statute 

29  comprise  any  distribution  in  the  ordinary  course  of  business,  even 
770  though  extraordinary  in  amount,  made  by  a domestic  or  foreign 

corporation  to  its  shareholders  out  of  its  earnings  or  profits  accumu- 
lated since  February  28,  1913,  and  in  the  case  [only]  of  a personal  service 
corporation  prior  to  January  1,  1918.  [For  the  purpose  of  determining  the 
character  of  a distribution,  any  distribution  during  the  first  sixty  days  of  a 
taxable  year  shall  be  deemed  to  have  been  made,  so  far  as  possible,  from 
earnings  or  profits  accumulated  during  preceding  taxable  years,  but  since 
February  28,  1913,  and,  in  the  case  of  a personal  service  corporation,  from 
the  most  recently  accumulated  earnings  or  profits  of  prior  years.  Any 
distribution  during  the  remainder  of  the  taxable  year  shall  be  deemed  to 
have  been  made,  so  far  as  possible,  from  earnings  or  profits  accumulated 
during  such  year  up  to  the  date  of  distribution,  after,  however,  setting  aside 
a proper  reserve  for  the  payment  of  accrued  income,  war  profits  and  excess 
profits  taxes.  {In  connection  with  above  matter^  cut  out  here^  see  lf3094^ 
below, )\  The  mere  declaration  of  a dividend  is  not  a distribution.  Divi- 
dends are  income  and  are  taxed  at  the  rates  for  the  year  in  which  paid, 
regardless  of  when  the  earnings  or  profits  out  of  which  they  were  paid  were 
accumulated  As  to  certain  stock  dividends  see,,  however,  article  1546  [But 
see  article  1545.]  Although  interest  on  State  bonds  and  certain  other 
obligations  is  not  taxable  when  received  by  a corporation,  upon  amalga- 
mation with  the  other  funds  of  the  corporation  such  income  loses  its  identity 
and  when  distributed  to  stockholders  in  dividends  is  taxable  to  the  same 
extent  as  other  dividends.  See  further  articles  54  and  858. 

3094a  Art.  1542.  Presumption  as  to  Source  of  Distribution. — In  the  case  of 
a corporation  other  than  a personal  service  corporation  any  distribution 
to  stockholders  is  deemed  to  have  been  made  so  far  as  possible  {a)  from  earnings 
or  profits',  (b)  during  the  year  1918  or  thereafter  from  earnings  or  profits  accumu- 
lated since  February  28,  1913;  (c),  if  during  the  first  sixty  days  of  a taxable 
year,  from  earnings  or  profits  accumulated  during  preceding  taxable  years;  and 
{d),  if  during  the  remainder  of  a taxable  year  after  the  first  sixty  days,  from  earn- 
ings or  profits  accumulated  during  the  taxable  year  up  to  the  date  of  distribu- 
tion, The  presumption  coyitained  in  clauses  (c)  and  (d)  affects  the  determina- 
tion of  invested  capital  for  the  purpose  of  the  war  profits  and  excess  profits  tax, 
but  has  no  effect  upon  the  rates  at  zvhich  dividends  paid,  in  1918  and  subsequent 
years  are  taxed.  In  ascertaining  whether  or  not  a distribution  was  made  out 
of  earnings  or  profits  of  the  taxable  year  there  should  first  be  set  aside  a proper 
reserve  for  the  payment  of  accrued  income  and  war  profits  and  excess  profits 
taxes.  See  article  857.  In  the  case  of  a personal  service  corporation  any 

410  C TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  301. 


distribution  is  deemed  to  have  been  made  so  far  as  possible  {a)  from  earnings 
or  profits;  {b)  during  the  year  1918  or  thereafter  from  earnings  or  profits  accumu- 
lated since  February  28,  1913;  (c)  if  during  the  first  sixty  days  of  a taxable 
year,  from  the  most  recently  accumulated  earnings  or  profits  of  preceding  taxable 
years;  and  {d)  if  during  the  remainder  of  the  taxable  year  after  the  first  sixty 
days,  from  earnings  or  profits  accumulated  during  the  taxable  year  up  to  the 
date  of  distribution. 

3095  Art.  1543  [Art.  1542].  Distributions  which  are  not  Dividends. — A dis- 
tribution by  a corporation  out  of  earnings  or  profits  accumulated  prior 

to  March  1,  1913,  or  out  of  any  assets  except  earnings  or  profits  accumulated 
since  February  28,  1913,  is  not  a dividend  within  the  meaning  of  the  statute. 
A distribution  by  a personal  service  corporation  out  of  earnings  or  profits 
accumulated  since  December  31,  1917,  is  not  a dividend.  A distribution 
out  of  earnings  or  profits  accumulated  before  March  1,  1913,  is  free  from 
tax  as  a dividend;  out  of  assets  other  than  earnings  or  profits  accumulated 
since  February  28,  1913,  may  or  may  not  be  free  from  tax,  according  as  each 
stockholder  receives  more  or  less  than  he  paid  for  his  stock  or  its  fair  market 
value  as  of  March  1,  1913;  and,  in  the  case  of  a personal  service  corporation, 
out  of  earnings  or  profits  accumulated  since  December  31,  1917,  is  taxed 
to  the  stockholders  as  though  they  were  partners.  See  section  218  of  the 
statu  tie  and  articles  328-335.  In  determining  whether  a distribution  is  made 
out  of  earnings  or  profits  accumulated  after  or  before  March  1,  1913,  due  considera- 
tion must  be  given  to  the  facts  and  mere  book  entries  increasing  or  decreasing  the 
surplus  will  fiot  be  conclusive. 

3096  Art.  1544  [Art.  1543].  Dividends  Paid  in  Property. — Dividends  paid 
30  in  securities  or  other  property  (other  than  its  own  stock),  in  which 

771  the  earnings  of  a corporation  have  been  invested,  are  income  to  the 
recipients  to  the  amount  of  the  fair  market  value  of  such  property 
when  receivable  by  the  stockholders.  A dividend  paid  in  stock  of  another 
corporation  is  not  a stock  dividend.  Where  a corporation  declares  a divi- 
dend payable  in  stock  of  another  corporation,  setting  aside  the  stock Jto 
be  so  distributed  and  notifying  the  stockholders  of  its  action,  the  income 
arising  to  the  recipients  of  such  stock  is  its  fair  market  value  at  the  time 
the  dividend  becomes  payable.  See  article  53.  Scrip  dividends  are  subject 
to  tax  in  the  year  in  which  the  warrants  are  issued. 

3097  Art.  1545  [Art.  1544].  Stock  Dividends. — A dividend  paid  in  stock  of 
36  the  corporation  is  income  to  the  amount  of  the  earnings  or  profits 

811  distributed,  as  shown  by  the  transfer  of  surplus  to  capital  account 
^ on  the  books  of  the  corporation,  usually  equal  to  the  par  value 

of  the  stock  distributed.  But  stock  distributions  made  out  of  surplus 
other  than  earnings  or  profits  accumulated  since  February  28,  1913,  when 
there  are  no  such  earnings  or  profits,  are  not  dividends  within  the  meaning  of 
the  statute  and  are  free  from  tax  as  dividends.  Stock  dividends  paid  from 
earnings  or  profits  accumulated  after  February  28,  1913,  received  by  a fidu- 
ciary and  retained  as  an  accretion  to  the  estate  under  the  terms  of  the  will 
or  trust,  are  income  to  the  estate. 

3098  Art.  1546  [Art.  1545].  Stock  Dividends  of  1918. — By  a special  except 
38  tion  to  the  general  rule  any  stock  dividend  received  by  a taxpayer 

[831  between  January  1 and  November  1,  1918,  or  declared  and  credited 
to  a stockholder  during  such  period  and  received  by  him  before 
MarcA  27,[1919,[[the  expiration  of  thirty  days  after  the  passageof  the  statute,] 

410  D TAX 


INC. 


Reg,  45,  Rev.  See  Note  on  page  301. 


is  deemed  to  have  been  paid  from  the  most  recently  accumulated  earn- 
ings or  profits  and  shall  be  taxed  to  the  recipient  at  the  rates  prescribed 
for  the  years  in  which  the  corporation  accumulated  the  earnings  or  profits 
so  distributed.  Thus,  such  a stock  dividend  will  be  deemed  to  have  been 
paid  from  the  earnings  of  1918  (unless  paid  during  the  first  sixty  days  of 
1918),  and  the  recipient,  if  an  individual,  will  be  liable  to  any  surtax  at 
the  rates  for  the  year  1918,  unless  at  the  time  such  dividend  was  paid  or 
credited  the  current  earnings  up  to  that  time  were  not  sufficient  to  cover 
the  distribution,  in  which  case  the  excess  over  the  earnings  of  the  taxable 
year  will  be  deemed'  to  have  been  paid  from  the  most  recently  accumulated 
surplus  of  prior  years  and  will  be  taxed  at  the  rate  or  rates  for  the  year  or 
years  in  which  earned.  A corporation  declaring  and  paying  such  a stock 
dividend  out  of  earnings  accumulated  over  a period  of  years  should  make  a 
record  in  its  books  of  the  amount  of  the  dividend  paid  out  of  each  year’s 
undistributed  profits  and  advise  the  stockholders  accordingly.  See  section 
206  of  the  statute  and  article  1642. 

3099  Art.  1547  [Art.  1546].  Sale  of  Stock  Received  as  Dividend. — -As  stock 
dividends  were  taxable  income  under  the  Revenue  Act  of  1916,  as  well 

as  the  present  statute,  but  were  not  under  the  Act  of  October  3,  1913,  dif- 
ferent considerations  may  apply  to  the  sale  of  stock  received  as  a dividend 
before  1916  and  stock  so  received  thereafter.  See  article  39.  For  the  purpose 
of  ascertaining  the  gain  or  loss  derived  from  the  sale  of  stock  of  a corporation 
received  as  a dividend,  or  from  the  sale  of  the  stock  in  respect  of  which  such 
dividend  was  paid,  the  cost  (used  to  include  also,  where  required,  fair  market 
price  or  value  as  of  March  1,  1913)  of  such  stock  is  to  be  determined  in  accord- 
ance with  the  following  rules; 

(1)  In  the  case  of  stock  {a)  received  as  a dividend  in  1913,  1914  or  1915 
out  of  surplus  however  created,  or  {b)  received  as  a dividend  in  1916  or  sub- 
sequent years  out  of  surplus  other  than  earnings  or  profits  accumulated 
since  February  28,  1913,  the  cost  of  each  share  of  new  stock  is  the  quotient 
of  the  cost  of  the  old  stock  divided  by  the  number  of  old  and  new  shares 
added  together. 

(2)  In  the  case  of  the  stock  in  respect  of  which  any  stock  dividend  was 
paid  as  described  under  (1),  the  cost  of  each  share  of  old  stock  is  similarly 
the  quotient  of  the  cost  of  the  old  stock  divided  by  the  number  of  old  and 
new  shares. 

(3)  In  the  case  of  stock  received  as  a dividend  in  1916  or  subsequent 
years  out  of  earnings  or  profits  accumulated  since  February  28,  1913,  the 
cost  of  each  share  of  new  stock  is  the  quotient  of  the  sum  of  {a)  the  cost  of  the  old 
stock  plus  (b)  the  valuation  at  which  the  new  stock  was  returnable  as  income  {as 
shown  by  the  transfer  of  surplus  to  capital  account  on  the  books  of  the  corporation, 
usually  its  par  value),  divided  by  the  number  of  old  and  new  shares  added 
together  [is  the  valuation  at  which  it  was  returnable  as  income,  as  shown  by 
the  transfer  of  surplus  to  capital  account  on  the  books  of  the  corporation, 
usually  its  par  value]. 

(4)  In  the  case  of  the  stock  in  respect  of  which  any  stock  dividend  was 
paid  as  described  under  (3),  the  cost  of  each  share  of  old  stock  is  similarly  the 
quotient  of  the  sum  of  {a)  the  cost  of  the  old  stock  plus  (b)  the  valuation  at  which 
the  new  stock  was  returnable  as  income,  divided  by  the  number  of  old  and  new 
shares  [is  its  original  cost,  regardless  of  any  stock  dividend]. 

3100  Art.  1548  [Art.  1547].  Distribution  in  Liquidation. — So-called  liqui- 

41  dation  or  dissolution  dividends  are  not  dividends  within  the  meaning 

828  of  the  statute,  and  amounts  so  distributed,  whether  or  not  including 

410 E TAX 


INC, 


Reg.  45,  Rev.  See  Note  on  page  301. 


any  surplus  earned  since  February  28,  1913,  are  to  be  regarded  as  pay- 
ments for  the  stock  of  the  dissolved  corporation.  Any  excess  so  received  over 
the  cost  of  his  stock  to  the  stockholder,  or  over  its  fair  market  [price  or] 
value  as  of  March  1,  1913,  if  acquired  prior  thereto,  is  a taxable  profit.  A 
distribution  in  liquidation  of  the  assets  and  business  of  a corporation,  which 
is  a return  to  the  stockholder  of  the  value  of  his  stock  upon  a surrender  of 
his  interest  in  the  corporation,  is  distinguishable  from  a dividend  paid  by  a 
going  corporation  out  of  current  earnings  or  accumulated  surplus  when 
declared  by  the  directors  in  their  discretion,  which  is  in  the  nature  of  a 
recurrent  return  upon  the  stock. 

3101  Art.  1549.  Distribution  from  Depletion  or  Depreciation  Reserve. 

— A reserve  set  up  out  of  gross  income  by  a corporation  and  main- 
tained for  the  purpose  of  making  good  an}^  loss  of  capital  assets  on  account 
of  depletion  or  depreciation  is  not  a part  of  its  surplus  out  of  which  ordinary 
dividends  may  be  paid.  A distribution  made  from  such  a reserve  will  be 
considered  a liquidating  dividend  and  will  constitute  taxable  income  to  a 
stockholder  only  to  the  extent  that  the  amount  so  received  is  in  excess  of  the 
cost  or  fair  market  value  as  of  March  1,  1913,  of  his  shares  of  stock.  No 
distribution,  however,  will  be  deemed  to  have  been  made  from  such  a 
reserve  except  to  the  extent  that  the  amount  paid  exceeds  the  surplus  and 
undivided  profits  of  the  corporation.  In  general,  any  distribution  made 
by  a corporation  other  than  out  of  earnings  or  profits  accumulated  since 
February  28,  1913,  is  to  be  regarded  as  a return  to  the  stockholder  of  part 
of  the  capital  represented  hy  [in]  his  shares  of  stock,  and  upon  a subsequent 
sale  of  such  stock  his  profit  will  be  the  excess  of  the  selling  price  over  the 
cost  of  the  stock  or  its  fair  market  value  as  of  A/larch  1,  1913,  after  applying 
on  such  cost  or  value  the  amount  of  any  such  capital  distribution. 

BASIS  FOR  DETERMINING  GAIN  OR  LOSS. 

3102  Art.  1561.  Basis  for  Determining  Gain  or  Loss  from  Sale.— For 

43  the  purpose  of  ascertaining  the  gain  or  loss  from  the  sale  or  exchange 

1854  of  property  the  basis  is  {a)  its  fair  market  price  or  value  as  of  March 

1,  1913,  if  acquired  prior  thereto,  or  {b),  if  acquired  on  or  after  that 
date,  its  cost  or  its  approved  inventory  value.  In  both  cases  proper  adjust- 
ment must  he  made  for  any  depreciation  or  depletion  sustained.  What  the  fair- 
market  price  or  value  of  property  was  on  March  1,  1913,  is  a question  of  fact 
to  be  established  by  any  evidence  which  will  reasonably  and  adequately 
make  it  appear.  As  to  inventories  see  section  203  of  the  statute  and  articles 
1581-1585.  The  fair  market  value  as  of  March  1,  1913,  has  no  bearing  on  the 
determination  of  the  invested  capital  of  a corporation  for  the  purpose  of  the  war 
profits  and  excess  profits  tax.  See  section  326  and  article  831. 

3 1 03  Art.  1562.  Sale  of  Property  Acquired  by  Gift  or  Bequest.—  In  the  case 
of  property  acquired  by  gift,  bequest,  devise  or  descent  the  basis  for 

computing  gain  or  loss  on  a sale  is  the  fair  market  price  or  value  of  the 
property  at  the  date  of  acquisition  or  as  of  March  1,  1913,  if  acquired  prior 
thereto.  For  the  purpose  of  determining  the  profit  or  loss  fro.'n  the  sale  of  prop- 
erty acquired  by  bequest,  devise  or  descent  since  February  28,  1913,  its 
value  as  appraised  for  the  purpose  of  the  federal  estate  tax,  or  in  the  case 
of  estates  not  subject  to  that  tax  its  value  as  appraised  in  the  State“’court 
for  the  purpose  of  State  inheritance  taxes  [or  otherwise],  should  be  deemed 
to  be  its  fair  market  value  when  acquired.  See  section  213  {b)  (3)  of  the 
statute  and  article  73. 


INC. 


410  F TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


3104  Art.  1563.  Exchanges  of  Property. — Gain  or  loss  arising  from  the 
46  acquisition  and  subsequent  disposition  of  property  Is  realized  when 

1909  as  the  result  of  a transaction  between  the  owner  and  another  person 
the  property  is  converted  Into  cash  or  into  property  {a)  that  Is 
essentially  different  from  the  property  disposed  of  and  {b)  that  has  a market 
value.  In  other  words,  both  {a)  a change  in  substance  and  not  merely  in 
form,  and  {b)  a change  Into  the  equivalent  of  cash,  are  required  to  complete 
or  close  a transaction  from  which  income  may  be  realized.  By  way  of 
Illustration,  If  a man  owning  ten  shares  of  listed  stock  exchanges  his  stock 
certificate  for  a voting  trust  certificate,  no  Income  Is  realized,  because  the 
conversion  Is  merely  In  form;  or  If  he  exchanges  his  stock  for  stock  In  a 
small,  closely  held  corporation,  no  Income  is  realized  If  the  new  stock  has 
no  market  value,  although  the  conversion  Is  more  than  formal;  but  if  he 
exchanges  his  stock  for  a liberty  bond,  income  may  be  realized,  because  the 
conversion  Is  Into  Independent  property  having  a market  value.  The  prop- 
erty received  in  exchange  may  be  real  estate^  personal  property^  or  a chose  in 
action.  The  exchange  of  a so-called  convertible  bond  for  stock  pursuant 
to  such  a privilege  granted  in  the  bond  will  produce  Income  if  the  stock 
received  in  exchange  has  a fair  m.arket  value  in  excess  of  the  cost  of  fair  market 
value  as  of  ]March  1,  1913,  of  the  bond. 

3105  Art.  1564.  Determination  of  Gain  or  Loss  from  Exchange  of 
Property. — {a)  The  am.ount  of  Income  derived  In  the  case  of  an  ex- 
change of  property,  as  of  stock  for  a bond,  is  the  excess  of  the  fair  market 
value  at  the  time  of  exchange  of  the  bond  recehmd  In  exchange  over  the 
original  cost  of  the  stock  exchanged  for  It,  or  over  the  fair  market  price  or 
value  of  such  stock  as  of  March  1,  1913,  if  acquired  before  that  date.  The 
amount  of  income  derived  from  a subsequent  sale  of  the  bond  for  cash  Is  the 
excess  of  the  amount  so  received  over  the  fair  market  value  of  such  bond 
when  acquired  In  exchange  for  the  stock,  {b)  On  the  other  hand.  If  the  prop- 
erty received  In  exchange  Is  substantially  the  same  property  or  has  no 
market  value,  then  no  gain  or  loss  is  realized,  but  the  new  property  Is  to  be 
regarded  as  substituted  for  the  old  and  upon  a sale  of  the  new  property  the 
amount  of  Income  derived  Is  the  excess  of  the  amount  so  received  over  the 
cost  or  fair  market  value  as  of  March  1,  1913,  of  the  old.  [But  see  article 
1566.] 

3106  Art.  1565.  Exchange  for  Different  Kinds  of^Property. — (a)^If 
property  is  exchanged  for  two  different  kinds  of  property,  such  as 

bonds  and  stock,  the  bonds  having  a market  value  and  the  stock  none,  the 
value  of  the  bonds  Is  to  be  compared  with  the  cost  or  fair  market  value  as  of 
March  1,  1913,  of  the  original  property,  as  the  case  may  be.  If  the  market 
value  of  the  bonds  is  less  than  such  cost  or  value,  the  difference  represents 
the  cost  of  the  stock.  If  the  market  value  of  the  bonds  is  greater  than  such 
cost  or  value,  the  difference  is  taxable  income  at  the  time  of  the  exchange 
and  whenever  sold  the  entire  proceeds  of  the  stock  will  be  taxable,  {h) 
If  property  is  exchanged  for  two  different  kinds  of  property,  such  as  bonds 
and  stock,  neither  having  a market  value,  the  cost  or  fair  market  value  as  of 
March  1,  1913,  of  the  original  property  should  be  apportioned,  if  possible, 
between  the  bonds  and  stock  for  the  purpose  of  determining  gain  or  loss  on 
subsequent  sales.  If  no  fair  apportionment  is  practicable,  no  profit  on  any 
subsequent  sale  of  any  part  of  the  bonds  or  stock  is  realized  until  out  of  the 
proceeds  of  sales  shall  have  been  recovered  the  entire  cost  or  fair  market 
value  as  of  March  1,  1913,  of  the  original  property. 

3106a  Art.  1566.  Exchange  of  Property  and  Stock. — {a)  Where  property 
is  transferred  to  a corporation  in  exchange  for  its  stocky  if  the  previous 

INC.  410  G TAX 


Reg.  46,  Rev.  See  Note  on  page  301. 


owner  of  the  property  receives  50  per  cent  or  more  of  the  stock  of  the  corporation^ 
so  that  an  interest  of  50  per  cent  or  more  in  such  property  remains  in  him,  then 
no  gain  or  loss  is  realized  by  such  owner  from  the  transaction.  For  the  purpose 
of  ascertaining  the  gain  or  loss  from  the  subsequent  sale  by  the  stockholder  of  any 
stock  so  received  for  such  property  the  stock  is  to  be  considered  as  substituted  for 
the  property  and  the  cost  of  the  property  or  {if  acquired  prior  thereto)  its  fair 
market  value  as  of  March  1,  1913,  is  the  basis  for  determining  the  amount  of  such 
gain  or  loss.  For  the  purpose  of  ascertaining  the  gain  or  loss  from  the  subsequent 
sale  by  the  corporation  of  any  such  property  the  cost  of  the  property  to  the  former 
owner  or  {if  acquired  prior  thereto  by  hirri)  its  fair  market  value  as  of  March  1, 
1913,  is  the  basis  for  determining  the  amount  of  such  gain  or  loss.  As  to  the 
invested  capital  of  the  corporation,  see  section  3^  of  the  statute  and  article  941. 
^^OwneF’  includes  ‘^owners’’.  This  article  applies  to  the  incorporation  of  a 
business  previously  conducted  by  an  individual  or  by  a partnership,  {b)  If, 
however,  the  exchange  of  property  and  stock  involves  less  than  50  per  cent  of  the  stock 
of  the  corporation,  the  exchange  constitutes  a closed  transaction,  and  the  former  owner 
of  the  property  realizes  a gain  or  loss  if  the  stock  has  a market  value  and  such 
market  vAlue  is  greater  or  less  than  the  cost  or  {if  acquired  prior  thereto)  the  fair 
market  value  as  of  March  1,  1913,  of  the  property  given  in  exchange,  {c)  Where 
a corporation  dissolves  and  distributes  its  assets  in  kind  and  not  in  cash  no 
taxable  income  is  received  from  the  transaction  by  its  stockholders,  because  they 
merely  exchange  an  indirect  interest  for  a direct  interest  in  the  same  property. 
As  to  cash  distributions,  see  article  1548.  For  the  purpose  of  ascertaining  the 
gain  or  loss  from  the  subsequent  sale  of  any  property  so  received  upon  dissol- 
tion  see  article  1564  {b).  See  also  articles  542  and-Sil . 

3107  Art.  1567  [Art.  1566].  Exchange  of  Stock  for  other  Stock  of  no 
47  Greater  Par  Value. — In  general,  where  two  {or  more)  corporations 

1910  unite  their  properties  by  either  {a)  the  dissolution  of  corporation  B 
and  the  sale  of  its  assets  to  corporation  A,  or  {b)  the  sale  of  its  prop- 
erty by  B to  A and  the  dissolution  of  B,  or  (c)  the  sale  of  the  stock  of  B to  A 
and  the  dissolution  of  B,  or  {d)  the  merger  of  B into  A,  or  {e)  the  consolidation 
of  the  corporations,  no  taxable  income  is  received  from  the  transaction  by  A 
or  B or  the  stockholders  of  either,  provided  the  sole  consideration  received 
by  B and  its  stockholders  in  {a),  {b),  {c)  and  {d)  is  stock  or  securities  of  A, 
and  by  A and  B and  their  stockholders  in  {e)  is  stock  or  securities  of  the 
consolidated  corporation,  in  any  case  of  no  greater  aggregate  par  or  face 
value  than  the  old  stock  and  securities  surrendered.  If  the  stock  so  received 
has  no  nominal  or  par  value  the  limitation  on  aggregate  par  value  is  inapplicable. 
[For  the  purpose  of  ascertaining  the  gain  derived  or  loss  sustained  from  the 
subsequent  sale  of  any  stock  of  A or  of  the  consolidated  corporation  so 
received,  the  original  cost  to  the  taxpayer  or  the  fair  market  price  or  value 
as  of  March  1,  1913,  of  the  stock  of  B or  A in  respect  of  which  the  new  stock 
was  issued,  less  any  untaxed  distribution  made  to  the  taxpayer  by  A out  of 
the  former  capital  or  surplus  of  B,  or  by  the  consolidated  corporation  out  of 
the  former  capital  or  surplus  of  A or  B,  is  the  basis  for  determining  the 
amount  of  such  gain  or  loss.] 

3107a  Art.  1568.  Determination  of  Gain  or  Loss  from  Subsequent  Sale. — 

The  new  stock  and  securities  received  as  described  in  the  preceding  article 
take  the  place  of  the  old  stock  and  securities.  For  the  purpose,  therefore,  of  ascer- 
taining the  gain  derived  or  loss  sustained  from  the  subsequent  sale  of  any  stock 
of  A or  of  the  consolidated  corporation  so  received,  the  original  cost  to  the  tax- 
payer or  the  fair  market  value  as  of  March  1,  1913,  of  the  stock  of  B or  A in 
respect  of  which  the  new  stock  was  issued,  less  any  untaxed  distribution  made  to 

410  H TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  301. 


the  taxpayer  hy  A out  of  the  former  capital  or  surplus  of  B,  or  by  the  consolidated 
corporation  out  of  the  former  capital  or  surplus  of  A or  B,  is  the  basis  for  deter- 
mining  the  amount  of  such  gain  or  loss.  Similarly.,  the  cost  after  reorganization, 
merger  or  consolidation  of  the  assets  of  A or  of  the  consolidated  corporation  is 
the  sum  of  the  cost  {or  the  fair  market  value  as  of  March  1,  1913)  of  the  assets  of 
A and  of  B for  the  purpose  of  ascertaining  the  gain  or  loss  upon  a subsequent 
sale.  The  nezu  invested  capital  of  A or  of  the  consolidated  corporation  is  to  be 
determined  as  if  A and  B were  rendering  a consolidated  return  as  affiliated 
corporations.  See  sections  240  and  326  of  the  statute  and  articles  631-638 
and  864-869. 

3108  Art.  1569  [Art.  1567].  Exchange  Stock  for  other  Stock  of  Greater  Par 

49  Value. — If  in  the  case  of  any  reorganization,  merger  or  consolidation 
1912  the  aggregate  par  or  face  value  of  the  new  stock  or  securities  received  is 

in  excess  of  the  aggregate  par  or  face  value  of  the  stock]  and  "securi- 
ties exchanged,  income  will  be  realized  from  the  transaction  by  the  re- 
cipients of  the  new  stock  or  securities  to  an  amount  limited  by*(fl)  the  ex- 
cess of  the  par  or  face  value  of  the  new  stock  or  securities  over  the  parlor 
face  value  of  the  old  and  {b)  the  excess  of  the  fair  market  value  of^the  new 
stock  or  securities  over  the  cost  or  fair  market  value  as  of  March  1,  1913, 
of  the  old.  In  other  words,  the  taxable  profit  will  be  {a)  or  (6),  whichever  is 
less.  Upon  a subsequent  sale  of  the  new  stock  or  securities  their  cost  to  the 
taxpayer  will  be  the  cost  or  fair  market  value  as  of  March  1,  1913,  of  the  old 
stock  and  securities,  plus  the  profit  taxed  on  the  exchange. 

3108a  Art.  1570.  Readjustment  of  Partnership  Interests. — When  a partner 
retires  from  a partnership,  or  it  is  dissolved,  he  realizes  a gain  or  loss 
measured  by  the  difference  between  the  price  received  for  his  interest  and  the  cost 
to  him  or  {if  acquired  prior  thereto)  the  fair  market  value  as  of  March  1,  1913, 
of  his  interest  in  the  partnership,  including  in  such  cost  or  value  the  amount  of 
his  share  in  any  undistributed  partnership  net  income  earned  since  February 
28,  1913,  on  which  the  inco7ne  tax  has  been  paid.  If,  however,  the  partnership 
distributes  its  assets  in  kind  and  not  in  cash,  the  partner  realizes  no  gain  or 
loss  until  he  disposes  of  the  property  received  on  distribution.  See  article  1566. 
Whenever  a new  partner  is  admitted  to  a partnership,  or  any  existing  partnership 
is  reorganized,  the  facts  as  to  such  change  or  "'reorganization  should  be  fully  set 
forth  in  the  next  retiirn  of  income,  in  order  that  the  Commissioner  may  determine 
whether  any  gain  or  loss  has  been  realized  by  any  partner.  See  also  article  1563. 

INVENTORIES. 

3109  Art.  1581.  Need  of  Inventories. — In  order  to  reflect  the  net 

50  income  correctly,  inventories  at  the  beginning  and  ending  of  each 
1861  year  are  necessary  in  every  case  in  which  the  production,  purchase 

or  sale  of  merchandise  is  an  income-producing  factor.  The  in- 
ventory should  include  raw  materials  and  supplies  on  hand  that  have  been 
acquired  for  sale,  consumption  or  use^in  productive  processes,  together 
with  all  finished  or  partly  finished  goods.  Title  to  the  merchandise  included 
in  the  inventory  should  be  vested  in  the  taxpayer  and  goods  merely  ordered 
for  future  delivery  and  for  which  no  transfer  of  title  has  been  effected  should 
be  excluded.  The  inventory  should  include  merchandise  sold  but  not 
shipped  to  the  customer  at  the  date  of  the  inventory,  together  with  any 
merchandise  out  upon  consignment,  but  if  such  goods  have  been  included  in  the 
sales  of  the  taxable  year  they  should  not  be  taken  in  the  inventory.  It  should  also 
include  merchandise  purchased,  although  not  actually  received,  to  which 

410  I TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  301. 


title  has  passed  to  the  purchaser.  In  this  regard  care  should  be  exercised  to 
take  into  the  accounts  all  invoices  or  other  charges  in  respect  of  merchandise 
properly  included  in  the  inventory,  but  which  is  in  transit  or  for  other  reasons 
has  not  been  reduced  to  physical  possession. 

3110  Art.  1582.  Valuation  of  Inventories. — Inventories  should  be  valued 
at  (a)  cost  or  (b)  cost  or  market  whichever  is  lower.  Whichever  basis 

is  adopted  must  be  applied  to  each  item  and  not  merely  to  the  total  of  the  inven- 
tory; that  is,  if  for  instance  basis  ib)  is  adopted,  the  value  of  each  item  in  the 
inventory  will  be  measured  by  market  if  that  is  lower  than  cost,  or  by  cost  if  that 
is  lower  than  market.  A taxpayer  may,  regardless  of  his  past  practice,  adopt 
the  basis  of  cost  or  market,  whichever  is  lower,  for  his  1918  inventory,  provided 
a disclosure  of  the  fact  and  that  it  represents  a change  is  made  in  the  return. 
Thereafter  changes  can  be  made  only  after  permission  is  secured  from  the  Com- 
missioner. But  see  article  1585 /or  inventories  by  dealers  in  securities..  [Which- 
ever basis  was  adopted  by  a taxpayer  in  respect  of  the  taxable  year  1917 
must  be  continued  unless  upon  application  to  the  Commissioner  permission 
is  granted  to  change.  If  basis  {b)  is  used  it  must  be  applied  to  each  item 
in  the  inventory  and  not  to  a part  only.]  Inventories  should  be  recorded  in 
a legible  manner  and  properly  computed  and  summarized  and  should  be 
preserved  as  a part  of  the  accounting  records  of  the  taxpayer.  Goods  taken 
in  the  inventory  which  have  been  so  intermingled  that  they  can  not  be  iden- 
tified with  specific  invoices  will  be  deemed  to  be  the  goods  most  recently 
purchased.  [ This  last  sentence  was  forvierly  a part  of  the  next  article.\ 

3111  Art.  1583.  Inventories  at  Cost. — Cost  means: 

(1)  In  the  case  of  merchandise  purchased,  the  invoice  price  less 
trade  or  other  discounts  except  strictly  cash  discounts  approximating  a fair 
interest  rate,  which  may  be  deducted  or  not  at  the  option  of  the  taxpayer 
provided  a consistent  course  is  followed.  To  this  net  invoice  price  should 
be  added  transportation  or  other  necessary  charges  incurred  in  acquiring 
possession  of  the  goods.  \The  sentence  formerly  here  is  now  the  last  sentence 
of  ^3110,  above.] 

(2)  In  the  case  of  merchandise  produced  by  the  taxpayer,  {a)  the  cost  of 
raw  materials  and  supplies  entering  into  or  consumed  in  connection  Vv^ith  the 
product,  (b)  expenditures  for  direct  labor,  (c)  indirect  expenses  incident 
to  and  necessary  for  the  production  of  the  particular  article,  including  in 
such  indirect  expenses  a reasonable  proportion  of  management  expenses, 
but  not  including  any  cost  of  selling  or  return  on  capital  whether  by  way  of 
interest  or  profit. 

In  any  industry  in  which  the  usual  rules  for  computation  of  cost  of  pro- 
duction are  inapplicable,  costs  may  be  approximated  upon  such  basis  as 
may  be  reasonable  and  in  conformity  with  established  trade  practice  in  the 
particular  industry. 

3112  Art.  1584.  Inventories  at  Market. — Market  means  the  current 

bid  price  prevailing  at  the  date  of  the  inventory  for  the  particular 

merchandise,  and  is  applicable  to  goods  purchased  and  on  hand  and  to 
basic  materials  in  goods  in  process  of  manufacture  and  in  finished  goods  on 
hand,  exclusive,  however,  of  goods  on  hand  or  in  process  of  manufacture 
for  delivery  upon  firm  sales  contracts  at  fixed  prices  entered  into  before  the 
date  of  the  inventory.  Where  no  open  market  quotations  are  available  the 
taxpayer  must  use  such  evidence  of  a fair  market  price  at  the  date  or  dates 
nearest  the  inventory  as  may  be  available  to  him,  such  as  specific  transactions 
in  reasonable  volume  entered  into  in  good  faith,  or  compensation  paid  for 

410  J TAX 


INC. 


Kt-g.  45,  Rev.  See  Note  on  page  301. 


cancellation  of  contracts  for  purchase  commitments.  The  burden  of  proof 
will  rest  upon  the  taxpayer  in  each  case  to  satisfy  the  Commissioner  of  the 
correctness  of  the  prices  adopted.  It  is  recognized  that  in  the  latter  part  of 
* 1918,  by  reason  among  other  things  of  governmental  control  not  having  been 

relinquished,  conditions  were  abnormal  and  in  many  commodities  there  was 
no  such  scale  of  trading  as  to  establish  a free  market.  In  such  a case,  when  a 
market  has  been  established  during  the  succeeding  year,  a claim  may  be 
filed /or  any  loss  sustained  in  accordance  with  the  provisions  of  section  214 
{a)  (12)  or  section  234  {a)  (14)  of  the  statute  [for  a recomxputation  of  the  net 
income  of  the  preceding  taxable  year  and  an  adjustment  of  the  income  and 
^1  war  excess  profits  taxes].  See  articles  261-268. 

3113  Art.  1585.  Inventories  by  Dealers  in  Securities. — A dealer  in 
securities,  who  in  his  books  of  account  regularly  inventories  unsold 

securities  on  hand  either  {a)  at  cost  or  {b)  at  cost  or  market  value  whichever 
is  lower,  may  make  his  return  upon  the  basis  upon  which  his  accounts  are 
kept;  provided  that  a description  of  the  method  employed  shall  be  included 
in  or  attached  to  the  return,  that  all  the  securities  must  be  inventoried  by 
the  same  method,  and  that  such  method  must  be  adhered  to  in  subsequent 
years,  unless  another  be  authorized  by  the  Commissioner.  For  the  purpose 
of  this  rule  a dealer  in  securities  is  a merchant  of  securities,  whether  an  in- 
dividual, partnership  or  corporation,  with  an  established  place  of  business, 
regularly  engaged  in  the  purchase  of  securities  and  their  resale  to  customers, 
hat  is,  one  who  as  a merchant  buys  securities  and  sells  them  to  customers 
with  a view  to  the  gains  and  profits  that  may  be  derived  therefrom.  If  such 
business  is  simply  a branch  of  the  activities  carried  on  by  such  person,  the 
securities  inventoried  as  here  provided  may  include  only  those  held  for 
purposes  of  resale  and  not  for  investment.  Taxpayers  who  buy  and  sell  or 
' hold  securities  for  investment  or  speculation,  and  not  in  the  course  of  an 

established  business,  and  officers  of  corporations  and  members  of  partner- 
ships, who  in  their  individual  capacities  buy  and  sell  securities,  are  not 
dealers  in  securities  within  the  meaning  of  this  rule. 

NET  LOSSES. 

3114  Art.  1601.  Scope  of  Net  Losses. — As  used  in  the  statute  the  term 
51-59  “net  loss’’  means  either  a business  operating  loss  or  a loss  realized 

1913  by  a bona  fide  sale  of  property  constructed,  installed  or  acquired 

on  or  after  April  6,  1917,  for  the  production  of  articles  contributing 
to  the  prosecution  of  the  war.  The  amount  of  net  loss  claimed  must  repre- 
sent an  actual  net  loss  over  and  above  all  income,  including  tax-free  income. 
Such  losses  will  be  allowable  only  in  respect  of  a taxpayer  having  a taxable 
year  beginning  after  October  31,  1918,  and  ending  prior  to  January  1,  1920, 
and  after  one  claim  has  been  allowed  no  further  claim  can  be  considered. 

3116  Art.  1602.  Claim  for  Allowance  of  Net  Loss. — A taxpayer  having 
such  a net  loss  may  file  a claim  on  form  46  with  his  return  of  income 
for  the  taxable  year  1919.  Such  claim  should  contain  a concise  statement  setting 
forth  the  amount  of  the  loss  sustained,  in  accordance  with  the  accompanying  return, 
the  nature  of  the  loss,  the  amount  of  the  taxpayer's  net  income  for  the  taxable  year 
1918,  the  taxes  paid  by  him  with  respect  thereto,  and  all  p er tine 7Lt  facts  necessary 
to  enable  the  Commissioner  to  determine  the  allozuability  of  the  claim.  [A  tax- 
payer having  such  a net  loss  may  file  a claim  with  the  collector  of  the  district  in 
which  the  taxpayer’s  return  for  the  preceding  year  was  filed.  Such  claim 
should  state  the  name  and  address  of  the  taxpayer  and  should  contain  a 

410  K TAX 


INC. 


Reg.  45,  Rev.  See^Note  on  page  301. 


concise  statement  of  the  amount  of  the  loss  sustained  and  the  basis  upon 
which  it  has  been  computed,  together  with  all  pertinent  facts  necessary  to 
enable  the  Commissioner  to  determine  the  allowability  of  the  claim.  Each 
claim  should  be  supported  by  an  affidavit.] 

3116  Art.  1603.  Allowance  of  Net  Loss. — The  amount  allowed  by  the 

Commissioner  in  respect  of  any  such  claim  shall  be  deducted  from 

the  net  income  for  the  taxable  year  1918  and  the  income  and  the  war  profits  and 
excess  profits  tax,  if  any,  for  such  year  [taxes  imposed  by  this  title]  shall  be 
recomputed  accordingly.  Any  amount  found  to  be  due  him  shall  be  credited 
or  refunded  to  the  taxpayer  [in  accordance  with  the  provisions  of  section  252]. 
See  section  252  of  the  statute  and  articles  1034-1036.  In  any  case  in  which 
it  is  found  by  the  Commissioner  that  such  net  loss  is  in  excess  of  the  net 
income  of  such  preceding  taxable  year,  the  taxpayer  may  carry  forward  the 
amount  of  such  excess  and  claim  it  as  a deduction  in  computing  net  income 
for  the  succeeding  taxable  year. 

FISCAL  YEAR  WITH  DIFFERENT  RATES. 

3117  Art.  1621.  Fiscal  Year  with  Different  Rates.— Sectionj205  of  the 
60-71  Statute  applies  to  income  taxes.  For  the  provisions  with  respect  to 
1666  war  profits  and  excess  profits  taxes  see  section  335  and  articles  951-955. 

Subdivision  (a),  which  deals  with  fiscal  years  beginning  in  1917  and 
ending  in  1918,  applies  to  corporations,  including  personal  service  corporations, 
and  to  individuals.  Subdivision  (b),  which  deals  with  fiscal  years  beginning 
in  1918  and  ending  in  1919,  applies  to  corporations  other  than  personal 
service  corporations  and  to  individuals.  Subdivision  (c),  which  deals  with 
fiscal  years  beginning  in  1917  or  1918  and  ending  in  1918  or  1919  applies  to 
partnerships  and  to  personal  service  corporations.  See  as  to  partnerships 
articles  321-327,  and  as  to  personal  service  corporations  articles  328-335. 

3ll8j  Art.  1622.  Fiscal  Year  of  Corporation  Ending  in  1918.— The 

method  provided  for  computing  the  tax  for  a fiscal  year  beginning 
in'1917  and  ending  in  1918  is  as  follows:  {a)  the  tax  attributable  to  the 
calendar  year  1917  is  found  by  computing  the  income  of  the  taxpayer  and 
the  tax  thereon  in  accordance  with  Title  I of  the  Revenue  Act  of  1916  as 
amended  and  Title  I of  the  Revenue  Act  of  1917  as  if  the  fiscal  year  was  the 
calendar  year  1917,  and  determining  the  proportion  of  such  tax  which  the 
proportion  of  the  fiscal  year  falling  within  the  calendar  year  1917  is  of  the 
full  fiscal  year;  {h)  the  tax  attributable  to  the  calendar  year  1918  is  found  by 
computing  the  income  of  the  taxpayer  and  the  tax  thereon  in  accordance 
with  the  present  statute  as  if  the  fiscal  year  was  the  calendar  year  1918,  and 
determining  the  proportion  of  such  tax  which  the  portion  of  such  fiscal  year 
falling  within  the  calendar  year  is  of  the  full  fiscal  year;  and  (c)  the  tax  for 
the  fiscal  year  is  found  by  adding  the  tax  attributable  to  the  calendar  year 
1917  and  the  tax  attributable  to  the  calendar  year  1918.  If  a corporation 
made  its  return  for  the  taxable  year  1917  on  the  calendar  year  basis  and 
for  the  taxable  year  1918  on  a fiscal  year  basis,  the  tax  attributable  to  the 
calendar  year  1917  need  not  again  be  computed  and  the  tax  attributable  to 
the  calendar  year  1918  computed  as  herein  provided  shall  be  the  tax  of  the 
corporation  for  the  portion  of  such  fiscal  year  falling  within  the  calendar 
year  1918.  A personal  service  corporation  is  not  required  to  pay  the  tax 
attributable  to  the  calendar  year  1918,  since  for  that  year  it  is  treated  sub- 
stantially like  a partnership  for  the  purposes  of  taxation.  See  section  218 
of  the  statute  and  articles  328-335. 


INC. 


410  L TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


3119  Art.  1623.  Deductions  and  Credits  in  the  Case  of  Corporation  Fiscal 
Year  Ending  in  1918. — Net  losses  deductible  from  net  income  of  the 

fiscal  year  under  the  provisions  of  section  204  of  the  statute  shall  be  deducted 
in  computing  the  tax  attributable  to  the  calendar  year  1917,  as  well  as  in 
computing  the  tax  attributable  to  the  calendar  year  1918.  In  computing 
the  tax  attributable  to  the  calendar  year  1917  the  net  income  computed  for 
the  entire  period  under  Title  I of  the  Revenue  Act  of^l916  as  amended  and 
Title  I of  the  Revenue  Act  of  1917  shall  be  credited  with  the  excess  profits 
tax  computed  for  the  entire  period  under  Title  II  of  the  Revenue  Act  of  1917 . 
In  computing  the  tax  attributable  to  the  calendar  year  1918  the  net  income 
computed  for  the  entire  period  under  the  present  statute  shall  be  credited 
with  the  war  profits  and  excess  profits  taxes  computed  for  the  entire  period 
under  Title  III  of  the  statute  at  the  rates  prescribed  for  1918.  See  section 
236  of  the  statute  and  article  591.  Amounts  previously  paid  by  the  taxpayer 
on  account  of  the  income  tax  for  such  fiscal  year  shall  be  credited  towards  the 
payment  of  the  income  tax  imposed  for  such  fiscal  year  by  the  present  statute. 
Any  excess  shall  be  credited  or  refunded  in  accordance  with  the  provisions  of 
section  252  [of  the  statute].  See  articles  1031  and  1034-1036. 

3120  Art.  1624.  Fiscal  Year  of  Individual  Ending  in  1918. — Since  under 
the  law  applicable  to  the  calendar  year  1917  individuals  were  not 

permitted  to  make  returns  on  the  fiscal  year  basis  (see  Title  I of  the  Revenue 
Act  of  1916  as  amended),  the  tax  of  an  individual  for  that  part  of  a fiscal 
year  ending  in  1918  attributable  to  the  calendar  year  1917  has  already  been 
included  in  the  tax  for  such  calendar  year  and  need  not  ordinarily  again  be 
computed.  The  tax  for  that  part  of  the  year  attributable  to  the  calendar 
year  1918  is  found  by  computing  the  income  of  the  taxpayer  for  the  taxable 
year  and  the  tax  thereon  in  accordance  with  the  present  statute  as  if  the 
taxable  year  was  the  calendar  year  1918,  and  determining  the  proportion  of 
such  tax  which  the  portion  of  such  fiscal  year  falling  within  the  calendar 
year  is  of  the  full  fiscal  year. 

3121  Art.  1625.  Fiscal  Year  of  Corporation  or  Individual  Ending  in 

1919. — The  method  provided  for  computing  the  tax  for  a fiscal 
year  beginning  in  1918  and  ending  in  1919  is  as  follows:  {a)  the  tax  at- 
tributable to  the  calendar  year  1918  is  found  by  computing  the  income  of 
the  taxpayer  and  the  tax  thereon  in  accordance  with  the  statute  as  if  the 
fiscal  year  was  the  calendar  year  1918,  and  determining  the  proportion  of 
such  tax  which  the  portion  of  such  fiscal  year  falling  within  the  calendar 
year  is  of  the  full  fiscal  year;  {b)  the  tax  attributable  to  the  calendar  year 
1919js  found  by  computing  the  income  of  the  taxpayer  and  the  tax  thereon 
in  accordance  with  the  statute  as  if  the  fiscal  year  was  the  calendar  year 
1919,  and  determining  the  proportion  of  such  tax  which  the  portion  of  such 
fiscal  year  falling  within  the  calendar  year  is  of  the  full  fiscal  year;  and  (c) 
the  tax  for  the  fiscal  year  is  found  by  adding  the  tax  attributable  to  the 
calendar  year  1918  and  the  tax  attributable  to  the  calendar  year  1919. 

PARTS  OF  INCOME  SUBJECT  TO  RATES  FOR  DIFFERENT  YEARS. 

3122  Art.  1641 . Parts  of  Income  Subject  to  Rates  for  Different  Years. — 

72  Section  206  of  the  statute  applies  to  a partner’s  share  of  partnership 

1678  net  income;  to  a stockholder’s  share  of  the  net  income  of  a personal 

service  corporation;  and  to  stock  dividends  received  by  a taxpayer 
between  January  1 and  Noveinoer  1,  or  declared  during  that  period 

and  received  by  the  taxpayer  after  November  1,  1918,  and  before  March  27, 

410  M 


INC. 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


1919  [the  expiration  of  30  days  after  the  passage  of  the  statute].  For  the 
treatment  of  income  of  a partner  or  of  a stockholder  in  a personal  service 
corporation  see  sections  218  and  205  of  the  statute  and  articles  321-335, 
1621  and  1624.  For  the  treatment  of  stock  dividends  see  section  201  and 
articles  1546  and  1642. 

3 1 23  Art.  1642.  Stock  Dividend  Subject  to  Rates  for  Different  Years.- 
40  The  method  of  ascertaining  the  precise  rate  applicable  to  such  por- 

S33  tions  of  stock  dividends  received  or  credited  In  1918  as  are  taxable 
at  rates  prescribed  for  previous  years  Is  as  follows:  The  amount  of 
the  income  of  the  recipient  to  which  the  1918  rates  are  applicable  Is  first 
ascertained.  To  such  amount  is  then  added  the  amount  of  income  of  the 
recipient  liable  to  tax  at  the  1917  rates  and  the  table  of  1917  rates  applied 
to  see  In  which  brackets  such  Income  falls.  The  Income  liable  to  1916 
rates  is  then  added  and  the  table  of  1916  rates  applied  to  it.  For  Instance, 
an  individual  has  $20,000  of  Income  liable  to  1918  rates  and  $25,000  of  divi- 
dends liable  to  1917  rates.  The  total  would  be  $45,000,  of  which  $20,000 
would  be  taxable  at  the  1918  rates  and  $20,000  to  $45,000  at  the  surtax  rates 
under  the  1917  table  applying  to  Income  over  $20,000.  In  order  that  the 
correctness  of  the  rates  may  be  verified,  taxpayers  reporting  stock  dividends 
at  other  than  1918  rates  will  be  required  to  render  a statement  at  the  time 
of  filing  their  returns  showing  the  corporations  from,  which  dividends  taking 
other  than  1918  rates  were  received,  wfith  the  particulars  of  the  dividends 
received  from  each.  See  also  article  1546. 

ADVISORY  TAX  BOARD. 

3124  Art.  1701.  Submission  of  Questions  to  Advisory  Tax  Board. — 
423  Questions  relating  to  the  Interpretation  or  administration  of  the 

2652  income  tax  and  war  profits  and  excess  profits  tax  laws  may  be  sub- 
mitted to  the  Advisory  Tax  Board  by  the  Commissioner  on  his  own 
Initiative  or  at  the  request  of  any  taxpayer  directly  Interested  for  the  purpose 
of  obtaining  the  recommendation  of  the  Board  thereon.  When  a final  con- 
clusion has  been  reached  by  the  Income  tax  unit  of  the  Internal  Revenue 
Bureau  as  to  the  disposition  of  a matter,  any  taxpayer  directly  interested 
therein  may  request  the  Commissioner  to  submit  such  matter  to  the  Board. 
In  the  case  of  matters  arising  In  connection  with  the  audit  of  a taxpayer’s 
return  the  taxpayer  will  ordinarily  be  notified  of  such  conclusion  prior  to 
assessment  by  letter  [over  the  signature  of  the  Commissioner  or  Deputy  Com- 
missioner]. The  taxpayer  shall  file  with  the  Commissioner  (to  be  trans- 
mitted to  the  income  tax  unit)  a request  in  writing  for  submission  with  a 
statement  of  his  objections  to  the  conclusion  of  the  unit  and  the  reasons  for 
such  objections.  Such  request  and  statement  shall  be  filed  with  the  Com- 
missioner within  thirty  days  after  the  taxpayer  has  been  ’notified  of  the 
conclusion  of  the  Income  tax  unit  or  within  such  longer  period  as  the  Com- 
missioner may  allow,  but  the  Board  may  at  its  discretion  at  any  time  receive 
additional  statements  of  objections  or  reasons  therefor. 

3125  Art.  1702.  Procedure  before  Advisory  Tax  Board. — Matters 
submitted  to  the  Advisory  Tax  Board  will  ordinarily  be  considered 

upon  the  papers,  but  a hearing  for  oral  presentation  of  a case  will  be  granted 
whenever  the  Board  deems  such  hearing  necessary  for  the  proper  disposition 
thereof.  Matters  will  ordinarily  be  considered  upon  the  facts  presented 
to  the  income  tax  unit.  New  evidence  will  not  ordinarily  be  received  by  the 
Board,  but  matters  will  be  recommitted  to  the  Income  tax  unit  for  further 

410  N TAX 


INC. 


Reg.  45,  Rev.  See  Note  on  page  301. 


presentation  of  facts.  Oral  or  written  evidence  may,  however,  be  re- 
ceived by  the  Board  whenever  it  deems  such  action  necessary  for  the  protec- 
tion of  the  Government  or  the  prevention  of  injustice  to  the  taxpayer.  De- 
cisions by  the  Board  upon  matters  referred  to  it  at  the  request  of  taxpayers 
will  be  transmitted  to  the  Commissioner. 

EXTENSION  OF  EXISTING  STATUTES. 

3126  Art.  1711.  Aids  to  Collection  of  Tax. — In  collecting  the  income  and 

429  war  profits  and  excess  profits  taxes  the  Commissioner  has  the  benefit  of 

1G20  all  existing  internal  revenue  laws.  In  aid  of  the  enforcement  of  the 
statute  the  Commissioner  may  require  any  person  to  keep  specified 
records,  to  render  returns  and  statements  as  directed,  to  submit  himself 
and  his  books  to  examination,  and  to  comply  with  such  regulat'ons  as  may 
be  prescribed.  Section  3165  of  the  Revised  Statutes,  as  amended  by  sec- 
tion 1317  of  the  Revenue  Act  of  1918,  provides  [^[440  and  ^1452]: 

See  also  sections  228,  250  and  1318  of  the  statute  and  articles  451  and 

1002. 

FRACTIONAL  PART  OF  CENT. 

3 1 27  Art.  1721.  When  Fractional  Part  of  Cent  May  be  Disregarded. — 

434  In  the  payment  of  income  or  war  profits  and  excess  profits  taxes, 

2428  and  in  each  step  or  computation  necessary  in  determining  he 

amount  of  any  such  tax,  a fractional  part  of  a cent  may  be  disre- 
garded unless  it  amounts  to  one-half  cent  or  more,  in  which  case  it  shall  be 
increased  to  1 cent. 

MEDIUM  OF  PAYMENT  OF  TAX. 

3128  Art.  1731.  Payment  of  Tax  by  Certificates  of  Indebtedness. — 

435  Collectors  will  receive  at  par  United  States  Treasury  certificates 

2428  of  indebtedness  of  the  tax  series  of  1919,  dated  August  20,  1918, 

and  maturing  July  15,  1919,  and  of  series  T,  dated  November  7. 
1918,  and  maturing  March  15,  1919,  in  payment  of  income  and  war  profits  and 
excess  profits  taxes  payable  at  or  before  the  maturity  of  the  certificates,  and 
certificates  of  series  T 2,  having  no  coupon,  dated  January  16,  1919,  and 
maturing  June  17,  1919,  in  payment  of  taxes  payable  within  sixty  days 
before  the  maturity  of  the  certificates.  The  terms  of  the  acceptance  of 
certificates  of  other  issues  will  be  prescribed  from  time  to  time.  The  amount 
at  par  of  the  certificates  of  indebtedness  presented  by  any  taxpayer  in 
payment  of  taxes  must  not  exceed  the  amount  of  the  taxes  to  be  paid  by  him. 

3129  Art.  1732.  Procedure  with  Respect  to  Certificates  of  Indebted- 
ness.— Such  certificates  of  indebtedness  may  be  accepted  by  the 

collector  prior  to  the  date  the  tax  is  due  and  In  that  case  should  be  for- 
warded by  the  collector  to  the  federal  reserve  bank  to  be  held  for  his  ac- 
count until  the  date  the  tax  is  due  and  for  deposit  on  such  date.  All  cou- 
pons maturing  on  or  before  the  date  the  tax  is  due  must  be  detached  by  the 
taxpayer  and  collected  in  ordinary  course,  but  all  other  coupons  must  re- 
main attached  to‘thc  certificate  and  be  forwarded  to  the  federal  reserve 
bank.  Any  accrued  Interest  to  the  date  the  tax  is  due,  not  covered  by 
coupons  detached  as  above  provided,  will  be  remitted  to  the  taxpayer  by 
the  federal  reserve  bank  by  check,  for  which  purpose  the  collector  will  fur- 
nish to  the  bank  the  name  and  address  of  the  taxpayer,  the  iimount  and 

INC.  410  O 


TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


serial  numbers  of  the  certificates  presented  in  each  case,  the  date  of  issue 
of  the  certificates,  and  the  date  the  tax  is  due.  Collectors  shall  in  no  ase 
pay  interest  on  such  certificates  nor  accept  them  for  an  amount  other  or 
greater  than  their  face  value.  Receipts  given  by  collectors  to  taxpayers 
should  show  the  amount  of  certificates  of  each  series  received  in  payment 
of  taxes.  For  the  purpose  of  saving  taxpayers  the  expense  of  transmitting 
such  certificates  as  are  held  in  federal  reserve  cities  to  the  office  of  the  col- 
lector in  whose  district  the  taxes  are  payable,  taxpavers  desiring  to  pav 
taxes  by  acceptable  certificates  of  indebtedness  should  communicate  with 
the  collector  and  request  from  him  authority  to  deposit  such  certificates  to 
his  credit  with  the  federal  reserve  bank  in  the  city  in  which  the  certificates 
are  held. 

3130  Art.  1733.  Payment  of  Tax  by  Uncertified  Checks. — Collectors 
may  accept  uncertified  checks  in  payment  of  income  and  war  profits 

and  excess  profits  taxes,  provided  such  checks  are  collectible  at  par,  that  is,  for 
their  full  amount,  without  any  deduction  for  exchange  or  other  charges.  The 
collector  will  stamp  on  the  face  of  each  check  before  deposit  the  words,  “This 
check  is  in  payment  of  an  obligation  to  the  United  States  and  must  be  paid  at 
par.  No  Protest,”  with  his  name  and  title.  The  day  on  which  the  collector  re- 
ceives the  check  will  be  considered  the  date  of  payment  so  far  as  the  taxpayer 
is  concerned,  unless  the  check  is  returned  dishonored.  If  one  check  is 
remitted  to  cover  two  or  more  persons’  taxes,  the  remittance  must  be  ac- 
companied by  a letter  of  transmittal  stating  {a)  the  name  of  the  drawer  of 
the  check;  {h)  the  amount  of  the  check;  (c)  the  amount  of  any  cash,  money 
order  or  other  instrument  included  in  the  same  remittance;  (d)  the  name  of 
each  person  whose  tax  is  to  be  paid  by  the  remittance;  {e)  the  amount  of  the 
payment  on  account  of  each  person;  and  (/)  the  kind  of  tax  paid. 

3131  Art.  1734.  Procedure  with  Respect  to  Dishonored  Checks. — If 

the  bank  on  which  any  such  check  is  drawn  should  refuse  to  pay  it 
at  par,  the  check  should  be  returned  through  the  depositary  bank  and  be 
treated  in  the  same  manner  as  a bad  check.  All  expenses  incident  to  the 
attempt  to  collect  such  a check  and  the  return  of  it  through  the  depositary 
bank  must  be  paid  by  the  drawer  of  the  check  to  the  bank  on  which  it  is 
drawn,  since  no  deduction  can  be  made  from  amounts  received  in  payment 
of  taxes.  See  section  3210  of  the  Revised  Statutes.  If  any  taxpayer  whose 
check  has  been  returned  uncollected  by  the  depositary  bank  should  fail  at 
once  to  make  the  check  good,  the  collector  should  proceed  to  collect  the  tax 
as  though  no  check  had  been  given.  A taxpayer  who  tenders  a certified 
check  in  payment  for  taxes  is  also  not  released  from  his  obligation  until  the 
check  has  been  paid.  See  chapter  191  of  the  Act  of  March  2,  1911. 

JURISDICTION  OF  DISTRICT  COURTS. 

3132  [See  1[454  and  111632.] 

DEPOSIT  OF  UNITED  STATES  BONDS  AS  SECURITY. 

3 1 33  [See  1[456  and  1[2220.] 

REPEAL  OF  FORMER  ACTS. 

3134  [See  1(461  and  1(2361.] 


INC.  410  P TAX 


Reg.  45,  Rev.  See  Note  on  page  301. 


VALIDATING  PROVISION. 

I 3135  [See  11465  and  1[2667.] 

CITATION  OF  ACT. 

3135a  [See  1(468  and  1[484.] 

INSPECTION  OF  GOVERNMENT  CONTRACTS. 

# 

^ 3136  “Sec.  1408.  That  every  person  who  on  or  after  April  6,  1917, 

entered  into  any  contract,  undertaking,  or  agreement  with  the 
IJnited  States,  or  with  any  department,  bureau,  officer,  commission,  board, 
or  agency  under  the  United  States  or  acting  in  its  behalf,  or  with  any  other 
person  having  contract  relations  with  the  United  States,  for  the  performance 
of  any  work  or  the  supplying  of  any  materials  or  property  for  the  use  of  or 
I for  the  account  of  the  United  States,  shall,  within  thirty  days  after  a 

* request  of  the  Commissioner  therefor,  file  with  the  Commissioner  a true  and 

correct  copy  of  every  such  contract,  undertaking,  or  agreement. 

“Whoever  fails  to  comply  with  such  request  of  the  Commissioner  shall  be 
guilty  of  a misdemeanor  and  shall  be  punished  by  a fine  of  not  more  than 
$1,000,  or  by  imprisonment  for  not  more  than  one  year,  or  both. 

“The  Commissioner  shall  (when  not  violative  of  the  technical  military 
or  naval  secrets  of  the  Government)  have  access  to  all  information  and 
data  relating  to  any  such  contract,  undertaking  or  agreement,  in  the 
possession,  control  or  custody  of  any  departm.ent,  bureau,  board,  agency, 
officer  or  commission  of  the  United  States  and  may  call  upon  any  such 
department,  bureau,  board,  agency,  officer  or  commission  for  a full  state- 
ment and  description  of  any  allowance  for  amortization,  obsolescence,  de- 
preciation or  loss,  or  of  any  valuation,  appraisal,  adjustment  or  final  settle- 
ment, made  in  pursuance  of  any  such  contract,  undertaking,  or  agreement.” 

AUTHORITY  FOR  REGULATIONS. 

3137  Art.  1800.  Promulgation  of  Regulations.— In  pursuance  of  the 
483  statute  the  foregoing  regulations  are  hereby  made  and  promul- 
2591  gated  and  all  rulings  inconsistent  herewith  are  hereby  revoked. 

DANIEL  C.  ROPER, 
Commissioner  of  Internal  Revenue. 
Approved:  CARTER  GLASS,  Secretary  of  the  Treasury. 

[Preliminary  edition  not  dated;  Released:  February  25,  1919.] 

[Revised  edition  approved  April  17,  1919;  Released:  April  21,  1919.] 

End  of  Part  IV. 

End  of  Regulations  45,  Revised. 


INC.  410  Q TAX 


Re : Extension  of  Time  for  Filing  Returns. 

To  Collectors  of  Internal  Revenue  and  Others  Concerned: 

3138  Although  no  general  extension  of  time  will  be  authorized  for  filing 
1507  Federal  Income  Tax  returns  due  March  15,  the  Commissioner 

of  Internal  Revenue  has  approved  a novel  feature  of  tax  collection  which 
will  serve  for  all  practical  purposes  as  a possible  extension  of  forty -five 
days  for  the  filing  of  corporation  income  and  excess  profits  tax  returns 
in  cases  where  corporations  are  unable  to  complete  and  file  their  returns 
of  March  15. 

If  a corporation  finds  that,  for  good  and  sufficient  reason,  it  is 

3139  impossible  to  complete  its  return  by  March  15,  it  may  make  a 
return  of  the  estimated  tax  due  and  make  payment  thereof  not 

later  than  March  15.  If  meritorious  reason  is  shown  as  to  why  the  corpor- 
ation is  unable  to  complete  its  return  by  the  specified  date,  the  collector 
will  accept  the  payment  of  the  estimated  tax  and  agree  to  accept  the  revised 
and  completed  tax  return  within  a period  of  not  more  than  45  days. 

Under  the  plan  adopted  for  corporation  payments  and  returns, 

3140  the  Government  will  be  able  to  collect  approximately  the  amount 
of  tax  due  on  or  before  March  15,  thus  meeting  its  urgent  needs, 

and  corporations  actually  requiring  further  time  for  the  preparation  of 
their  complete  returns  will  be  granted  ample  time  in  which  to  do  so. 

One  of  the  advantages  of  this  plan  is  that  it  relieves  the  taxpayer 

3141  of  one-half  of  one  per  cent  interest  per  month  that  would  be  attached 
to  the  payment  of  the  taxes  under  an  extension  granted  at  the 

request  of  the  taxpayer.  The  taxpayer  will,  of  course,  not  be  relieved 
of  interest  on  such  amount  as  his  payment  may  fall  short  of  the  tax  fou'nd 
later  to  be  due  on  the  basis  of  his  final  teturn. 

Should  the  payment  on  March  15  of  the  estimated  tax  due  be 

3142  greater  than  the  tax  eventually  found  to  be  due  on  examination  of 
the  completed  return  the  excess  payment  will  automatically  be 

credited  to  the  next  installment  which  will  be  due  on  June  15. 

Provision  for  systematically  handling  this  new  feature  will  be 

3143  made  in  the  construction  of  the  new  return  blanks  for  corporations. 
The  new  form  will  be  a combined  income  and  excess  profits  blank, 

embodied  in  which  is  a detachable  letter  of  remittance.  Any  corporation 
which  finds  that,  for  sufficient  reasons,  it  cannot  complete  its  return  by  March 
15,  may  detach  and  fill  out  the  letter  of  remittance,  and  forward  same  to  the 
collector  on  or  before  March  15,  together  with  a check,  money-order  or  draft 
for  the  tax  due  on  that  date.  If  the  exact  tax  is  not  known  the  estimated 
tax  due  will  be  paid  in  this  manner.  A statement  in  writing  of  the  reasons 
why  it  is  impossible  for  the  corporation  to  complete  the  return  by  the  specified 
date  must  accompany  every  such  remittance. 

Individual  taxpayers  will  be  given  similar  privileges  in  cases  in 

3144  which  it  is  made  clear  by  the  taxpayer  that  the  time  available  is 
not  sufficient  to  enable  him  to  complete  his  return  by  March  15. 

No  reason  exists,  according  to  the  Internal  Revenue  officials,  for  delaying 
the  filing  of  the  returns  of  individual  incomes,  except  in  unusually  difficult 
cases. 

Forms  for  returns  of  individual  incomes  up  to  $5,000  will  be  dis- 

3145  tributed  by  collectors  within  a few  days.  Forms  for  larger  incomes 
’^Ul  be  available  about  February  24.  Corporation  blanks  will  be 

distributed  by  March  1.  Regulations  governing  the  administration  of  the 
new  Income  Tax  will  also  be  available  before  March  1. 

Daniel  C.  Roper, 

Commissioner  of  Internal  Revenue. 

February  13,  1919. 


INC. 


410  R TAX 


(T.  D.  2792.) 

Income  Tax  Extension  of  Tbme  in  Which  to  File  Returns  of  Taxpayers 
for  the  Year  1918  Y/ith  the  Collector  of  Internal  Revenue 
for  the  District  of  Hawaii,  Pursuant  to  the 
Requirements  of  the  New  Revenue  Act. 

Treasury  Department, 

Offi  CE  OF  Commissioner  of  Internal  Revenue, 
Washington^  D.  C. 

To  Collectors  of  Internal  Revenue  and  Others  Concerned: 
314S  Because  of  the  fact  that  it  will  be  impossible  to  put  into  the  hands 
1507  of  taxpayers  residing  or  located  in  the  Internal  Revenue  District 
3188  of  Hav/aii  the  blank  forms  and  instructions  prescribed  by  this 
Department  for  the  use  of  taxpayers  in  making  returns  pursuant 
to  the  new  Revenue  Act  in  time  for  such  returns  to  be  filed  on  or  before 
the  due  date — March  15,  1919 — an  extension  of  time  of  sixty  days  from 
that  date  is  hereby  granted  to  all  taxpayers  filing  returns  in  the  Internal 
Revenue  District  of  Hawaii. 

Daniel  C.  Roper, 
Commissioner  of  Internal  Revenue. 

Approved:  February  19,  1919. 

Carter  Glass, 

Secretary  of  the  Treasury. 

(T.  D.  2794.) 

Meaning  of  “Nonresident  Alien.” 

Treasury  Department, 

Office  of  Commissioner  of  Internal  Revenue, 
Washington,  D.  C. 

To  Collectors  of  Internal  Revenue  and  Others  Concerned: 

3147  “Nonresident  alien  individual”  means  an  individual  (a)  whose 
489  residence  is  not  within  the  United  States,  and  (b)  who  is  not  a 
493  citizen  of  the  United  States. 

2973 

3148  Residence  wdll  be  determined  in  accordance  with  the  following: 

(1)  Establishm.ent  of  Residence. — Any  alien  living  in  the  United 

3149  States  who  is  not  a mere  transient,  as  explained  below,  is  a resident 
of  the  United  States,  for  purposes  of  the  income  tax.  Whether  he 

is  a transient  or  not  is  determined  by  his  intentions  with  regard  to  his  stay. 
If  he  lives  in  the  United  States,  and  has  no  definite  intention  as  to  his  stay, 
he  is  a resident.  The  best  evidence  of  his  intention  is  afforded  by  the  conduct, 
acts,  and  declarations  of  the  alien.  The  typical  transient  is  one  who  stops 
for  a short  time  in  the  course  of  a journey  through  the  United  States — 
sometimes  performing  labor,  sometimes  not — or  one  who  enters  the  United 
States  intending  only  to  stay  long  enough  to  carry  out  some  purpose,  object, 
or  plan  not  involving  an  extended  stay  in  the  United  States.  A mere  floating 
intention  indefinite  as  to  time,  to  return  to  another  country,  is  not  sufficient 
to  constitute  him  a transient. 

3150  (2)  Proof  of  Residence. — An  alien’s  statements  as  to  his  intention 
with  regard  to  residence  are  not  conclusive,  but  when  unequivocal 

will  determine  the  question  of  his  intention,  unless  his  conduct,  acts  or  other 

410  S TAX 


INC. 


surrounding  circumstances  contradict  the  statements.  It  sometimes  occurs 
that  an  alien  who  genuinely  intends  his  stay  to  be  transient  may  put  off 
his  departure  from  time  to  time  by  reason  of  changed  conditions  remaining 
a transient  though  living  in  the  United  States  for  considerable  time.  The 
fact  that  an  alien’s  family  is  abroad  does  not  necessarily  indicate  that  he  is  a 
transient  rather  than  a resident.  An  alien,  who  enters  this  country  intending 
to  make  his  home  in  a foreign  country  as  soon  as  he  has  accumulated  a sum 
of  money  sufficient  to  provide  for  his  journey  abroad,  is  to  be  considered  a 
transient  provided  his  expectation  in  this  regard  may  reasonably  be  fulfilled 
within  a comparatively  short  time,  considering  the  rate  of  his  savings. 

3151  (3)  Loss  of  Status  as  a Resident. — It  will  be  presumed  that  an  alien 
who  has  established  a residence  in  the  United  States  as  outlined  above, 

continues  to  be  a resident  until  he  or  his  family  evidence  an  intention  to 
change  residence  to  another  country  by  starting  to  remove.  Thus,  alien 
residents  who,  following  the  armistice  agreement  of  November,  1918,  take 
steps  toward  returning  to  their  native  countries,  as  by  applying  for  passports, 
are  to  be  regarded  as  residents  for  that  portion  of  the  taxable  year  which 
elapsed  up  to  the  time  that  such  step  was  taken. 

3152  (4)  Practice  of  Employers  in  Determining  Status  of  Alien  Employees 
— Aliens  employed  in  the  United  States  are  prima  facie  regarded  as 

nonresidents.  If  wages  are  paid  without  withholding  the  tax,  the  employer 
should  be  provided  with  written  proof  of  fact  which  overcome  the  presumption 
that  such  alien  is  a nonresident.  Such  facts  include  the  following: 

(a)  If  an  alien  has  been  living  in  the  United  States  for  as  much  as 

3153  one  year  immediately  prior  to  the  time  he  entered  the  employment 
of  the  withholding  agent,  or  if  he  has  been  regularly  employed  by  an 

individual  resident  in  the  United  States  or  by  a resident  corporation  in  the 
same  city  or  county  for  as'*much  as  three  months  immediately  prior  to  any 
payment  by  the  employer,  he  may  be  treated  as  a resident  in  deciding  as  to 
the  necessity  of  withholding  part  of  such  payment,  provided  no  facts  are 
known  to  the  employer  showing  that  he  is  in  fact  a transient,  such  as  one  of 
the  type  mentioned  under  (1).  The  facts  with  regard  to  the  length  of  time 
the  alien  has  thus  lived  in  this  country  or  has  been  so  regularly  employed  may 
be  established  by  the  certificate  of  the  alien; 

(b)  The  employer  may  also  obtain  evidence  to  overcome  the  prima 

3154  facie  presumption  of  nonresidence  by  securing  from  the  alien  Form 
1078,frevised,  properly  executed  or  an  equivalent  certificate  of  the 

alien  establishing  residence.  Having  secured  such  evidence  from  the 
alien,  the  employer  may  rely  thereon  unless  the  statement  of  the  alien  was 
false  and  the  employer  had  reasonable  cause  to  believe  it  false,  and  may 
continue  to  rely  thereon  until  the  alien  ceases  to  be  a resident  under  the 
provisions  of  the  preceding  paragraph. 

An  employer  who  seeks  to  account  for  failure  to  withhold  before  this 

3155  date  if  he  did  not  at  the  time  secure  Form  1078  or  its  equivalent, 
is  permitted  to  prove  the  former  status  of  the  alien  by  any  material 
evidence. 

3156  (5)  Treasury  Decision  No.  2242  [1[489,  Tf491  and  1[493]  is  modified 
so  far  as  inconsistent  herewith. 

3157  Form  1078,  as  revised,  is  as  follows: 

[For  Form  1078  see  Supplementary  Page  34.] 

Daniel  C.  Roper, 
Commissioner  of  Internal  Revenue, 

Approved:  February  21,  1919. 

Carter  Glass, 

Secretary  of  the  Treasury, 


INC. 


410  T TA3^ 


Re : Extension  of  Time  for  Filing  Returns. 


Treasury  Department, 

Office  of  Commissioner  of  Internal  Revenue, 
Washingtoriy  D,  C. 

Income  taxpayers  both  corporation  and  individual,  were  to-day 

3158  granted  by  the  Internal  Revenue  Bureau  further  relief  with  respect 
1507  to  the  filing  of  their  completed  tax  returns  for  1918.  The  statement 
3138  that  the  taxpayer  is  unable  by  March  15,  to  execute  and  file  the 

complete  return  will  be  accepted,  under  the  new  procedure,  as  suffi- 
cient reason  for  extending  for  forty-five  days  the  time  for  filing  complete 
income  and  excess  profits  returns,  provided  in  every  case  the  taxpayer  pays 
on  or  before  March  15  at  least  25%  of  the  estimated  amount  of  the  tax  due. 

A supply  of  blanks  of  Form  1040-T,  for  the  use  of  individuals  as 

3159  tentative  return  on  the  estimated  tax  basis,  were  shipped  to  each 
collector  of  Internal  Revenue  to-day.  Collectors  will  furnish  this 

Form  to  any  individual  requesting  an  extension  of  time  for  the  filing  of  his 
complete  return  for  1918. 

The  tentative  return  to  be  used  by  corporations  who  make  payment 

3160  of  the  estimated  tax  due  on  or  before  March  15  is  being  printed,  and 
a supply  will  be  forwarded  to-morrow  to  each  collector,  who  will 

mail  these  Forms  to  every  corporation  on  his  list.  [To  be  known  as  Form 
103 1-T.] 

Under  the  estimated  tax  procedure,  which  is  now  available  to  every 

3161  taxpayer  under  the  Income  and  Excess  Profits  Section  of  the  new 
Revenue  Law,  there  is  no  extension  beyond  the  legal  due  date, 

March  15,  for  the  payment  of  the  taxes  then  falling  due. 

It  is  urged  by  the  Bureau  that  the  estimates  be  computed  on  the 

3162  most  exact  basis  available.  Should  the  first  payment  to  be  made  on 
or  before  March  15,  under  this  plan,  be  greater  than  the  amount 

eventually  found  to  have  been  due  upon  examination  of  the  completed 
return  the  excess  payment  will  be  automatically  credited  against  the  next 
installment,  which  will  be  due  June  15. 

The  taxpayer  will  not  be  relieved,  however,  under  this  plan,  of  the 

3163  interest  due  upon  any  amount  by  which  his  payment  on  March  15 
may  fall  short  of  the  amount  found  to  have  been  due  upon  examina- 
tion of  the  completed  return. 

Commissioner  Daniel  C.  Roper,  in  announcing  the  further  relief  for 

3164  taxpayers  in  the  matter  of  completing  their  returns,  stated  that  he 
believed  the  plan  is  not  only  simple  and  workable,  but  adequately 

protects  the  interests  of  the  taxpayer  and  the  Government. 

February  27,  1919. 


(T.  D.  2796.) 

3166  The  Time  for  Filing  Returns  of  Information,  Fiduciary  Returns, 
1507  Form  1041,  Withholding  Returns,  Forms  1042^and  1013,  and  Part- 
nerships as  Hereinafter  Outlined,  is  Extended  to  May  15,  1919,  and 
to  March  15,  1919,  in  the  Case  of  Corporations  and  Partnerships 
Having  a Fiscal  Year  Ending  in  1918. — In  view  of  the  delay  in  the  final 
passage  of  the  Revenue  Act  of  1918  and  of  the  preparation  of  the  forms 
required  thereunder,  an  extension  of  time  to  include  May  15,  1919,  is  hereby 

INC.  410  U tax 


granted  for  the  filing  of  returns  of  information  (forms  1099  and  1096),  fidu- 
ciary returns  (form  1041),  annual  withholding  returns  (form  1042,  accom- 
panied by  form  1098,  and  form  1013,)  returns  of  partnerships  which  are 
required  to  file  returns  on  the  calendar  year  basis,  and  all  other  returns  which 
are  not  the  basis  for  the  assessment  of  the  tax. 

3166  This  decision  shall  not  be  construed  as  relieving  taxpayers  from  filing 
returns  which  serve  as  a basis  for  assessment,  even  though  the  person 
making  the  return  is  not  taxable  thereon,  nor  as  relieving  beneficiaries, 

partners  and  stockholders  of  personal  service  corporations  from  including 
in  their  personal  returns  their  distributive  share  of  the  income  accruing  to 
the  trust  or  estate  or  the  partnership  or  personal  service  corporation,  whether 
distributed  or  not. 

3167  Partnerships  and  corporations  having  a fiscal  year  ending  in  1918 
3247  which  have  secured  extensions  of  time  which  have  not  expired  are 

hereby  granted  an  extension  of  time  to  March  15,  1919,  for  the  filing 
of  such  returns.  When  the  returns  are  filed,  two  forms  should  be  used  and 
two  computations  made,  one  showing  on  the  return  form  used  for  1917  the  tax 
calculated  on  the  whole  income  for  the  entire  period  under  the  provisions 
and  at  the  rates  prescribed  by  the  Act  of  September  8,  1916,  and  the  Act  of 
October  3,  1917,  the  other  showing  on  the  form  for  1913  the  tax  on  the  whole 
income  for  the  entire  period,  calculated  under  the  provisions  and  at  the 
rates  prescribed  by  the  Revenue  Act  of  1918.  The  tax  due  will  be  the  sum 
of  so  many  twelfths  of  the  first  amount  as  there  are  months  in  1917  covered 
by  the  return  and  of  the  second  amount  as  there  are  months  in  1918. 

3168  In  view  of  the  disturbed  conditions  abroad  and  the  consequent  inter- 
ference with  the  usual  channels  of  communication,  an  extension  of  time 
for  filing  returns  of  income  for  1918  and  subsequent  years  is  hereby 

granted  in  the  case  of  alien  individuals  actually  living  beyond  the  boun- 
daries of  the  United  States  and  corporations,  or  their  proper  representatives 
in  the  United  States,  and  of  American  citizens  residing  or  traveling  abroad, 
including  persons  in  military  or  naval  service  on  duty  outside  the  United 
States,  for  such  period  as  may  be  necessary,  not  exceeding  90  days  after 
proclamation  by  the  President  of  the  end  of  the  war  with  Germany.  In  all 
such  cases  an  affidavit  must  be  attached  to  the  return,  stating  the  causes  of 
the  delay  in  filing  it,  in  order  that  the  Commissioner  may  determine  whether 
the  failure  to  file  the  return  in  time  was  due  to  a reasonable  cause  and  not 
to  wilful  neglect.  If  the  showing  justifies  the  conclusion  that  the  failure  to 
file  the  return  in  time  was  excusable,  no  penalty  by  way  of  addition  to  the 
tax  will  be  imposed,  except  interest  as  provided  by  the  statute.  (T.  D.  2796, 
signed  by  Commissioner  Daniel  C.  Roper,and  dated  February  27,  1919.) 

(VICTORY  LIBERTY  LOAN  ACT.) 

(Sections  1,  2,  and  4.) 

Public — No.  328 — 65th  Congress. 

In  effect  March  3,  1919. 

3169  Exemption  of  Liberty  Loan  Bond  and  Note  Interest. — That  the 
975  Second  Liberty  Bond  Act  is  hereby  amended  by  adding  thereto  a 

2868  new  section  to  read  as  follows : 

3297  . . . ■ • 

3170  “Sec.  18.  (a)  That  in  addition  to  the  bonds  and  certificates  of 

indebtedness  and  war-savings  certificates  authorized  by  this  Act 
and  amendments  thereto,  the  Secretary  of  the  Treasury,  with  the 

approval  of  the  President,  is  authorized  to  borrow  from  time  to  time  on  the 

410  V TAX 


INC. 


credit  of  the  United  States  for  the  purposes  of  this  Act,  and  to  meet  public 
expenditures  authorized  by  law,  not  exceeding  in  the  aggregate  $7,000,000,000, 
and  to  issue  therefor  notes  of  the  United  States  at  not  less  than  par  in  such 
form  or  forms  and  denomination  or  denominations,  containing  such  terms 
and  conditions,  and  at  such  rate  or  rates  of  interest,  as  the  Secretary  of  the 
Treasury  may  prescribe,  and  each  series  of  notes  so  issued  shall  be  payable 
at  such  time  not  less  than  one  year  nor  more  than  five  years  from  the  date 
of  its  issue  as  he  may  prescribe,  and  may  be  redeemable  before  maturity 
(at  the  option  of  the  United  States)  in  whole  or  in  part,  upon  not  more  than 
one  year’s  nor  less  than  four  months’  notice,  and  under  such  rules  and  regu- 
lations and  during  such  period  as  he  may  prescribe. 

3171  “(b)  The  notes  herein  authorized  may  be  issued  in  any  one  or  more 
of  the  following  series  as  the  Secretary  of  the  Treasury  may  pre- 
scribe in  connection  with  the  issue  thereof: 

3172  “(1)  Exempt,  both  as  to  principal  and  interest,  from  all  taxation 
(except  estate  or  inheritance  taxes)  now  or  hereafter  imposed  by  the 
United  States,  any  State,  or  any  of  the  possessions  of  the  United 

States,  or  by  any  local  taxing  authority; 

3173  “(2)  Exempt,  both  as  to  principal  and  interest,  from  all  taxation 
now  or  hereafter  imposed  by  the  United  States,  any  State,  or  any  of 
the  possessions  of  the  United  States,  or  by  any  local  taxing  authority, 

except  (a)  estate  or  inheritance  taxes,  and  (b)  graduated  additional  income 
taxes,  commonly  knov/n  as  surtaxes,  and  excess-profits  and  war-profits 
taxes,  now  or  hereafter  imposed  by  the  United  States,  upon  the  income  or 
profits  of  individuals,  partnerships,  associations,  or  corporations; 

3174  “(3)  Exempt,  both  as  to  principal  and  interest,  as  provided  in  para- 
graph (2);  and  with  an  additional  exemption  from  the  taxes  referred 
to  in  clause  (b)  of  such  paragraph,  of  the  interest  on  an  amount  of 

such  notes  the  principal  of  which  does  not  exceed  $30,000,  owned  by  any 
individual,  partnership,  association,  or  corporation;  or 

3175  “(4)  Exempt,  both  as  to  principal  and  interest,  from  all  taxation 
now  or  hereafter  imposed  by  the  United  States,  any  State,  or  any 
of  the  possessions  of  the  United  States,  or  by  any  local  taxing  author- 
ity, except  (a)  estate  or  inheritance  taxes,  and  (b)  all  income,  excess-profits, 
and  war-profits  taxes,  now  or  hereafter  imposed  by  the  United  States,upon 
the  income  or  profits  of  individuals,  partnerships,  associations,  or  corporations. 

3176  “(c)  If  the  notes  authorized  under  this  section  are  offered  in  more 
than  one  series  bearing  the  same  date  of  issue,  the  holder  of  notes  of 
any  such  series  shall  (under  such  rules  and  regulations  as  may  be 

prescribed  by  the  Secretary  of  the  Treasury)  have  the  option  of  having  such 
notes  held  by  him  converted  at  par  into  notes  of  any  other  such  series  offered 
bearing  the  same  date  of  issue. 

3177  “(d)  None  of  the  notes  authorized  by  this  section  shall  bear  the 
circulation  privilege.  The  principal  and  interest  thereof  shall  be 
payable  in  United  States  gold  coin  of  the  present  standard  of  value. 

The  word  ‘bond’  or  ‘bonds’  where  it  appears  in  sections  8,  9,  10,  14,  and  15 
of  this  Act  as  amended,  and  sections  3702,  3703,  3704,  and  3705  of  the  Revised 
Statutes,  and  section  5200  of  the  Revised  Statutes  as  amended,  but  in  such 
sections  only,  shall  be  deemed  to  include  notes  issued  under  this  section.” 

3178  Sec.  2.  (a)  That  until  the  expiration  of  five  years  after  the  date 

of  the  termination  of  the  war  between  the  United  States  and  the 
German  Government,  as  fixed  by  proclamation  of  the  President,  in 

addition  to  the  exemptions  provided  in  section  7 [1(976  and  1[2869]  of  the 
Second  Liberty  Bond  Act  in  respect  to  the  interest  on  an  amount  of  bonds 
and  certificates,  authorized  by  such  Act  and  amendments  thereto,  the  prin- 

410  W TAX 


INC. 


cipal  of  which  does  not  exceed  in  the  aggregate  $5,000,  and  in  addition  to  all 
other  exemptions  provided  in  the  Second  Liberty  Bond  Act  or  the  Supple- 
ment to  Second  Liberty  Bond  Act  [11981  and  1f2871],  the  interest  received 
on  and  after  January  1,  1919,  on  an  amount  of  bonds  of  the  First  Liberty 
Loan  Converted,  dated  November  15,  1917,  May  9,  1918,  or  October  24, 
1918,  the  Second  Liberty  Loan,  converted  and  unconverted,  the  Third 
Liberty  Loan,  and  the  Fourth  Liberty  Loan,  the  principal  of  which  does  not 
exceed  $30,000  in  the  aggregate,  owned  by  any  individual,  partnership,  asso- 
ciation, or  corporation,  shall  be  exempt  from  graduated  additional  income 
taxes,  commonly  known  as  surtaxes,  and  excess-profits  and  war-profits  taxes, 
now  or  hereafter  imposed  by  the  United  States,  upon  the  income  or  profits 
of  individuals,  partnerships,  associations,  or  corporations. 

3179  (b)  In  addition  to  the  exemption  provided  in  subdivision  (a),  and 
in  addition  to  the  other  exemptions  therein  referred  to,  the  interest 
received  on  and  after  January  1,  1919,  on  an  amount  of  the  bonds 

therein  specified  the  principal  of  which  does  not  exceed  $20,000  in  the  aggre- 
gate, owned  by  any  individual,  partnership,  association,  or  corporation, 
shall  be  exempt  from  the  taxes  therein  specified:  Provided^  That  no  owner 
of  such  bonds  shall  be  entitled  to  such  exemption  in  respect  to  the  interest 
on  an  aggregate  principal  amount  of  such  bonds  exceeding  three  times  the 
principal  amount  of  notes  of  the  Victory  Liberty  Loan  originally  subscribed 
for  by  such  owner  and  still  owned  by  him  at  the  date  of  his  tax  return. 

3180  Sec.  4.  That  section  3 of  the  Fourth  Liberty  Bond  Act  is  hereby 
991  amended  to  read  as  follows: 

“Sec.  3.  That,  notwithstanding  the  provisions  of  the  Second  Liberty 
Bond  Act  or  of  the  War  Finance  Corporation  Act  or  of  any  other  Act,  bonds, 
notes,  and  certificates  of  indebtedness  of  the  United  States  and  bonds  of 
the  War  Finance  Corporation  shall,  while  beneficially  owned  by  a nonresi- 
dent alien  individual,  or  a foreign  corporation,  partnership,  or  association, 
not  engaged  in  business  in  the  United  States,  be  exempt  both  as  to  principal 
and  interest  from  any  and  all  taxation  now  or  hereafter  imposed  by  the 
United  States,  any  State,  or  any  of  the  possessions  of  the  United  States  or  by 
any  local  taxing  authority.”  (Sections  1,  2,  and  4 of  “An  Act  to  amend  the 
Liberty  Bond  Acts  and  the  War  Finance  Corporation  Act,  and  for  other 
purposes”,  known  as  the  “Victory  Liberty  Loan  Act”,  approved  by  the 
President,  March  3,  1919.) 


3 1 80a  Supplementary  Return  and  Additional  Tax  Payment  under  the 
Revenue  Act  of  1918  by  Fiscal  Year  Corporations  for  Taxable  Years 
Ending  in  1918. — Answering  telephone  inquiry  corporation  which  paid  income 
and  excess  profits  tax  at  1917  rates  for  fiscal  year  ended  in  1918  should  file 
returns  in  accordance  with  Article  952  of  Part  II,  preliminary  regulations, 
and  pay  at  least  one-fourth  of  additional  amount  due  on  or  before  March 
15,  1919,  and  balance  as  installments  fall  due.  If  none  of  tax  has  been  paid 
at  least  one-fourth  of  total  tax  will  be  payable  March  15  and  balance  in 
installments.  (Telegram  to  The  Corporation  Trust  Company,  signed  by 
Commissioner  Daniel  C.  Roper  and  dated  March  3,  1919.) 


The  next  page  Is  page  411. 
INC.  410  X TAX 


Reg.  46,  Rev.  Part  II-A.  See  Note  on  page  801. 


REGULATIONS  45,  REVISED. 


) PART  II  A. 

INCOME  TAX  ON  CORPORATIONS. 

TABLE  OF  CONTENTS. 

For  table  of  contents  of  Regulations  45,  Revised,  Parts  I,  II  A, 

III,  and  IV,  see  page  301. 

^ SEE  NOTE  ON  PAGE  301. 

TAX  ON  CORPORATIONS. 

3181  Art.  501.  Income  Tax  on  Corporations. — ^The  statute  imposes  an 
260  income  tax  at  a fixed  rate  on  all  corporations  not  expressly  exempt. 
^ 1662  See  section  231  of  the  statute.  The  tax  is  upon  net  income,  as  defined 

f in  the  statute,  after  deducting  from  gross  income,  as  defined  in  the 

statute,  the  allowable  deductions.  See  sections  232,  233,  234  and  235. 
Certain  credits  are  allowed  against  net  income  and  against  the  amount  of  the 
tax.  See  sections  236  and  238.  The  tax  is  payable  upon  the  basis  of  returns 
rendered  by  the  corporations  liable  thereto,  except  that  in  some  cases  it  is 
to  be  paid  at  the  source  of  the  income.  See  sections  237,  239,  240  and  241. 
The  statute  also  imposes  on  corporations  a war  profits  and  excess  profits 
tax.  See  Part  II  B of  the  regulations.  For  the  income  tax  on  individuals, 
for  administrative  provisions,  and  for  definitions  and  general  provisions, 
see  Parts  I,  III  and  IV  of  the  regulations. 

^ 3182  Art.j502.  Rates  of  Tax. — ^The  income  tax  on  corporations  is  at 

the  rate  of  12  per  cent  of  the  net  income  subject  to  tax  for  the 
calendar  year  1918  and  at  the  rate  of  10  per  cent  of  the  net  income  subject 
to  tax  for  the  calendar  year  1919  and  subsequent  years.  In  order  to  deter- 
mine the  amount  subject  to  tax  the  net  income,  as  defined  in  section  232  of 
the  statute  and  article  531  of  the  regulations,  is  first  entitled  to  the  credits 
specified  in  section  236  of  the  statute  and  article  591. 

3183  Art.  503.  Corporations  Liable  to  Tax, — Every  corporation,  do- 
mestic or  foreign,  not  exempt  under  section  231  of  the  statute,  is 
I liable  to  the  tax.  It  makes  no  difference  that  a domestic  corporation  may 

receive  no  income  from  sources  within  the  United  States.  On  the  other 
hand,  a foreign  corporation  is  taxed  only  on  its  income  from  sources  within 
the  United  States.  See  section  233  of  the  statute  and  article  550.  For  what 
the  term  ‘‘corporation”  includes  and  for  the  difference  between  domestic  and 
foreign  corporations  see  section  1 and  articles  1501-1509. 

. 3184  Art.  504.  Tax  on  Transportation  Corporations. — The  Act  to  provide 

' 264  for  the  operation  of  transportation  systems  while  under  federal 

1684  control,  for  the  just  compensation  of  their  owners,  and  for  other 
purposes,  of  March  21,  1918,  authorizes  the  President  to  agree  with 
carriers  for  their  just  compensation  and  provides: 

Every  such  agreement  shall  provide  that  any  Federal  taxes  under  the  Act 
of  October  third,  nineteen  hundred  and  seventeen,  or  y\cts  in  addition  thereto 
or  in  amendment  thereof,  commonly  called  war  taxes,  assessed  for  the  period 
I of  Federal  control  beginning  January  first,  nineteen  hundred  and  eighteen,  or 

any  part  of  such  period,  shall  be  paid  by  the  carrier  our  of  its  own  funds,  or 

INC.  411 


TAX 


Reg.  45,  Rev.  Part  II-A.  See  Note  on  page  301. 


shall  be  charged  against  or  deducted  from  the  just  compensation;  that  other  taxes 
assessed  under  Federal  or  any  other  governmental  authority  for  the  period  of 
Federal  control  or  any  part  thereof,  either  on  the  property  used  under  such 
Federal  control  or  on  the  right  to  operate  as  a carrier,  or  on  the  revenues  or 
any  part  thereof  derived  from  operation  (not  including,  however,  assessments 
for  public  improvements  or  taxes  assessed  on  property  under  construction,  and 
chargeable  under  the  classification  of  the  Interstate  Commerce  Commission  to 
inv'cstment  in  road  and  equipment),  shall  be  paid  out  of  revenues  derived  from  rail- 
way operations  while  under  Federal  control:  that  all  taxes  assessed  under  Federal 
or  any  other  governmental  authority  for  the  period  prior  to  January  first,  nineteen 
hundred  and  eighteen,  whenever  levied  or  payable,  shall  be  paid  by  the  carrier 
out  of  its  own  funds,  or  shall  be  charged  against  or  deducted  from  the  just  tom- 
oensation. 

[Accordingly,  in  the  case  of  transportation  corporations  while  under  federal 
control  five-sixths  of  the  tax  for  the  calendar  year  1918  and  four-fifths  of 
the  tax  for  each  calendar  year  thereafter  shall  be  paid  by  the  carrier  out  of 
its  own  funds  or  deducted  from  its  just  compensation,  and  the  remainder 
of  the  tax  shall  be  paid  out  of  revenues  derived  from  railway  operations 
while  under  federal  control.] 

CONDITIONAL  AND  OTHER  EXEMPTIONS 

3185  Art.  511.  Proof  of  Exemption. — In  order  to  establish  its  exemp- 
265  tion,  and  thus  be  relieved  of  the  duty  of  filing  returns  of  income 

1739  and  paying  the  tax,  it  is  necessary  that  every  organization  claiming 
exemption,  except  personal  service  corporations,  file  an  affidavit 
with  the  collector  of  the  district  in  which  it  is  located,  showing  the  character 
of  the  organization,  the  purpose  for  which  it  was  organized,  the  sources  of 
its  income  and  its  disposition,  whether  or  not  any  of  its  income  is  credited 
to  surplus  or  may  inure  to  the  benefit  of  any  private  stockholder  or  indi- 
vidual, and  in  general  all  facts  relating  to  its  operations  which  affect  its 
right  to  exemption.  To  such  affidavit  should  be  attached  a copy  of  the 
charter  or  articles  of  incorporation  and  by-laws  of  the  organization.  Upon 
receipt  of  the  affidavit  and  other  papers  by  the  collector,  he  will  inform^  the 
organization  whether  or  not  it  is  exempt.  If,  however,  the  collector  is  in 
doubt  as  to  the  taxable  status  of  the  organization,  he  will  refer  the  affidavit 
and  accompanying  papers  to  the  Commissioner  for  decision.  When  an  or- 
ganization has  established  its  right  to  exemption,  it  need  not  thereafter  make 
a return  of  income  or  any  further  showing  with  respect  to  its  status  under 
the  law,  unless  it  changes  the  character  of  its  organization  or  operations 
or  the  purpose  for  which  it  was  originally  created.  Collectors  will  keep  a 
list  of  all  exempt  corporations,  to  the  end  that  they  may  occasionally  in- 
quire into  their  status  and  ascertain  whether  or  not  they  are  observing  the 
conditions  upon  which  their  exemption  is  predicated.  As  to  personal  service 
corporations  see  section  218  of  the  statute  and  articles  328-335. 

3186  Art.  512.  Agricultural  and  Horticultural  Organizations.  Agri- 
cultural or  horticultural  organizations  exempt  from^  tax  do  not 

include  corporations  engaged  in  growing  agricultural  or  horticultural  pro- 
ducts or  raising  live  stock  or  similar  products  for  profit,  but  include  only 
those  organizations  which,  having  no  net  income  inuring  to  the  benefit  of 
their  members,  are  educational  or  instructive  in  character  and  have  for  their 
purpose  the  betterment  of  the  conditions  of  those  engaged  in  these  pursuits, 
the  improvement  of  the  grade  of  their  products,  and  the  encouragement  and 
promotion  of  these  industries  to  a higher  degree  of  efficiency.  Included  in 
this  class  as  exempt  are*^ organizations  such  as  county  fairs  and  like  asso- 
ciations of  a quasi-public  character,  which  through  a system  of  awards, 

412  TAX 


INC. 


Reg.  46,  Rev.  Part  II-A.  See  Note  on  page  301. 


I 


) 


) 


) 


prizes  or  premiums  are  designed  to  encourage  the  production  of  better  live 
stock,  better  agricultural  and  horticultural  products,  and  whose  income,  de- 
rived from  gate  receipts,  entry  fees,  donations,  etc.,  is  used  exclusively  to 
meet  the  necessary  expenses  of  upkeep  and  operation.  Societies  or  asso- 
ciations which  have  for  their  purpose  the  holding  of  annual  or  periodical 
race  meets,  from  which  profits  inure  or  may  inure  to  the  benefit  of  the  mem- 
bers or  stockholders,  do  not  come,  within  the  terms  of  this  exemption.  • A 
corporation  engaged  in  the  business  of  raising  stock  or  poultry,  or  growing- 
grain,  fruits  or  other  products  of  this  character,  as  a means  of  livelihood 
and  for  the  purpose  of  gain,  is  an  agricultural  or  horticultural  society  only 
in  the  sense  that  its  name  indicates  the  kind  of  business  in  which  it  is  en- 
gaged, and  it  is  not  exempt  from  tax. 

3187  Art.  513.  Mutual  Savings  Banks. — A Massachusetts  savings  bank, 
otherwise  exempt,  which  establishes  an  insurance  department  under 

the  statutes  of  that  State,  does  not  thereby  become  subject  to  tax  upon  the 
income  received  by  such  department. 

3188  Art.  514.  Fraternal  Beneficiary  Societies. — A fraternal  bene-, 
ficiary  society  is  exempt  from  tax  only  if  operated  under  the  “lodge 

system,”  or  for  the  exclusive  benefit  of  the  members  of  a society  so  oper- 
ating. ^^Operating  under  the  lodge  system’’  means  '^carrying  on  its  activities 
under  a form  of  organization  that  comprises  heel  branches,  chartered  by  a parent 
organization  and  largely  self-governing^  called  lodges,  chapters,  or  the  like. 
[It  must  be  a society  organized  under  a charter,  which  has  duly  ap- 
pointed or  elected  officers  and  an  adopted  ritual  and  ceremonial,  holds  meet- 
ings at  stated  intervals  and  is  supported  by  dues  or  assessments.]  In  order 
to  be  exempt  it  is  also  necessary  that  the  society  have  an  established  system 
for  the  payment  to  its  members  or  their  dependents  of  life,  sick,  accident  or 
other  benefits. 

3189  Art.  515.  Building  and  Loan  Associations. — A building  and  loan 
association  entitled  to  exemption  is  one  organized  pursuant  to  the 

laws  of  the  United  States  or  of  some  State  or  Territory  thereof,  which  accumu- 
lates funds  to  be  loaned  to  its  members  and  to  be  repaid  in  small  periodical 
installments.  The  statute  requires  that  the  members  of  the  association  shall 
share  in  its  profits  on  substantially  the  same  footing.  Subject  to  this  require- 
ment, it  does  not  prevent  exemption  that  the  association  issues  prepaid  stock 
entitled  to  a specified  percentage  of  the  profits.  Where,  however,  the  asso- 
ciation issues  paid  up  stock,  the  holders  of  which  are  entitled  to  a fixed 
dividend  and  also  to  share  in  the  profits  with  all  the  other  holders  of  stock, 
it  is  not  exempt. 

3190  Art.  516.  Cemetery  Companies. — A cemetery  company  having 
a capital  stock  represented  by  shares,  or  whidi  is  operated  for  profit 

or  for  the  benefit  of  others  than  its  members,  does  not  come  within  the 
exempted  class.  A cemetery  company  of  which  all  lot  owners  are  members:, 
issuing  preferred  stock  entitling  the  holder  to  a semi-annual  dividend  of 
4 per  cent,  and  whose  articles  of  incorporation  provide  that  the  preferred 
stock  shall  be  retired  at  par  as  soon  as  sufficient  funds  are  realized  from  sales 
and  that  all  funds  realized  in  addition  thereto  shall  be  used  by  the  company 
for  the  care  and  improvement  of  the  cemetery  property,  is  within  the  exemp- 
tion. 


INC. 


413  TAX 


Reg.  45,  Rev.  Partlll-A.  See  Note  on  page  301. 


3191  Art.  517.  Religious,  Charitable,  Scientific  and  Educational 
Corporations. — The  exemption  applies  only  to  a corporation  or 

association.  It  does  not  include  the  case  of  a trust,  under  which  the  trustee 
is  authorized  to  use  the  trust  property  for  religious  purposes.  In  order  to 
be  exempt  the  corporation  or  association  must  meet  three  tests:  {a)  it  must 
be  organized  and  operated  for  one  or  more  of  the  specified  purposes;  {h)  it 
must  be  organized  and  operated  exclusively  for  such  purposes;  and  (c)  no 
part  of  its  income  must  inure  to  the  benefit  of  private  stockholders  or  indi- 
viduals. 

3192  (1)  Charitable  corporations  include  an  association  for  the  relief 
of  the  families  of  clergymen,  even  though  the  latter  make  a con- 
tribution to  the  fund  established  for  this  purpose;  or  for  furnishing  the  serv- 
ices of  trained  nurses  to  persons  unable  to  pay  for  them;  or  for  aiding  the 
general  body  of  litigants  by  improving  the  efficient  administration  of  justice. 
Educational  corporations  may  include  an  association  whose  sole  purpose  is  the 
instruction  of  the  public  [even  if  it  merely  disseminates  propaganda  on  a 
single  question.  Thus  an  association  inculcating  prohibition  or  protectionist 
principles  is  exempt.]  This  [The  same]  is  true  of  an  association  to  promote 
acquaintance  with  the  Spanish  language  and  literature,  although  it  has  inci- 
dental amusement  features;  of  an  association  to  increase  knowledge  of  the 
civilization  of  another  country;  and  of  a Chautauqua  association  whose 
primary  purpose  is  to  give  lectures  on  subjects  useful  to  the  individual  and 
beneficial  to  the  community  and  whose  amusement  features  are  incidental 
to  this  purpose.  But  associations  formed  to  disseminate  controversial  or  parti- 
san propaganda  are  not  educational  within  the  mea?iing  of  the  statute.  Societies 
designed  to  encourage  the  performance  of  first  class  orchestral  music  are  not 
exempt,  the  purpose  being  merely  to  provide  a high  grade  of  entertainment. 
Scientific  corporations  include  an  association  for  the  scientific  study  of  law, 
to  the  end  of  improvement  in  its  administration. 

3193  (2)  Where  a religious  corporation  owns  a large  quantity  of  farm 
land  and  works  it,  and  also  manufactlires  and  sells  clothing  and  other 

articles  of  profit,  it  is  not  operated  exclusively  for  religious  purposes  and  is 
not  exempt,  even  though  its  property  is  held  in  common  and  its  profits  do 
not  inure  to  the  benefit  of  individual  members  of  the  society. 

3194  (3)  It  does  not  prevent  exemption  that  private  individuals,  for 
whose  benefit  a charity  is  organized,  receive  the  income  of  the  cor- 
poration or  association.  The  statute  refers  to  individuals  having  a per- 
sonal and  private  interest  in  the  activities  of  the  corporation,  such  as  stock- 
holders. If,  however,  a corporation  issues  “voting  shares,  ” which  entitle 
the  holders  upon  the  dissolution  of  the  corporation  to  receive  the  proceeds 
of  its  property,  including  accumulated  income,  the  riglit  to  exemption  does 
not  exist,  even  though  the  by-laws  provide  that  the  shareholders  shall  not 
receive  any  dividend  or  other  return  upon  their  shares. 

3195  Art.  518.  Business  Leagues. — A business  league  is  an  association 
of  persons  having  some  common  business  Interest,  which  limits 

its  activities  to  work  for  such  common  interest  and  does  not  engage  in  a 
regular  business  of  a kind  ordinarily  carried  on  for  profit.  Its  work  need 
not  be  similar  to  that  of  a chamber  of  commerce  or  board  of  trade.  An  as- 
sociation engaged  in  furnishing  information  to  prospective  investors,  to  en- 
able them  to  make  sound  investments,  is  not  such  a league,  since  its  mem- 
bers have  no  common  business  interest,  and  it  is  not  exempt,  even  though 


INC. 


414  TAX 


Reg.  45,  Rev.  Part  II-A.  See  Note  on  page  301. 


all  of  its  income  is  devoted  to  the  purpose  stated.  A clearing  house  asso- 
ciation, not  organized  for  profit,  no  part  of  the  net  income  of  which  inures 
to  any  private  stockholder  or  individual,  is  exempt  provided  its  activities 
are  limited  to  the  exchange  of  checks  and  similar  work  for  the  common 
benefit  of  its  members.  An  association  of  persons  who  are  engaged  in  the 
business  of  carrying  freight  and  passengers  by  boats  propelled  by  steam, 
which  is  designed  to  promote  the  legitimate  objects  of  such  business,  and  all  of 
the  income  of  which  is  derived  frorn  membership  dues  and  is  expended  for 
office  expenses  and  the  salary  of  a secretary-treasurer,  is  exempt  from  tax. 
An  incorporated  cotton  exchange,  whose  shares  carry  the  right  to  dividends, 
is  organized  for  profit  and  is  not  exempt. 

3196  Art.  519.  Civic  Leagues. — ^A  corporation  having  capital  stock 
and  possessing  a charter  which  authorizes  it  to  buy,  improve  and  sell 

real  estate  is  organized  for  profit  within  the  meaning  of  the  statute  and  is 
not  exempt^from  the  tax  as  a civic  league  or  organization,  even  though  it  no 
longer  exercises  such  powers  for  profit  and  is  operated  exclusively  for  the 
promotion  of  social  welfare. 

• 

3197  Art.  520.  Social  Clubs. — The  exemption  applies  to  practically 
all  social  and  recreation  clubs  which  are  supported  by  membership 

fees,  dues  and  assessments.  If  a club,  by  reason  of  the  comprehensive  powers 
granted  in  its  charter,  engages  in  traffic,  in  agriculture  or  horticulture,  or 
in  the  sale  of  real  estate,  timber,  etc.,  for  profit,  such  club  is  not  organized 
and  operated  exclusively  for  pleasure,  recreation  or  social  purposes,  and  any 
profit  realized  from  such  activities  is  subject  to  tax. 

3198  Art.  521.  Mutual  Insurance  Companies  and  Like  Organizations. 

-^It  is  necessary  to  exemption  that  the  income  of  the  company  be 
derived  solely  from  assessments,  dues  and  fees  collected  from  members.  If 
income  is  received  from  other  sources,  the  corporation  is  not  exempt,  even 
though  its  additional  income  is  tax  exempt.  Income,  however,  from  sources 
other  than  those  specified  does  not  prevent  exemption  where  its  receipt  is 
a mere  incident  of  the  business  of  the  company.  Thus  the  receipt  of  inter- 
est upon  a working  bank  balance,  or  of  the  proceeds  of  the  sale  of  badges, 
office  supplies  or  equipment,  will  not  defeat  the  exemption.  The  same  is 
true  of  the  receipt  of  interest  upon  liberty  bonds,  where  they  were  purchased 
as  a patriotic  duty  and  were  afterwards  sold.  Where,  however,  such  bonds 
are  bought  as  a permanent  investment,  the  receipt  of  the  interest  destroys 
the  exemption.  The  receipt  of  what  is  in  substance  an  eutrance  fee,  charged 
by  a rnutual  fire  insurance  company  as  a condition  of  naerubership,  does  not 
render  the  company  taxable,  although  this  fee  is  called  a prentiurn.  But 
the  issuance  of  policies  for  stipulated  cash  premiunts  prevents  exen^ption. 
A local  [ AnJ  exchange  or  association  to  insure  the  owners  of  automobiles 
against  fire,  theft,  collision,  public  liability  and  property  damage,  is  exempt, 
since  it  performs  function^'  of  the  same  character  as  a mutual  fire  insurance 
company,  and  is  a like  organization  within  the  meaning  of  the  statute. 
A local  reservoir  and  ditch  company  may  likewise  be  exempt  from  tax.  The 
exemption  does  not  include  a telephone  clearing  association,  whose  business 
is  to  apportion  toll  rates  between  independent  telephone  companies  handling 
the  same  calls  and  whose  income  consists  of  compensation  paid  by  such  com- 
panies and  receipts  from  the  sale  of  form  blanks.  The  phrase  ^‘of  a purely 
Igcal  character'^  c^ualifies  only  “ like  organizations. 


Reg.  45,  Rev.  Part  II-A.  See  Note  on  page  301. 

3199  Art.  522.  Cooperative  Associations. — (a)  Cooperative  associa- 
tions, acting  as  sales  agents  for  farmers  or  others,  in  order  to  come 

within  the  exemption  must  establish  that  for  their  own  account  they  have 
no  net  income.  Cooperative  dairy  companies  [not  having  capital  stock,] 
which  are  engaged  in  collecting  milk  and  disposing  of  it  or  the  products  thereof 
and  distributing  the  proceeds,  less  necessary  operating  expenses,  among 
their  members  upon  the  basis  of  the  quantity  of  milk  or  of  butter  fat  in  the 
milk  furnished  by  such  members,  are  exempt  from  the  tax.  If  the  proceeds 
of  the  business  are  distributed  in  any  other  way  than  on  such  a proportion- 
ate basis,  the  company  will  be  subject  to  tax.  A farmers’  association  is  not 
exempt  from  taxation  where  in  accounting  to  farmers  furnishing  produce 
for  the  proceeds  of  sales  it  deducts  more  than  the  necessary  selling  expenses 
incurred,  (b)  Cooperative  associations  acting  as  purchasing  agents  are  not 
expressly  exempt  from  tax  and  must  make  returns  of  income,  but  rebates 
made  to  purchasers,  whether  or  not  members  of  the  association,  in  propor- 
tion to  their  purchases  may  be  excluded  from  gross  income  in  computing 
the  net  income  subject  to  tax.  Any  profits  made  from  non-members  and 
distributed  to  members  in  the  guise  of  rebates  are^  of  course,  subject  to  tax.  , 

: . , . NET  INCOME  DEFINED 

3200  Art.  531.  Net  Income. — Net  income  is  that  portion  of  the  gross 
, 280  income  which  remains  after  all  proper  deductions  have  been  taken 

1787  into  account.  The  net  income  of  corporations  is  determined  in  gen- 
eral in  the  same  manner  as  the  net  income  of  individuals,  but  the 

deductions  allowed  corporations  are  not  precisely  the  same  as  those  allowed 
individuals.  See  sections  233,  234  and  235  of  the  statute.  The  net  income 
of  corporations  is  to  be  computed  on  the  same  basis  as  to  accounting  periods 
as  the  net  income  of  individuals.  See  sections  212  and  226  and  articles  21-26 
and  431:. 

GROSS  INCOME  DEFINED 

3201  Art.  541.  Gross  Income. — The  gross  income  of  a corporation  for 
< 281--  the  purpose  of  the  tax  in  general  includes  and  excludes  the  same 

1788  things  as  the  gross  income  of  an  individual.  It  embraces  not  only 
^ - the  operating  revenues,  but  also  gains,  profits  and  income  from  all 

other  sources,  such  as  rentals,  royalties,  interest,  dividends  from  stock  in 
other  corporations,  and  profits  from  the  sale  of  capital  assets.  The  proceeds 
of  life  insurance  policies  paid  upon  the  death  of  the  insured  to  a corporation 
beneficiary,  less  any  premiums  paid  by  the  corporation  and  not  deducted  from 
gross  income,  are  to  be  included  in  i s gross  income.  See  sections  213  and  215 
of  the  statute  and  articles  31-88  and  294.  But  in  the  case  of  life  and  mutual 
marine  insurance  companies  and  of  foreign  corporations  there  are  special 
provisions.  See  articles  548-550. 

3202  Art.  542.  Sale  of  Capital  Stock. — The  proceeds  from  the  original 
'-18,80  sale  by  a corporation  of  its  shares  of  capital  stock,  whether 
' - - such  proceeds  are  in  excess  of  or  less  than  the  par  value  of  the  stock 
issued,  constitute  the  capital  of  the  company.  If  the  stock  is  sold  at  a prem- 
ium, the  premium  is  not  income.  Likewise,  if  the  stock  is  sold  at  a discount, 
the  amount  of  the  discount  is  not  a loss  deductible  from  gross  income.  If, 
for  the  purpose  of  enabling  a corporation  to  secure  working  capital  or  for 
any  other  purpose,  the  stockholders  donate  or  return  to  the  corporat  on  to 
be  resold  by  it  certain  shares  of  stock  of  the  company  previously  issued 
to  them,  or  if  the  corporation  purchases  any  of  its  stock  and  holds  it  as  treasury 


INC. 


416  TAX 


Reg.  45,  Rev.  Part  II-A.  See  Note  on  page  301. 


Stock,  the  sale  of  such  stock  will  be  considered  a capital  transaction  and  the 
proceeds  of  such  sale  will  be  treated  as  capital  and  will  not  constitute  income 
of  the  corporation.  [If,  however,  treasury  stock,  meaning  stock  previously 
issued  by  the  corporation  and  repossessed  by  it  through  purchase  or  otherwise 
and  then  carried  on  its  books  as  an  asset,  is  resold  at  a price  in  excess  of  its 
cost  or  value  upon  repossession,  such  excess  shall  be  returned  as  income  for 
the  year  in  which  resold.  Unissued  stock  is  not  treasury  stock].  A corporation 
realizes  no  gain  or  loss  from  the' purchase  of  its  own  stock.  See  articles  563, 
861  and  862. 

3203  Art.  543.  Contributions  by  Stockholders. — Where  a corporation 
1834  requires  additional  funds  for  conducting  its  business  and  obtains 
such  needed  money  through  voluntary  pro  rata  payments  by  its 
stockholders,  the  amounts  so  received  being  credited  to  its  surplus  account 
or  to  a special  capital  account,  such  amounts  will  not  be  considered  income, 
although  there  is  no  increase  in  the  outstanding  shares  of  stock  of  the  cor- 
poration. The  payments  in  such  circumstances  are  in  the  nature  of  voluntary 
assessments  upon,  and  represent  an  additional  price  paid  for,  the  shares 
of  stock  held  by  the  individual  stockholders,  and  will  be  treated  as  an  addition 
to  and  as  a part  of  the  operating  capital  of  the  company.  [The  cancel- 
lation by  a stockholder  of  indebtedness  owing  from  the  corporation 
usually  has  the  effect  of  increasing  the  capital  and  surplus  of  the  corporation 
and  not  of  producing  income.]  See  articles  51,  293,  838  and  860.  § 

3203a  Art.  544.  Sale  and  Retirement  of  Corporate  Bonds. — (1)  {aY If  bonds 
2072  are  issued  by  a corporation  at  their  face  value,  the  corporation  real- 
izes no  gain  or  loss,  {b)  If  thereafter  the  corporation  purchases  and 
retires  any  of  such  bonds  at  a price  in  excess  of  the  issuing  price  or  face  value, 
the  excess  of  the  purchase  price  over  the  issuing  price  or  face  value  is  a deductible 
expense  for  the  taxable  year.  See  section  23^  of  the  statute  and  article  563. 
(c)  If,  however,  the  corporation  purchases  and  retires  any  of  such  bonds  at  a 
price  less  than  the  issuing  price  or  face  value,  the  excess  of  the  issuing  price  or 
face  value  over  the  purchase  pric^  is  gain  or  income  for  the  taxable  year. 

3203b  (2)  {a)  If  bonds  are  issued  by  a corporation  at  a premium,  the  net 
amount  of  such  premium  is  gain  or  income  which  should  be  prorated 
or  amortized  over  the  life  of  the  bonds,  {b)  If  thereafter  the  corporation  purchases 
and  retires  any  of  such  bonds  at  a price  in  excess  of  the  issuing  price  minus 
any  amount  of  premium  already  returned  as  income,  the  excess  of  the  purchase 
price  over  the  issuing  price  minus  any  amount  of  premium  already  returned  as 
income  (or  over  the  face  value  plus  any  amount  of  premium  not  yet  returned  as 
income)  is  a deductible  expense  for  the  taxable  year,  (c)  If,  however,  the  cor- 
poration purchases  and  retires  any  of  such  bonds  at  a price  less  than  the  issuing 
price  minus  any  amount  of  premium!^ already  returned  as  income,  the  excess 
of  the  issuing  price  minus  any  amount  of  premium  already  returned  as  income 
(or  of  the  face  value  plus  any  amount  of  premium  not  yet  returned  as  income) 
over  the  purchase  price  is  gain^or  income  for  the"" taxable  year. 

3203c  r(3)  (a)  If  bonds  are  issuedH^by  a corporation  at  a discount,  the  net  amount 
of  such  discount  is  deductible  as  interest  and  should  be  prorated  or 
amortized  over  the  life  of  the  bonds,  (b)  If  thereafter  the  corporation  purchases 
and  retires  any  of  such  bonds  at  a price  in  excess  of  the  issuing  price  plus  any 
amount  of  discount  already  deducted,  the  excess  of  the  purchase  price  over  the 
issuing  price  plus  any  amount  of  discount  already  deducted  (or  over  the  face 
value  minus  any  amount  of  discount  not  yet  deducted)  is  a deductible  expense 

INC.  417  TAX 


Reg.  45,  Rev.  Part  II- A.  See  Note  on  page  801. 


for  the  taxable  year.  [ {cYJf,  however^  the  corporation  purchases  and  retires  any  of 
such^bonds  at  a price  less  than  the  issuing  price  plus  any  amount  of  discount 
already  deducted^  the  excess  of  the  issuing  price  plus  any  amount  of  discount 
already  deducted  {or  of  the  face  value  minus  any  amount  of  discount  not  yet  de- 
ducted) over  the  purchase  price  is  gain  or  income  for  the  taxable  year. 

[Comment:  Articles  566  and  567  of  the  preliminary  edition  read  as 
follows:  Art.  566.  Where  a corporation  sells  its  bonds  at  a discount,  the 
amount  of  such  discount,  together  with  any  commission  for  selling  and  other 
expenses  incidental  to  issuing  the  bonds,  constitutes  a loss  which  should 
be  prorated  over  the  life  of  the  bonds  sold.  The  amount  thus  apportioned 
to  each  year  will  be  deductible  from  the  gross  income  of  each  such  year  until 
the  bonds  shall  have  been  paid  or  redeemed.  See  article  848.  Art.  567. 
Where  a corporation  under  the  terms  of  its  indenture  securing  an  issue  of 
bonds  is  required  annually  or  at  specified  periods  to  purchase  and  retire 
a certain  number  of  its  bonds  and  in  doing  so  pays  more  than  the  issuing 
price  of  the  bonds,  the  loss  sustained  is  an  allowable  deduction  from  gross 
income  for  the  year  in  which  such  purchase  is  m.ade  under  the  following 
conditions:  (1)  If  the  bonds  were  sold  at  face  value,  then  the  loss  is  the 
difference  between  the  face  value  and  the  price  at  which  they  were  repurchased 
for  retirement.  (2)  If  the  bonds  were  sold  at  a premium,  or  at  a discount, 
then  the  loss  is  the  difference  between  the  price  at  which  the  bonds  were 
sold  and  the  price  at  which  they  were  repurchased,  plus,  in  the  case  of 
bonds  sold  at  a premium,  the  amount  of  such  premium  already  returned  as 
income,  or  minus,  in  the  case  of  bonds  sold  at  a discount,  the  amount  of  such 
discount  already  deducted  as  a loss.  When  a corporation  sets  aside  a part  of 
its  earnings  for  the  purpose  of  creating  a sinking  fund  with  which  to  retire 
its  bonded  or  other  indebtedness,  the  annual  additions  to  such  funds  are  not 
allowable  deductions  from  gross  income.] 

3204  Art.  545.  [Art.  544].  Sale  of  Capital  Assets. — Where  property  Is 
acquired  and  later  sold  for  a higher  price,  the  gain  on  the  sale  is  income. 

If,  however,  the  property  was  acquired  before  March  1,  1913,  only  such 
portion  of  the  gain  as  accrued  subsequently  to  February  28,  1913,  is  taxable. 
Where,  then,  a corporation  sells  its  capital  assets  In  whole  or  In  part,  it  shall 
include  in  its  gross  income  for  the  year  in  which  the  sale  was  made  the 
amount  of  the  excess  of  the  sales  price  over  the  fair  market  value  of  such 
assets  as  of  March  1,  1913,  If  acquired  prior  to  that  date,  or  over  their  cost 
if  acquired  subsequently  to  that  date.  In  every  case,  however,  In  ascertain- 
ing the  gain,  the  cost  of  the  assets,  or  the  fair  market  value  as  of  A larch  1, 
1913,  of  the  assets  acquired  prior  thereto,  should  first  be  reduced  by  the 
amount  of  any  charges  for  depreciation,  depletion  and  other  losses  which 
have  been  or  should  have  been  made.  If  the  purchaser  takes  over  all  the 
assets  and  assumes  the  liabilities,  the  amount  so  assumed  is  part  of  the  pur- 
chase price.  See  also  article  563.  If  the  sale  Is  made  for  stock  of  another 
corporation,  the  rules  contained  in  section  202  of  the  statute  and  in  articles 
1561-1570  are  particularly  applicable. 

3205  Art.  546.  [Art.  545].  Income  from  Leased  Property. — Where  a 
corporation  has  leased  its  property  in  consideration  that  the  lessee 

shall  pay  in  lieu  of  other  rental  an  amount  equivalent  to  a certain  rate  of 
dividend  on  the  lessor’s  capital  stock  or  the  interest  on  the  lessor’s  outstanding 
indebtedness,  together  with  taxes,  insurance,  or  other  fixed  charges,  such  pay- 
ments shall  be  considered  rental  payments  and  shall  be  returned  by  the  lessor 
corporation  as  income,  notwithstanding  the  fact  that  the  dividends  and  In- 


INC. 


418  TAX 


Reg.  45,  Rev.  Part  II-A.  See  Note  on  page  301. 


terest  are  paid  by  the  lessee  directly  to  the  stockholders  and  bondholders  of 
the  lessor.  The  fact  that  a corporation  has  conveyed  or  let  its  property  and 
has  parted  with  its  management  and  control,  or  has  ceased  to  engage  in  the 
business  for  which  it  was  originally  organized,  will  not  relieve  it  from  lia- 
bility to  the  tax.  While  the  payments  wiade  by  the  lessee  directly  to  the 
bondholders  or  stockholders  of  th'e  lessor  are  rentals  as  to  both  the  lessee 
and  lessor  (rentals  paid  in  one  case  and  rentals  received  in  the  other),  to 
the  bondholders  and  the  stockholders  such  amounts  are  interest  and  dividend 
payments  received  as  fromi  the  lessor  and  as  such  shall  be  accounted  for  in 
their  returns. 

3205a  Art.  547.  Gross  Income  of  Corporation  in  Liquidation. — When  a 
1728  corporation  is  dissolved  its  affairs  are  usually  wound  up  by  a receiver 
or  trustees  in  dissolution.  The  corporate  existence  is  continued  for 
the  purpose  of  liquidating  the  assets  and  paying  the  debts ^ and  such  receiver 
or  trustees  stand  in  the  stead  of  the  corporation  for  such  purposes.  Any  sales 
of  property  by  them  are  to  be  treated  as  if  moAe  by  the  corporation  for  the  purpose 
of  ascertaining  the  gain  or  loss.  No  gain  or  loss  is  realized  by  a corporation 
from  the  mere  distribution  of  its  assets  in  kind  upon  dissolution^  however  they 
may  have  appreciated  or  depreciated  in  vahie  since  their  acquisition.  See  fur- 
ther ^articles  622  and  1548. 

3206  Art.  548.  [Art.  546].  Gross  Income  of  Insurance  Companies. — The 
2225  gross  income  of  insurance  com.panies  consists  of  their  total  revenue 

[derived]  from  the  operation  of  the  business  and  of  their  income  from 
all  other  sources  within  the  taxable  year  [for  which  the  return  is  made], 
except  as  otherwise  provided  by  the  statute.  Gross  income  includes  net 
premiums  {that  is.,  gross  premiums  less  reHirned  premiums  on  policies  can- 
celled and  premiums  on  policies  not  taken)  fnwQ?,X.mQnt\\\Q.omQ,  profits  [income] 
from  the  sale  of  [capital]  assets,  and  all  gains,  profits  and  incom.e  reported  to  the 
State  insurance  departments,  except  income  specifically  exempt  from  tax. 
Premiums  received  by  mutual  marine  insurance  companies  which  are  paid  out 
for  reinsurance  should  be  eliminated  f 7 om  gross  income  and  the  payments  for 
reinsurance  from  disbursements.  [Amounts  of  premium  received  and  paid 
out  under  reinsurance  treaties  should  be  eliminated  from  both  income  and 
disbursements.]  Deposit  premiums  on  perpetual  risks  received  and  re- 
turned by  fire  insurance  companies  should  be  treated  in  the  same  manner,  as 
no  reserAm  will  be  recognized  [considered]  covering  liability  for  such  deposits, 
[but]  The  earnings  on  such  deposits  must  [will]  be  included  in  the  investment 
incomie.  A net  decrease  in  reserve  funds  required  by  law  within  the  taxable 
year  must  be  included  in  the  gross  income.  See  articles  568-572. 

3207  Art.  549.  [Art.  547.]  Gross  Income  of  Life  Insurance  Companies. — 
2256  A life  insurance  company  shall  not  include  in  gross  income  such  por- 
tion of  any  actual  premium  received  from  any  individual  policyholder 

as  is  paid  back  or  credited  to  or  treated  as  an  abatement  of  premium  of  such 
policyholder  within  the  taxable  year,  {a)  ^'‘Paid  backd'^  means  paid  in  cash, 
{b)  ''^Credited  to^^  means  held  to  the  credit  of,  including  dividends  applied  to 
pay  renezval  premiu7ns,  to  purchase  additional  paid-up  insurance  or  annuities, 
or  to  shorten  the  endowment  or  premium-paying  period.  It  does  not  include 
dividends  provisionally  ascertained  and  apportioned  upon  deferred  dividend 
policies,  (c)'  Treated  as  an  abatement  of  premium''^  means  of  the  premium 
for  the  taxable  year.  Where  the  dividend  paid  back  is  in  excess  of  the  premium 
received  from  the  policyholder  within  the  taxable  year  there  may  be  excluded 
from  gross  income  only  thef amount  of  such  premium  received,  and  where  no 

419  TAX 


INC. 


Reg.  45,  Rev.  Part  II-A.  See  Note  on  page  301. 


premium  is  received  from  the  policyholder  within  the  taxable  year  the  company 
is  not  entitled  to  exclude  from  its  premiums  received  from  other  policyholders 
any  amount  in  respect  of  such  dividend  payment.  ['The  amount  which'a  life  insur- 
ance company  is  authorized  to  exclude  from  gross  income  on  account  of  any 
premium  refunded  to  an  individual  policyholder  is  limited  to  an  am.ount  not 
in  excess  of  the  actual  premium  paid  by  the  policyholder  within  the  taxable 
year.  Where  the  dividend  paid  is  in  excess  of  the  premium  received,  there 
can  be  excluded  from  gross  income  only  the  amount  of  the  premium  received 
from  the  policyholder  within  the  same  year.  Dividends  provisionally  as- 
certained, apportioned  or  credited  on  deferred  dividend  policies  can  not  be 
excluded  or  deducted  from  the  total  income  received,  for  the  reason  that  the 
assured  has  no  vested  or  enforcible  right  in  the,m  and  can  not  at  the  time  of 
the  ascertainment,  apportionment  or  credit,  nor  until  the  maturity  of  the 
policy,  avail  himself  of  such  dividend,  and  that  in  the  event  of  the  death  of 
the  assured  prior  to  the  expiration  of  the  deferred  dividend  period  the  amount 
so  ascertained,  apportioned  or  credited  lapses.  Book  incomm  of  life  insurance 
companies  which  consists  of  ‘‘dividends  applied  to  purchase  paid-up  addi- 
tions and  annuities,”  “dividends  applied  to  pay  renmval  premiums,”  and 
“dividends  applied  to  shorten  the  endowment  or  premium-paying  period, 
shall  not  be  included  in  gross  incoime  except  when  the  dividends  applied  are 
declared  on  paid-up  participating  policies.] 

3208  Alt.  550  [Art  548].  Gross  Income  of  Foreign  Corporations. — The 
284  gross  income  of  a foreign  corporation  or  insurance  company  means  its 

2887  gross  income  from  sources  within  the  United  States,  as  defined 
and  described  in  articles  91-93  relating  tononresident  alien  individuals. 
The  income  from  business  relating  to  a foreign  country  which  is  transacted 
by  a United  States  branch  or  agency  of  a foreign  insurance  comipany  must 
be  returned  as  gross  incomm. 

DF^DUCTIOTTS  ALLOWED. 

3209  Art.  561.  AJiowable  Deductions. — In  general  the  deductions  from 
287  gross  incoine  allo'wed  corporations  are  the  same  as  allowed  indi- 

1922  viduals,  except  that  corporations  may  deduct  dividends  received 
fromi  other  corporations  subject  to  the  tax  and  may  not  deduct 
charitable  contributions,  and  that  insurance  companies  are  permitted  spe- 
cial deductions.  See  section  214  of  the  statute.  Particularly,  as  to  business 
expenses  see  articles  101-111;  as  to  interest  paid  see  articles  121  and  122; 
as  to  taxes  paid  see  articles  131-134;  as  to  losses  see  articles  141-145;  as  to 
bad  debts  see  articles  151-154;  as  to  depreciation  see  articles  161-171;  as 
to  amortization  see  articles  181-188;  as  to  depletion  see  articles  201-233; 
and  as  to  loss  in  inventory  see  articles  261-268. 

3210  Art.  562.  Donations. — Donations  made  by  a corporation  for  pur- 

2014  poses  connected  with  the  operation  of  its  business,  when  limited 

to  charitable  institutions,  hospitals  or  educational  institutions  con- 
ducted for  the  benefit  of  its  employees  or  their  dependents,  are  a proper 
deduction  as  ordinary  and  necessary  expenses.  Donations  which  legiti- 
m.ately  represent  a consideration  for  a benefit  flowing  directly  to  the  cor- 
poration as  an  incident  of  its  business  are  allowable  deductions  from  gross 
incomie.  For  example,  a street  railway  corporation  may  donate  a sum  of 
m.oney  to  an  organization  intending  to  hold  a convention  in  the  city  in  which 
it  operates,  with  the  reasonable  expectation  that  the  holding  of  such  con- 
vention will  augment  its  income  through  a greater  number  of  people  using 

420  TAX 


INC. 


the  cars.  Expenses  incurred  in  advertising  and  promoting  the  sale  of  liberty 
bonds  and  war  savings  stamps  over  the  corporation's  name  are  deductible. 
Sums  of  money  expended  for  lobbying  purposes,  the  promotion  or  defeat  of 
legislation,  the  exploitation  of  propaganda,  including  advertising  other  than 
trade  advertising,  and  contributions  for  campaign  expenses,  are  not  deductible 
from  gross  income. 

3210a  Art.  563.  Sale  of  Capital  Stock,  Bonds  and  Capital  Assets. — A cor- 

302  poration  sustains  no  deductible  loss  from  the  sale  of  its  capital  stock. 
2063  See  article  542.  If  it  sells  its  bonds  at  a discount,  the  amount  of  such 

discount  is  treated  as  interest  paid,  and  if  it  retires  its  bonds  at  a price 
in  excess  of  the  issuing  price,  such  excess  may  usually  be  deducted  as  expense. 
See  articles  544  and  848.  If  the  corporation  sells  its  capital  assets  for  less  than 
their  cost  or  fair  market  value  as  of  March  1,  1913,  the  loss  sustained  is  deductible. 
See.  article  545. 

321 1 Art.  564  [Art.  563].  Interest  . — Interest  paid  by  a corporation  on  scrip 

291  dividends  is  an  allowable  deduction.  So-called  interest  on  preferred 
2027  stock,  which  is  in  reality  a dividend  thereon,  can  not  be  deducted 

in  arriving  at  net  income.  [Interest  paid  by  the  taxpayer  on  a miort- 
gage  upon  , real  property  of  which  it  is  the  legal  or  equitable  owner,  even 
though  the  taxpayer  is  not  directly  liable  on  the  bond  or  note  secured  by 
such  mortgage,  may  be  deducted  as  interest  on  its  indebtedness.]  In  the  case 
of  banks  and  loan  or  trust  companies  interest  paid  within  the  year  on  de- 
posits or  on  moneys  received  for  investoent  and  secured  by  interest-bearing 
certificates  of  indebtedness  issued  by  such  bank  or  loan  or  trust  company 
may  be  deducted  from  gross  income. 

3212  Art.  565  [Art.  564].  Effect  of  Tax-Free  Covenant  in  Bonds. — ^Corpo- 

292  rations  may  deduct  taxes  from  gross  income  to  the  same  extent  as 
2061  individuals,  except  that  in  the  case  of  corporate  bonds  or  obligations 

containing  a tax-free  covenant  clause,  the  corporation  paying  a 
federal  tax,  or  any  part  of  it,  [whether  federal.  State  or  otherwise,]  for  some 
one  else  pursuant  to  its  agreemient  is  not  entitled  to  deduct  such  payment 
from  gross  income  on  any  ground.  In  the  case,  however,  of  corporate  bonds 
or  obligations  containing  an  appropriate  tax-free  covenant  clause,  the  corpo- 
ration paying  a State  tax  or  any  other  than  a federal  tax  for  some  one  else  pursuant 
to  its  agreement  may  deduct  sttch  payment  as  interest  paid  on  indebtedness. 

32 1 3 Art.  566  [Art.  565].  Tax  on  Bank  Stock. — Banks  paying  taxes  assessed 
2050  against  their  stockholders  on  account  of  their  ownership  of  the 

shares  of  stock  issued  by  such  banks  can  not  deduct  the  amount 
of  taxes  so  paid  [unless  the  laws  of  the  State  make  the  tax  a direct  liability 
of  such  banks,  that  is,  a lien  upon  their  property].  The  shares  of  stock  be- 
ing the  property  of  the  stockholders,  to  the  extent  that  the  taxes  assessed 
on  the  value  of  the  shares  of  stock  are  property  taxes  the  holders  are  pri- 
marily liable  for  their  payment.  As  federal  statutes  prohibit  States  from 
imposing  any  tax  upon  national  banks  except  upon  the  value  of  their  real 
estate,  in  cases  where  States  levy  a tax  on  the  stock  of  such  banks  and  make 
it  the  duty  of  the  banks  to  pay  such  tax  for  the  stockholders  it  is  clear  that 
such  payrr.ents  are  not  deductible  from  the  gross  incom.e  of  such  banks. 
This  rule  applies  also  in  the  case  of  corporations  other  than  banks,  upon 
the  value  of  whose  stock  taxes  are  assessed  to  the  stockholders.  Such  pay- 
ments by  banks  or  other  corporations  are  regarded  as  in  the  nature  of  addi- 
tional dividends  and  must  be  included  by  the  stockholder  in  his  dividends 
received,  if  he  deducts  the  taxes  paid  on  his  behalf.  See  articles  565  and  134. 

42 1 TAX 


INC. 


Reg.  45,  Rev.  Part  II-A.  See  Note  on  page  301. 


3214  [Art.  566. — Discount  on  corporate  bonds,  and  Art.  567 — Retirement 
to  of  corporate  bonds,  see  paragraph  3203  a,  b,  and  c,  and  “Commend’ 

3218  thereunder.] 

3219  Art.  567  [Art.  568].  Depositors^  Guaranty  Fund.— Banking  corpora- 

2019  tions,  which  pursuant  to  the  laws  of  the  States  in  which  they  are  doing 

business  are  required  to  set  apart,  keep  and  maintain  in  their  banks 
the  amount  levied  and  assessed  against  them  by  the  State  authorities  as  a 
“Depositors’  guaranty  fund,”  may  deduct  from  their  gross  income  the 
amount  so  set  apart  each  year  to  this  fund,  provided  that  such  fund,  when 
set  aside  and  carried  to  the  credit  of  the  State  banking  board  or  duly 
authorized  State  officer,  ceases  to  be  an  asset  of  the  bank  and  may  be 
withdrawn  in  whole  or  in  part  upon  demand  by  such  board  or  State  officer 
to  meet  the  needs  of  these  officers  in  reimbursing  depositors  in  insolvent 
banks,  and  provided  further  that  no  portion  of  the  am.ount  thus  set  aside 
and  credited  is  returnable  under  the  laws  of  the  State  to  the  assets  of  the 
banking  corporation.  If,  however,  such  amiount  is  simply  set  up  on  the 
books  of  the  bank  as  a reserve  to  m.eet  a contingent  liability  and  remains 
an  asset  of  the  bank,  it  will  not  be  deductible  except  as  it  is  actually  paid 
out  as  required  by  law  and  upon  demand  of  the  proper  State  officers. 

3220  Art.  568  [Art.  569].  Deductions  Allowed  Insurance  Companies. — 

2238  Insurance  companies  are  entitled  to  the  same  deductions  from  gross 

income  as  other  corporations,  and  also  to  the  deduction  of  the  net 
addition  required  by  law  to  be  made  within  the  taxable  year  to  reserve  funds 
and  of  the  sums  other  than  dividends  paid  within  the  taxable  year  on  policy 
and  annuity  contracts.  “Paid”  inchides  “accrued”  or  “incurred”  {construed 
according  to  the  method  of  accounting  upon  the  basis  of  which  the  net  income 
is  computed)  during  the  taxable  year,  but  does  not  include  any  estimate  for  losses 
incurred  but  not  reported  during  the  taxable  year.  As  payments  on  policies 
there  should  be  reported  all  death,  disability  and  [or]  other  policy  claims  (other 
than  dividends  as  above  specified)  paid  within  the  year,  including  fire,  accident 
and  liability  losses,  matured  endowments,  annuities,  payments  on  install- 
ment policies  and  surrender  values  actually  paid.  See  also  article  566.  [There 
may  also  be  deducted  as  losses  agency  balances  or  other  amounts  charged 
off,  losses  from  defalcation,  and  premium  notes  voided  by  lapse  provided 
such  notes  have  at  some  time  been  included  in  returns  of  income.  Taxes 
paid  by  insurance  companies  on  the  value  of  their  stock  outstanding  and  in 
the  hands  of  stockholders  are  not  deductible.  Alutual  miarine  insurance 
companies  may  include  in  their  deductions  from  gross  income  amounts 
repaid  to  policyholders  on  account  of  premiums  previously  paid  by  them  and 
interest  paid  upon  such  amounts  between  the  date  of  ascertainment  thereof 
and  the  date  of  payment  thereof,  provided  such  amounts  and  interest  have 
been  included  in  gross  income.  See  articles  546  and  547.] 

3221  Art.  569  [Art.  570].  Required  Addition  to  Reserve  Funds  of  Insur- 

2249  ance  Companie's. — Insurance  companies  may  deduct  from  gross  income 

[By  a special  provision  insurance  companies  are  entitled  to  deduct 
in  addition  to  all  other  deductions]  the  net  addition  required  by  law  to  be 
made  within  the  taxable  year  to  reserve  funds,  including  in  the  case  of  assess- 
ment insurance  companies  the  actuod  deposit  of  sums  with  State  or  Territorial 
officers  pursuant  to  law  as  additions  to  guarantee  or  reserve  funds.  This  is 
considered  to  mean  the  net  addition  required  by  the  specific  statutes  of  the 
States  within  which  the  taxpayer  transacts  business.  K requirement  by  a 
State  insurance  commissioner  that  a net  addition  shall  be  made  to  certain 


INC. 


422  TAX 


Reg,  45,  Rev.  Part  II-A.  See  Note  on  page  301. 


amounts  retained  to  meet  specified  liabilities  is  not  a net  addition  required 
by  lav/  to  be  made  to  reserve  funds  within  the  meaning  of  the  statute.  Only 
reserves  commonly  recognized  as  reserve  funds  in  insurance  accounting  are 
to  be  taken  into  consideration  in  computing  the  net  addition  to  reserve  funds 
required  by  law.  In  the  case  of  a hre  insurance  company  the  only  reserve 
fund  commionl)^  recognized  is  the  “unearned-premium”  fund.  Casualty 
companies  may  deduct  losses  incurred  within  the  taxable  year;  but  unless  the 
net  addition  to  the  unpaid  loss  reserve  required  by  law  exceeds  such  losses  incurred^ 
no  deduction  for  the  net  oAdAtion  to  the  unpaid  loss  reserve  may  be  taken.  In 
any  event  only  the  excess  of  such  net  addition  over  such  losses  may  be  deducted. 
[The  net  addition  to  the  fund  maintained  to  pay  incurred  losses  is  not  a legal 
deduction  from  gross  incorr  e.  In  the  case  of  casualty  companies  reserve  funds 
consist  of  amounts  m.aintained  to  m.eet  the  “unearned-premium”  liability 
and  the  “unpaid-loss”  liability.]  In  the  case  of  life  insurance  companies 
the  net  addition  to  the  “reinsurance  reserve”and  the  “reserve  for  supple- 
mentary contracts  not  involving  life  contingencies,”  and  the  net  addition 
to  any  other  reserve  funds  necessarily  maintained  for  the  purpose  of  liqui- 
dating policies  at  maturity,  are  legally  deductible.  An  increase  in  the  reserve 
[am.ount]  maintained  by  a life  insurance  company  to  pay  dividends  on  de- 
ferred dividend  policies  may  not  be  deducted  from  gross  incom.e.  [An  assess- 
ment insurance  com^pany  is  entitled  to  deduct  from  gross  income  the  increase 
in  the  ammunt  V'hich  it  is  required  by  law  to  keep  on  deposit  with  State 
insurance  departments  as  a protection  to  policyholders.]  hlutual  hail  and 
mutual  [hail  and]  cyclone  insurance  companies  are  entitled  to  deduct  from 
gross  incom.c  the  net  addition  which  they  are  required  to  make  [under  the 
laws  of  the  States  in  which  they  operate]  to  the  “guaranty  surplus”  fund  or 
simdlar  fund.  [Corporations  issuing  policies  covering  life,  health  and  accident 
insurance  combined  in  one  policy  issued  on  the  weekly  premium  payment  plan, 
continuing  for  life  and  not  subject  to  cancellation,  will  be  permitted  to  include 
in  the  net  addition  to  reserve  funds  the  net  addition  to  any  fund  specially 
maintained  for  the  protection  of  policyholders  of  the  above  class.  See  next 
paragraph.] 

3221a  Art.  570.  Special  Deductions  Allowed  in  the  Case  of  Combined 
Life,  Health  and  Accident  Policies. — Corporations  which  issue 
combination  policies  of  life,  health  and  accident  insurance  on  the  weekly  piemium 
payment  plan,  continuing  for  life  and  not  subject  to  cancellation,  may  deduct 
from  gross  income  only  such  portion  of  the  net  addition  not  required  by  law 
made  within  the  taxable  year  to  reserve  funds  as  is  needed  for  the  protection  of 
the  holders  of  such  combination  policies.  In  general  the  net  addition  to  any  fund 
especially  maintained  for  the  protection  of  such  policyholders  may  be  deducted. 
The  determination  by  the  company  of  the  need  for  such  addition  is  subject  to 
review  by  the  Commissioner,  and  the  return  of  income  should  be  accompanied 
by  a full  explanation  of  the  basis  upon  which  such  fund  and  the  additions  to 
it  are  determined. 

3221b  Art.  571.  Special  Deductions  Allowed  Mutual  Marine  Insurance 
Companies. — Mutual  marine  insurance  companies  should  include  in 
gross  income  the  gross  premiums  collected  and  received  bv  them  less  amounts 
paid  for  reinsurance.  See  section  233  of  the  statute  and  article  548.  They  may 
deduct  from  gross  income  amounts  repaid  to  policyholdet s on  account  of  premiums 
previously  paid  by  them,  together  with  the  interest  actually  paid  upon  such 
amounts  betiueen  the  date  of  ascertainment  and  the  date  of  payment  thereof. 
The  remainder  of  the  premiums  accordingly  form  part  of  the  net  income  of  the 
company,  except  to  the  extent  that  they  are  subject  to  the  deductions  allowed 
insurance  companies  in  general  and  other  corporations. 

423  T.AX 


INC. 


Reg.  45,  Rev.  Part  II-A.  See  Note  on  page  301. 


3221c  Art.  572.  Special  Deductions  Allowed  Mutual  Insurance  Companies. 

— Mutual  insurance  companies  {other  than  mutual  life  and  mutual 
marine  insurance  companies)^  which  require  their  members  to  make  premium 
deposits  to  provide  for  losses  and  expenses,  are  allowed,  to  deduct  from  gross 
income  the  aggregate  amount  of  premium  deposits  returned  to  their  policyholders 
or  retained  for.  the  payment  of  losses,  expenses  and  reinsurance  reserves.  If, 
however,  any  portion  of  such  amount  is  applied  during  the  taxable  year  to  the 
payment  of  losses,  expenses  or  reinsurance  reserves,  for  which  a separate  allow- 
ance is  taken,  then  such  portion  is  not  deductible ; ayid  if  any  portion  of  such 
amount  for  which  an  allowance  is  taken  is  subsequently  applied  to  the  payment 
of  expenses,  losses  or  reinsurance  reserves,  then  such  payment  cannot  be  separately 
deducted.  An  amount  of  premium  deposits  retained  for  the  payment  of  expenses 
and  losses,  and  the  amount  of  such  expenses  and  losses,  may  not  both  be  de- 
deducted.  A company  zvhich  invests  part  of  the  premium  deposits  so  retained 
by  it  in  interest-bearing  securities  may  nevertheless  deduct  such  part,  but  not  the 
interest  received  on  such  securities.  A mutual  fire  insurance  company  which 
has  a guaranty  capital  is  taxed  like  other  mutual  fire  insurance  companies . A 
stock  fire  insurance  company,  operated  on  the  mutual  plan  to  the  extent  of  paying 
dividends  to  certain  classes  of  policyholders,  may  make  a return  on  the  same 
basis  as  a mutual  fire  insurance  CG:npa7iy  with  respect  to  its  business  conducted 
on  the  mutual  plan. 

3222  Art.  573  [Art.  571].  Deductions  Allowed  Foreign  Corporations. — 

324  Foreign  corporations  are  allowed  the  same  deductions  from  their 
2300  gross  income  arising  from  sources  within  the  United  States  as  are 
allowed  to  domestic  corporations,  to  the  extent  that  such  deductions 
are  connected  with  such  gross  income,  with  the  exception  that  the  interest 
deductible  is  that  proportion  of  so  much  of  the  entire  interest  paid  on  the 
corporate  indebtedness  as  would  be  deductible  if  paid  by  a domestic  corpora- 
tion which  the  gross  income  from  sources  within  the  United  States  bears 
to  the  total  gross  income,  and  that  full  deduction  may  be  made  for  taxes 
imposed  by  the  United  States  or  any  of  its  possessions,  or  by  any  State, 
Territory  or  political  subdivision  thereof,  except  taxes  for  local  benefits 
and  income,  war  profits  and  excess  profit  taxes.  A Canadian  manufacturing 
corporation  which  sells  part  of  its  product  in  the  United  States  and  part 
in  Canada  should  report  its  deductions  for  cost  of  manufacture,  exclusive 
of  interest  paid  on  its  indebtedness,  in  the  same  proportion  as  the  quantity 
of  its  product  sold  in  the  United  States  bears  to  the  total  quantity  sold. 
See  section  214  (b)  of  the  statute  and  article  271. 

ITEMS  NOT  DEDUCTIBLE. 

3223  Art.  581.  Items  not  Deductible. — No  deduction  from  gross  in- 
326  come  may  be  made  for  any  amounts  paid  out  for  new  buildings 

1944  or  for  permanent  improvements  or  betterments  inade  to  increase 
the  value  of  any  property,  or  for  any  amounts  expended  in  re- 
storing property  or  in  making  good  the  exhaustion  thereof  for  which  an 
allowance  for  depreciation  or  depletion  or  other  allowance  is  or  has  been 
made,  or  for  any  amounts  paid  for  premiums  on  any  life  insurance  policy 
covering  the  life  of  an  officer  or  employee  or  of  any  person  financially 
interested  in  the  business  of  the  corporation  when  the  corporation  is  directly 
or  indirectly  a beneficiary  under  such  policy.  See  section  215  of  the  statute 
and  articles  291-294. 


INC. 


424 


TAX 


Reg.[45,[Rev.^  Part.  SeeXNote'on  page'301. 

3223a  Art.  582.  Capital  Expenditures. — Expenses  of  the  organization  of 
1945  a corporation^  such  as  incorporation  fees  and  attorneys^  and  accountants^ 
2967  charges^  constitute  investments  of  capital  and  are  not  deductible  from 
gross  income.  See  article  818.  A holding  company  which  guarantees 
dividends  at  a specified  rate  on  the  stock  of  a subsidiary  corporation  for  the 
purpose  of  securing  new  capital  for  the  subsidiary  and  increasing  the  value  of 
its  stock  holdings  in  the  subsidiary  may  not  deduct  amounts  paid  in  carrying 
out  this  guaranty  in  computing  its  net  income^  but  such  payments  may  be  added 
to  the  cost  of  its  stock  in  the  subsidiary.  But  see  article  868. 

CREDITS  ALLOWED. 

3224  Art.  591.  Credits  Allowed. — After  ascertaining  the  net  income  of 
327  a domestic  corporation  it  is  allowed  as  credits  against  such  net 
2325  income  before  the  application  of  the  income  tax  rate  the  sum  of 
$2,000,  plus  the  amount  of  any  war  profits  and  excess  profits  tax 
assessed  or  to  be  assessed  for  the  same  taxable  year,  and|plus^the  amount 
of  interest  not  entirely  exempt  from  tax  received  upon  obligations  of  the 
United  States  and  bonds  of  the  War  Finance  Corporation.  See  section  213  (b) 
of  the  statute  and  articles  77-82.  Consequently,  in  the  case  of  corporations 
no  income  tax  is  imposed  on  any  interest  received  upon  obligations  of  the 
United  States  or  bonds  of  the  War  Finance  Corporation.  A foreign  corpora- 
tion is  allowed  the  same  credits  other  than  the  sum  of  $2,000.  As  to  corpora- 
tions with  fiscal  years  beginning  in  1917  see  section  205  and  article  1623.  For 
the  purpose  of  the  war  profits  and  excess  profits  tax  a corporation  is  not  entitled 
to  these  credits.  See  also  section  216  and  articles  301-307. 


PAYMENT  OF  TAX  AT  SOURCE. 

3225  Art.  601.  Withholding  in  the^Case^of  Nonresident  Foreign  Cor- 
332  porations. — With  respect  to  payments  to  foreign  corporations 
572  not  engaged  in  trade  or  business  within  the  United  "States  and 

not  having  any  office  or  place  of  business  therein,  withholding  is 
required  of  a tax  of  2 per  cent  in  the  case  of  interest  payable  upon  corporate 
bonds  or  other  obligations  containing  a tax-free  covenant  clause,  and  of  a 
tax  of  10  per  cent  in  the  case  of  other  fixed  or  determinable  annual  or  period- 
ical income,  other  than  corporate  dividends.  See  section  221  of  the  statute 
and  articles  361-376.  To  enable  debtors  in  the  United  States  to  distinguish 
between  foreign  corporations  which  have  and  those  which  have  not  any 
office  or  place  of  business  in  the  United  States,  and  also  to  enable  such  corpo- 
rations as  have  an  office  or  place  of  business  in  the  United  States  to  claim 
exemption  from  withholding  the  tax  on  bond  Interest  or  other  Income,  a 
certificate  stating  that  any  such  corporation  has  an  office  or  place  of  business 
in  the  United  States  should  be  filed  by  It  with  the  debtor. 

CREDIT  FOR  TAXES. 

3226  Art.  611.  Credit  for  Foreign  Taxes. — For  the  meaning  of^the^terms 
337  used  in  section  238  of  the  statute  see  sectional  and  article  382.  To 

2332  secure  such  a credit  a domestic  corporation  must  pursue  the  same 
course  as  that  prescribed  for  an  individual  by  article  383,  except 
that  form  1118  is  to  be  used  for  claiming  credit  and  form  1119  for  the  bond, 
if  a bond  be  required.  For  the  redetermination  of  the  tax,'^when  a credit 
for  such  taxes  has  been  rendered  incorrect  by  later  developments,  see  article 


INC. 


425 


TAX 


Reg.  45,  Rev.  Part  II-A.  See  Note  on  page  301. 


384,  all  of  the  provisions  of  which  apply  with  equal  force  to  a corporation 
taxpayer.  For  credit  where  taxes  are  paid  by  a foreign  corporation  controlled 
by  a domestic  corporation,  see  article  636.  A claim  for  credit  in  such  a 
case  is  also  to  be  made  on  form  1118. 

CORPORATION  RETURNS. 

3227  Art.  621.  Corporation  Returns. — Every  corporation  not  expressly 
343  exempt  from  tax  and  every  personal  service  corporation  must  make  a 

1398  return  of  income,  regardless  of  the  amount  of  its  net  income.  In 
the  case  of  ordinary  corporations  the  return  shall  be  on  form  1120. 
For  returns  of  insurance  companies  see  article  623;  of  personal  service  cor- 
porations see  article  624;  of  foreign  corporations  see  article  625;  and  of  af- 
filiated corporations  see  section  240  of  the  statute  and  articles  631-638.  A 
corporation  having  an  existence  during  any  portion  of  a taxable  year  is 
required  to  make  a return.  A corporation  which  has  received  a charter, 
but  has  never  perfected  its  organization,  and  which  has  transacted  no  busi- 
ness and  has  no  income  from  any  source,  may  upon  presentation  of  the 
facts  to  the  collector  be  relieved  from  the  necessity  of  making  a return  so 
long  as  it  remains  in  an  unorganized  condition.  In  the  absence  of  a proper 
showing  to  the  collector  such  a corporation  will  be  required  to  make  a re- 
turn. A corporation  which  was  dissolved  in  1918  or  1919  prior  to  the  en- 
actment of  the  present  statute  is  not  relieved  from  the  necessity  of  render- 
ing returns  thereunder  for  1918  and  for  such  portion  of  1919  as  elapsed 
before  its  dissolution.  See  further  section  228  of  the  statute  and  articles  406, 
407  and  451. 

3228  Art.  622.  Returns  by  Receivers.- — Receivers,  trustees  in  dissolu- 
346  tion,  trustees  in  bankruptcy,  and  assignees,  operating  the  property 

1429  or  business  of  corporations,  must  make  returns  of  income  for  such 
corporations  on  form  1120,  covering  each  year  or  part[s]  of  <3year[s] 
during  which  they  are  in  control.  Notwithstanding  that  the  powers  and 
functions  of  a corporation  are  suspended  and  that  the  property  and  business 
are  for  the  tim^e  being  in  the  custody  of  the  receiver  trustee  or  assignee, 
subject  to  the  order  of  the  court,  such  receiver,  trustee  or  assignee  stands 
in  the  place  of  the  corporate  officers  and  is  required  to  perform  all  the  duties 
and  assum.e  all  the  liabilities  which  would  devolve  upon  the  officers  of  the 
corporation  vrere  they  in  control.  A receiver  in  charge  of  only  part  of  the 
property  of  a c6rporation,  however,  as  a receiver  in  m^ortgage  foreclosure 
proceedings  involving  merely  a small  portion  of  its  property,  need  not  make 
a return  of  income.  See  articles  424  and  547. 

3229  Ajt.  623.  Returns  of  Insurance  Companies. — Insurance  com  pa- 

2275  nies  transacting  business  in  the  United  States  or  deriving  an  income 

from  sources  therein  are  required  to  file  returns  of  income.  The 
return  shall  be  on  form  1120.  [The  returns  of  insurance  companies  must 
be  rendered  in  conformity  with  the  reports  made  for  the  same  period  to 
State  insurance  departoents.]  As  an  aid  in  auditing  the  returns,  wherever 
possible  a copy  of  the  report  to  the  State  insurance  department  should  be 
submitted  with  the  return.  Otherwise  a copy  of  schedule  Z)  , parts  1.  3 and  4, 
of  the  report  should  be  attached  [thereto]  to  the  return^  showing  the  federal, 
State  and  ihunicipal  obligations  from  which  the  interest  omdtted  from 
gross  income  was  derived,  and  a copy  of  the  coiuplete  report  should  be 
furnished  as  soon  as  ready  for  filing. 


INC. 


426  TAX 


3230  Art.  624.  Returns  of  Personal  Service  Corporations. — Every  per- 
343  sonal  service  corporation  must  make  a return  of  income,  regard- 
less of  the  amount  of  its  net  income.  The  return  shall  be  on  form 

1065  (revised).  It  shall  be  made  for  the  taxable  year  of  the  personal  service 
corporation;  that  is,  for  its  annual  accounting  period  (fiscal  year  or  calendar 
year,  as  the  case  may  be),  regardless  of  the  taxable  years  of  its  stockholders. 
See  Sections  200,  212  and  218  of  the  statute  and  articles  1523-1532,  25,  26 
and  328-335.  If  the  personal  service  corporation  makes  any  change  in  its 
accounting  period  it  shall  render  its  return  in  accordance  with  the  provisions 
of  section  226  of  the  statute  and  article  431.  The  return  of  a personal  service 
corporation  shall  state  specifically  (a)  the  items  of  its  gross  income  enumerated 
in  section  213  of  the  statute;  (b)  the  deductions  enumerated  in  section  214 
of  the  statute,  other  than  the  deduction  provided  in  paragraph  (11)  of  sub- 
division (a)  of  that  section;  (c)  the  amounts  specified  in  subdivisions  (a)  and 
(b)  of  section  216  of  the  statute  received  by  the  personal  service  corporation; 
(d)  the  amount  of  any  income,  war  profits  and  excess  profits  taxes  of  the  per- 
sonal service  corporation  paid  during  the  taxable  year  to  a foreign  country 
or  to  any  possession  of  the  United  States,  and  the  amount  of  any  such  taxes 
accrued  but  not  paid  during  the  taxable  year;  (e)  the  amounts  distributed 
by  the  corporation  during  its  taxable  year  with  the  dates  of  distribution; 
(/)  the  names  and  addresses  of  the  stockholders  of  the  corporation  at  the  close 
of  its  taxable  year  and  their  respective  shares  in  such  corporation;  (g)  such 
facts  as  tend  to  show  whether  or  not  the  corporation  is  a personal  service 
corporation;  and  (h)  such  other  facts  as  are  required  by  the  form.  A personal 
service  corporation  which  makes  a return  for  a fiscal  year  beginning  in  1917 
shall  include  therein  all  the  facts  required  for  the  computation  of  income 
and  excess  profits  taxes  under  Title  I of  the  Revenue  Act  of  1916,  as  amended 
by  the  Revenue  Act  of  1917,  and  under  Titles  I and  II  of  the  Revenue  Act 
of  1917.  See  sections  205  and  335  of  the  statute  and  articles  1621-1625  and 
951. 

3231  Art.  625.  Returns  of  Foreign  Corporations. — Every  foreign  cor- 
345  poration  having  income  from  sources  within  the  United  States 

2314  must  make  a return  of  income  on  form  1120.  If  such  a corpora- 
tion has  no  office  or  place  of  business  here,  but  has  a resident  agent, 
he  shall  make  the  return.  It  is  not  necessary,  however,  for  it  to  be  required 
to  make  a return  that  the  foreign  corporation  shall  be  engaged  in  business 
in  this  country  or  that  it  have  any  office,  branch  or  agency  in  the  United 
States.  See  article/  404,  550  and  573. 

3232  Art.  626.  Returns  for  Fractional  Part  of  Year. — In  the  case  of  a 

1479  corporation  making  its  first  return  of  income  on  the  basis  of  a fiscal 

year  and  in  the  case  of  a corporation  changing  its  accounting  period^ 
whether  from  calendar  year  to  fiscal  year^  from  fiscal  year  to  calendar  year^or 
from  one  fiscal  year  to  another  fiscal  year^  a separate  return  for  a fractional 
part  of  a year  is  required.  See  section  226  of  the  statute  and  article  431.  In 
such  a case  the  credit  of  $2,000  agahist  net  income  allowed  a domestic  corporation 
shall  be  reduced  to  such  proportion  of  the  full  credit  as  the  number  of  months 
in  the  period  for  zvhich  the  return  is  made  bears  to  twelve  months.  See  sections22>6 
and  305  and  articles  591  and  761.  [Former  Art.  626 — Use  of  prescribed  forms, 
is  now  Art.  407,  1f3017^.1  y 

CONSOLIDATED  RETURNS. 

3233  Art.  631.  Affiliated  Corporations. — 4'he  provision  of  the  statute 
349  requiring  affiliated  corporations  to  file  consolidated  returns  is  based 

1405  upon  the  principle  of  levying  the  tax  according  to  the  true  net  in- 
c(jme  and  invested  capital  of  a single  business  enterprise,  even 

427 


INC. 


TAX 


Reg.  45,  Rev.  Part  II-A,  See  Note  on  page  301. 


though  the  business  Is  operated  through  more  than  one  corporation.  Where 
one  corporation  owns  the  capital  stock  of  another  corporation  or  other 
corporations,  or  where  the  stock  of  two  or  more  corporations  is  owned  by 
the  same  interests,  a situation  results  which  is  closely  analogous  to  that  of 
a business  maintaining  one  or  more  branch  establishments.  In  the  latter 
case,  because  of  the  direct  ownership  of  the  property,  the  invested  capital 
and  net  income  of  the  branch  form  a part  of  the  invested  capital  and  net 
income  of  the  entire  organization.  Where  such  branches  or  units  of  a 
business  are  owned  and  controlled  through  the  medium  of  separate  corpora- 
tions, It  is  necessary  to  require  a consolidated  return  In  order  that  the  In- 
vested capital  and  net  Income  of  the  entire  group  may  be  accurately  de- 
termined. Otherwise  opportunity  would  be  afforded  for  the  evasion  of 
taxation  by  the  shifting  of  Income  through  p'rice  fixing,  charges  for  services 
and  other  means  by  which  Incom.e  could  be  arbitrarily  assigned  to  one  or 
another  unit  of  the  group.  In  other  cases  without  a consolidated  return 
excessive  taxation  might  be  Imposed  as  a result  of  purely  artificial  condi- 
tions existing  between  corporations  within  a controlled  group.  See  articles 
785,  791,  802  and  864-869. 

3234  Art.  632.  Consolidated  Returns. — Affiliated  corporations,  as  defined 
In  the  statute  and  in  article  633,  are  required  to  file  consolidated 

returns  on  form  1120.  The  consolidated  return  shall  be  filed  by  the  parent 
or  principal  reporting  corporation  in  the  office  of  the  collector  of  the  dis- 
trict in  which  it  has  its  principal  office.  Each  of  the  other  affiliated  cor- 
porations shall  file  in  the  office  of  the  collector  of  Its  district  form  1122,  along 
with  the  several  schedules  indicated  thereon.  The  parent  or  principal 
corporation  filing  a consolidated  return  shall  include  in  such  return  a state- 
ment specifically  setting  forth  {a)  the  name  and  address  of  each  of  the 
subsidiary  or  affiliated  corporations  included  In  such  return,  {b)  the  par 
value  of  the  total  outstanding  capital  stock  of  each  of  such  corporations  at 
the  beginning  of  the  taxable  year,  (c)  the  par  value  of  such  capital  stock 
held  by  the  parent  corporation  or  by  the  same  Interests  at  the  beginning 
of  the  taxable  year,  {d)  in  the  case  of  affiliated  corporations  owned  by  the 
same  interests,  a list  of  the  individuals  or  partnerships  constituting  such 
interests,  with  the  percentage  of  the  total  outstanding  stock  of  each  affiliated 
corporation  held  by  each  of  such  individuals  or  partnerships  during  all 
of  the  taxable  year,  and  {e)  a schedule  showing  the  proportionate  amount 
of  the  total  tax  which  it  is  agreed  among  them  Is  to  be  assessed  upon  each 
affiliated  corporation.  Foreign  corporations  and  personal  service  corporations 
need  not  file  consolidated  returns.  See  article  1524. 

3235  Art.  633.  When  Corporations  are  Affiliated. — Corporations  will  be 
354  deemed  to  be  affiliated  {a)  when  one  domestic  corporation  owns 

1410  directly  or  controls  through  closely  affiliated  interests  or  by  a nominee 
or  nominees  substantially  all  the  stock  of  the  other  or  others,  or  {h) 
when  substantially  all  the  stock  of  two  or  more  domestic  corporations  is  owned 
or  controlled  by  the  same  Interests.  The  words  “substantially  all  the  stock” 
cannot  he  interpreted  as  meaning  any  particular  percentage^  but  must  be  construed 
according  to  the  facts  of  the  particular  case  [shall  be  deemed  to  mean  95  per  cent 
or  more  of  the  outstanding  voting  capital  stock  (not  including  stock  in  the 
treasury)  at  the  beginning  of  and  during  the  taxable  year].  The  owning  or 
controlling  of  95  per  cent  or  more  of  the  outstanding  voting  capital  stock  {not 
including  stock  in  the  treasury)  at  the  beginning  of  and  during  the  taxable  year 
will  be  deemed  to  constitute  an  affiliation  within  the  meaning  of  the  statute.  Con- 
solidated returns  may,  however,  be  required  even  though  the  stock  ownership  is 

428  TAX 


INC. 


Reg.  45,  Rev.  Part  II-A.  See  N ote  on  page  301. 


less  than  95  per  cent.  When  the  stock  ownership  is  less  than  [falls  below]  95 
per  cent,  but  [is]  in  excess  of  50  per  cent,  a full  disclosure  of  affiliations  should 
[shall]  be  made,  showing  all  pertinent  facts^  including  the  stock  owned  in  each 
subsidiary  or  affiliated  corporation  and  the  percentage  of  such  stock  owned  to  the 
total  stock  outstanding  [and  if  it  appears  that  the  taxes  can  not  be  equitably 
assessed  in  such  cases  on  the  basis  of  separate  returns,  consolidated  returns 
may  be  required].  Such  statement  should  preferably  be  made  in  advance  of 
filing  the  return  with  a request  for  instructions  as  to  whether  a consolidated  return 
should  be  made.  In  any  event  such  a statement  should  be  filed  as  a part  of  the 
return.  The  words  “[by]  the  same  interests”  shall  be  deemed  to  mean  the 
same  individual  or.  partnership  or  the  same  individuals  or  partnerships,  but 
when  the  stock  of  two  or  more  corporations  is  owned  by  two  or  more  indi- 
viduals or  by  two  or  more  partnerships  a consolidated  return  is  not  required 
unless  the  percentage  of  stock  held  by  each  individual  or  each  partnership 
is  substantially  the  same  in  each  of  the  affiliated  corporations. 

3236  Art.  634.  Change  in  Ownership  During  Taxable  Year. — When  one 
355  corporation  owns  substantially  all  the  stock  of  another  corporation 

1411  at  the  beginning  of  any  taxable  year,  but  during  the  taxable  year 
sells  all  or  a majority  of  such  stock  to  outside  interests  not  affiliated 

with  it,  or  when  one  corporation  during  any  taxable  year  acquires  sub- 
stantially all  the  capital  stock  of  another  corporation  with  which  it  was 
not  previously  affiliated,  a full  disclosure  of  the  circumstances  of  such 
changes  in  ownership  shall  be  submitted  to  the  Commissioner.  In  accordance 
with  the  peculiar  circumstances  in  each  case  the  Commissioner  may  require 
separate  or  consolidated  returns  to  be  filed,  to  the  end  that  the  tax  may  be 
equitably  assessed. 

3237  Art.  635.  Corporation  Deriving  Chief  Income  from  Government 
350  Contracts. — In  the  case  of  any  affiliated  corporation  organized 

140G  after  August  1,  1914,  and  not  a successor  to  a then  existing  busi- 
ness, 50  per  cent  or  more  of  whose  gross  income  consists  of  gains, 
profits,  commissions  or  other  income  derived  from  a Government  contract 
or  contracts  made  between  April  6,  1917,  and  November  11,  1918,  both 
dates  inclusive,  the  net  income  and  invested  capital  of  such  corporation  shall 
be  taken  out  of  the  consolidated  net  income  and  invested  capital  of  the 
group  of  affiliated  corporations  and  the  corporation  so  segregated  shall  be 
separately  assessed  on  the  basis  of  its  own  invested  capital  and  net  income, 
the  remainder  of  such  affiliated  group  being  assessed  on  the  basis  of  the  re- 
maining consolidated  invested  capital  and  net  income.  See  section  1 of  the 
statute  and  article  1510. 

3238  Art.  636.  Domestic  Corporation  Affiliated  ~ with  Foreign  Cor- 
350  poration. — A domestic  corporation  which  owns  a majority  of  the 

1412  stock  of  a foreign  corporation  shall  not  be  permitted  or  required 
to  include  the  net  income  or  invested  capital  of  such  foreign  cor- 
poration in  a consolidated  return,  but  for  the  purpose  of  section  238  of  the 
statute  a domestic  corporation  which  owns  a majority  of  the  voting  stock 
of  a foreign  corporation  shall  be  entitled  to  credit  its  [in  respect  of  any] 
income j war  profits  and  excess  profits  taxes  with  any  income,  war  profits  or 
excess  profits  taxes  paid  (but  not  including  taxes  accrued)  by  such  foreign 
corporation  during  the  taxable  year  to  any  foreign  country  or  to  any  posses- 
sion of  the  United  States  upon  income  derived  from  sources  without  the 
United  States  in  an  amount  equal  to  the  proportion  which  the  amount  of  any 
dividends  (not  deductible  under  section  234)  received  by  such  domestic 

429 


INC. 


TAX 


Reg.  45,  Rev.  Part  II-A.  See  Note  on  page  301. 


corporation  from  such  foreign  corporation  during  the  taxable  year  bears  to 
the  total  taxable  income  of  such  foreign  corporation  upon  or  with  respect  to 
which  such  taxes  were  paid.  But  in  no  such  case  shall  the  amount  of  the 
credit  for  such  taxes  exceed  the  amount  of  such  dividends  (not  deductible 
under  section  234)  received  by  such  domestic  corporation  during  the  taxable 
year.  A domestic  corporation  seeking  such  credit  must  comply  with  those 
provisions  of  subdivision  (a)  of  article  383  which  are  applicable  to  credits  for 
taxes  already  paid,  except  that  in  accordance  with  article  611  the  form  to  be 
used  is  form  1118  instead  of  form  1116. 

3239  Art.  637.  Consolidated  Net  Income  of^Affiliated^Corporations. — 

Subject  to  the  provisions  covering  the  determination  of  taxable  net 
income  of  separate  corporations,  and  subject  further  to  the  elimination  of 
intercompany  transactions,  the  consolidated  taxable  net  income  shall  be  the 
combined  net  income  of  the  several  corporations  consolidated,  except  that 
the  net  income  of  corporations  coming  within  the  provisions  of  article  635 
s\xal\h^  taken  [excluded.]  Inrespectof  the  statement  of  gross  income  and  de- 
ductions and  the  several  schedules  required  under  form  1120,  a corporation 
filing  a consolidated  return  is  required  to  prepare  and  file  such  statements 
and  schedules  in  columnar  form  to  the  end  that  the  details  of  the  items  of 
gross  income  and  deductions  for  each  corporation  included  in  the  consolida- 
tion may  be  readily  audited. 

3240  Art.  638  Different  Fiscal  Years  of  Affiliated  Corporations. — In  the 

1427  case  of  all  consolidated  returns,  consolidated  invested  capital  must 
be  computed  as  of  the  beginning  of  the  taxable  year  of  the  parent 
or  principal  reporting  company  and  consolidated  income  must  be  computed 
on  the  basis  of  its  [fiscal]  year.  Whenever  the  fiscal  year  of  one  or  more 

subsidiary  or  other  affiliated  corporations  differs  from  the  fiscal  year  of  the 
parent  or  principal  corporation,  the  Commissioner  should  be  fully  advised 
by  the  taxpayer  in  order  that  provision  may  be  made  for  assessing  the  tax 
in  respect  of  the  period  prior  to  the  beginning  of  the  fiscal  year  of  the  parent 
or  principal  company.  See  section  226  of  the  statute  and  article  431. 

TIME  AND  PLACE  FOR  FILING  RETURNS. 

3241  Art.  651.  Time  and  Place  for  Filing  Returns. — Returns  of  income 
358  must  be  made  on  or  before  the  fifteenth  day  of  the  third  month  fol- 

1471  lowing  the  close  of  the  fiscal  or  calendar  year,  as  provided  in  section 
227  of  the  statute  and  articles  441-447.  A corporation  going  into 
liquidation  during  any  taxable  year  may  upon  the  completion  of  such  liqui- 
dation prepare  a return  covering  its  income  for  the  fractional  part  of  the 
year  during  which  it  was  engaged  in  business  and  may  immediately  file  such 
return  with  the  collector.  A corporation  having  an  office  or  agency  in  the 
United  States  must  make  its  return  to  the  collector  of  the  district  in  which ^ is 
located  its  principal  office  or  agency.  Other  corporations  must  make  their 
returns  to  the  collector  at  Baltimore.  See  also  sections  250  and  253  of  the  statute 
and  articles  1001-1013  and  1041.  [A  corporation  desiring  an  extension  of  time 
within  which  to  file  its  return  should  submit  to  the  collector  before  the  time 
for  filing  the  return  a tentative  return  and  estimate  on  form  1031  T,  accom- 
panied by  a remittance  of  not  less  than  one-fourth  of  the  estimated  amount 
of  income  and  war  profits  and  excess  profits  taxes  for  the  taxable  year.  In 
such  a case  the  collector  may  grant  a reasonable  extension  of  time  for  filing 
the  complete  return,  not  to  exceed  thirty  days  or,  in  the  case  of  returns  for 
1918,  not  to  exceed  forty-five  days  after  March  15,  1919.  See  also  sections 
250  and  253  of  the  statute  and  articles  1001-1003  and  1041.] 

430  TAX 


INC. 


3242 


[Art.  652.  Last  Due  Date. — Is  now  Art.  447,  •[[3028<3.] 


3243  Art.  1800.^-  Promulgation  of  Regulations. — In  pursuance  of  the 
433  statute  the  foregoing  regulations  are  hereby  made  and  promulgated 
2591  and  all  rulings  inconsistent  herewith  are  hereby  revoked. 

Daniel  C.  Roper, 
Commissioner  of  Internal  Revenue. 
Approved:  Carter  Glass,  Secretary  of  the  Treasury. 

(Preliminary  edition  not  dated;  Released:  March  5,  1919.) 

(Revised  edition  dated  April  17,  1919;  Released  a few  days  later.) 


3244  Withholding  at  the  New  Rates.  Liability  of  Debtors  and  of  Credi- 
3003  tors. — Employers  of  nonresident  aliens  were  not  required  in  making 
payments  prior  to  February  twenty-five,  nineteen  nineteen,  to  with- 
hold more  than  two  per  cent  of  such  payments  and  as  to  such  payments  will 
not  be  held  responsible  for  more  than  two  per  cent  unless  then  actually 
withheld  at  a higher  rate.  This  ruling  does  not  affect  the  tax  liability  of  the 
nonresident  alien  who  will  be  liable  for  tax  at  the  rates  prescribed  for  nineteen 
eighteen  and  nineteen  nineteen  and  should  make  returns  accordingly.  He 
is  entitled  to  credit  for  the  amount  paid  to  the  Government  by  withholding 
agent.  (Telegram  to  The  Corporation  Trust  Company,  signed  by  Com- 
missioner Daniel  C.  Roper  and  dated  March  5,  1919.) 


3245  Modification  of  the  Ruling  Relative  to  Apportioning  the  Personal 

1140  or  Family  Exemptions  Because  of  Change  in  Marital  or  Family 

1 141  Status  During  the  Year. — The  status  of  an  Income  Tax  payer  on 

2971a  December  31  will  determine  his  personal  exemption  for  1918,  as  in 

previous  years,  according  to  a new  ruling  issued  to-day  by  the  Treasury 
Department. 

The  subdividing  of  personal  or  family  exemptions  to  cover  a person’s 
changes  in  status  during  1918  is  abandoned.  Pargaraph  three  of  Section  six 
of  the  instructions  on  the  new  forms  for  individual  returns,  is  made  void 
by  the  new  ruling. 

When  claiming  the  personal  or  family  exemption  on  his  return,  a taxpayer 
should  be  guided  by  the  following  schedule  of  lawful  allowances. 

If  married  and  living  with  wife  (or  husband)  on  the  last  day  of  the  year, 
the  exemption  allowed  is  $2,000.  Any  taxpayer  who,  though  unmarried, 
supported  in  his  household  on  December  31  one  or  more  relatives  who  were 
dependent  upon  him,  may  claim  the  $2,000  exemption. 

Single  persons,  also  married  persons  who  were  living  apart  on  December  3 1 , 
and  who  have  no  dependents,  may  claim  only  $1,000  exemption. 

Additional  exemption  of  $200  is  allowed  for  each  person  who  was  dependent 
upon  the  taxpayer  on  December  31  if  the  dependent  is  under  18  years  of  age 
or  is  mentally  or  physically  incapable  of  self-support.  (Official  announcement 
by  the  Bureau  of  Internal  Revenue,  dated  March  11,  1919.) 


(T.  D.  2797.) 

3246  Time  of  Payment  of  Tax  where  a Corporation  has  Filed  a Return 
2339  for^a  Fiscal  Year  Ending  in  1918. — If  a corporation  has  before  Febru- 
3031  ary  25,  1919,  filed  a return  for  a fiscal  year  ending  in  1918  and  paid 
3180a  or  become  liable  for  a tax  computed  under  the  Revenue  Act  of  1917, 
and  is  subject  to  additional  tax  for  the  same  period  under  the  Revenue 
Act  of  1918,  the  return  covering  such  additional  tax  shall  be  filed  at  the  same 

INC.  431 


TAX 


time  as  returns  of  persons  making  returns  for  the  calendar  year  1918  are  due 
under  existing  rulings,  and  payment  of  such  additional  tax  is  due  in  the*same 
installments  and  at  the  same  times  as  in  the  case  of  payments  based  on  returns 
for  the  calendar  year  1918.  If  no  part  of  the  tax  for  such  fiscal  year  was  due 
until  after  February  24,  1919,  the  whole  amount  of  tax  due,  including  tax 
due  under  the  original  return  and  additional  tax  due  under  the  amended 
return,  will  be  payable  in  the  same  installments  and  at  the  same  times  as  in 
the  case  of  payments  based  on  returns  for  the  calendar  year  1918.  (T.  D. 

2797,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  March  11,  1919.) 


(T.  D.  2796. — Amended.) 

3247  Amendment  to  T.  D.  2796. — This  Treasury  Decision  should  be 
3167  substituted  for  the  previous  mimeograph  issue  of  T.  D.  2796,  the 
words  and  figures  “September  8,  1916,  and  the  Act  of”  having  been 
inserted  after  the  word  “of”  in  the  eighth  line  of  the  third  paragraph  [seventh 
line  of  lf3167].  (T.  D.  2796 — Amended,  signed  by  Commissioner  Daniel 

C.  Roper,  and  dated  February  27,  1919.) 


3248  Computation  of  Discount  and  Interest  for  Taxation  Purposes. — 

1792  The  Commissioner  of  Internal  Revenue  has  authorized  the  publica- 
tion of  the  following  letter  written  in  response  to  an  inquiry  from  a 
national  bank  with  reference  to  the  method  of  reporting  discount  and  interest 
on  time  loans  for  taxation  purposes: 

“Receipt  is  acknowledged  of  your  letter  of  February  8,  1919,  in  which  you 
state: 

‘On  January  1,  1918,  we  changed  our  method  of  handling  discount  and 
interest  on  time  loans.  Up  to  this  time  all  discount  and  interest  charged  on 
loans  had  been  credited  directly  to  discount  and  interest,  but  at  this  date,  the 
actual  amount  of  discount  and  interest,  which  had  been  so  credited  and  was 
still  unearned,  was  ascertained,  credited  to  unearned  account  on  our  books, 
and  thereafter  all  discount  and  interest  collected  in  advance  was  credited 
to  this  account,  our  discount  earned  receiving  credit  for  each  day’s  actual 
earnings.’ 

“You  ask  to  be  advised  what  course  you  should  pursue  in  the  preparation 
of  your  income  and  war-excess  profits  tax  returns  for  the  year  1918.  The 
method  of  treating  discount  and  interest  on  time  loans  adopted  by  you  on 


INC. 


432  TAX 


January  1,  1918,  has  been  generally  recognized  as  the  correct  method  of  com- 
puting such  income,  and  the  Comptroller  of  the  Currency  has  suggested 
the  adoption  of  this  method  by  all  national  banks.  The  amount  of  income 
from  discount  and  interest  on  time  loans  which  you  should  report  for  the 
year  1918  is  the  amount  of  such  income  actually  earned  during  that  year,  and 
as  the  amount  of  such  income  for  the  year  1917  and  years  prior  thereto  has 
been  computed  and  reported  upon  a different  method,  amended  returns 
should  be  filed  showing  the  correct  amount  of  such  income  for  each  year 
back  to  1909,  inclusive,  or  to  the  date  of  the  organization  of  your  bank, 
if  it  was  organized  subsequent  to  1909.”  (Letter  to  a National  Bank,  signed 
by  Commissioner  Daniel  C.  Roper,  and  dated  February  11,  1919.  Reprinted 
from  The  Federal  Reserve  Bulletin  for  March,  1919.) 


3249  The  Advisory  Tax  Board  Membership. — Commissioner  Daniel  C. 
2652  Roper  announced  today  his  appointments  to  the  new  Advisory 

Tax  Board  of  the  Bureau  of  Internal  Revenue.  Five  memberships 
are  announced.  The  sixth  membership  has  been  reserved  as  a roving  com- 
mission for  experts  who  will  be  called  in  from  time  to  time  from  various 
industries.  The  men  named  today  are: 

Dr.  T.  S.  Adams,  Professor  of  Political  Economy  of  Yale  University, 
and  formerly  of  the  Wisconsin  Tax  Commission. 

J.  E.  Sterrett,  of  New  York,  Certified  Public  Accountant,  and 
formerly  President  of  the  American  Institute  of  Accountants. 

Stuart  W.  Cramer,  of  Charlotte,  North  Carolina,  engineer,  con- 
tractor and  cotton  manufacturer;  former  President  of  the  National 
Association  of  American  Cotton  Adanufacturers. 

L.  F.  Speer,  former  Deputy  Commissioner,  Bureau  of  Internal 
Revenue,  Income  Tax  Division. 

Fred  T.  Field,  of  Boston,  Mass.,  expert  tax  lawyer,  and  formerly 
Assistant  Attorney  General  of  Massachusetts. 

3250  The  chairman  of  the  new  board  of  advisors  will  be  Dr.  Adams,  who  has 
been  active  in  the  Bureau’s  affairs  for  some  time. 

3251  Particular  attention  will  be  given  to  problems  arising  where  dif- 
ferences of  opinion  exist  between  the  taxpayers  and  the  Bureau. 

Such  differences  occur  not  only  with  individuals,  but  also  with  groups  and 
even  with  classes  of  industry. 

3252  Formal  hearings  will  be  given  to  taxpayers^ in  every  case  where  the 
facts  warrant,  and  it  was  stated  today  at  the  Revenue  Bureau  that 

the^  smallest  individual  or  the  most  eminent  legal  counsel  for  the 
largest  corporation  shall  find  a hearing  equally  accessible.  Commissioner 
Roper  has  already  announced  his  policy  “to  employ  every  means  available 
so  that  the  scales  of  justice  may  be  held  evenly  in  deciding  each  case.” 

3253  The  Board  will  be  called  upon  to  decide  questions  involving  the 
general  aspects  of  taxation  and  differentiation  of  economic  activities, 

accounting,  forms  of  organization,  trade  customs,  industrial  manage- 
ment, legal  procedure  and  administration.  Special  studies  will  be  made  of 
such  matters  as  they  affect  Federal  taxation.  (Official  announcement  from 
the  Bureau  of  Internal  Revenue,  dated  March  14,  1919.) 


(T.  D.  2804) 


3254  Extension  of  Time  for  Filing  Returns  of  Partnerships  Whose  Fiscal 
1507  Year  Ended  in  1918. — By  Treasury  Decision  2796  the  time  for 
3 1 65  filing  certain  classes  of  returns  which  are  not  the  basis  for  an  assessment 

of  tax  was  extended  to  May  15,  1919,  and  the  time  for  filing  returns 
of  partnerships  and  corporations  having  a fiscal  year  ended  on  the  last  day 
of  some  month  (other  than  December)  in  the  year  1918,  and  which  had  secured 
extensions  of  time  in  which  to  file  returns,  such  extensions  not  having  expired, 
was  further  extended  to  March  15,  1919. 

3255  In  view  of  the  fact  that  necessary  forms  are  not  yet  available,  a 
further  extension  to  May  15,  1919,  is  hereby  granted  all  such  partner- 
ships. Individual  members  of  such  partnerships,  as  in  the  case  of  partner- 
ships filing  on  the  basis  of  the  calendar  year,  will  be  required  to  include  in 
their  individual  returns  their  distributive  shares  of  the  earnings  of  such 
partnerships  (ascertained  or  estimated)  and  pay  at  least  one-fourth  of  the  tax 
due  on  March  15th.  (T.  D.  2804,  signed  by  Commissioner  Daniel  C.  Roper, 
and  dated  March  13,  1919.) 


(T.  D.  2805.) 

3256  Amended  Returns  May  be  Accepted  so  that  the  Taxable  Year  of 
1405  Affiliated  Corporations  will  Coincide. — In  any  case  where  an  affiliated 
3233  corporation  has  made  its  income  tax  return  on  the  basis  of  a taxable 

year  different  from  that  on  the  basis  of  which  a consolidated  excess 
profits  tax  return  in  which  it  is  included  has  been  made  under  the  provisions 
of  Articles  77  .[^[1415]  and  78  [1[1417]  of  Regulations  41  and  of  T.  D.  2662 
[1418],  an  amended  income  tax  return  may  be  made  on  the  basis  of  the  same 
taxable  year  as  the  consolidated  return,  even  though  notice  was  not  given 
within  the  time  prescribed  in  Articles  211  to  215  [1[1488  to  1495],  inclusive, 
of  Regulations  No.  33  (revised)  or  in  Regulations  45  [^[2840].  In  such  a 
case  an  amended  income  tax  return  shall  also  be  made  for  any  unaccounted  for 
portion  of  the  corporation’s  taxable  year. 

3257  Collectors  of  Internal  Revenue  may  accept  amended  returns  made 
under  .the  provisions  of  this  Treasury  Decision.  (T.  D.  2805,  signed 

by  Commissioner  Daniel  C.  Roper  and  dated  March  14,  1919.) 


Forms  for  making  returns  by  nonresident  aliens. — No  1040-B  will 
be  issued  for  use  of  nonresident  aliens.  1040  or  1040-A  will  be  used. 
Instructions  are  now  being  prepared  as  to  how  these  forms  may  be 
adapted  for  use  of  nonresident  aliens.  (Telegram  to  a subscriber, 
signed  by  Commissioner  Daniel  C.  Roper,  and  dated  March  14,  1919.) 


International  reciprocal  personal  specific  exemption  allowances. — 

Data  regarding  countries  which  impose  income  tax  and  permit  credits 
to  United  States  citizens  not  residing  in  such  countries  similar  to 
credits  provided  in  Section  216,  Revenue  Act  of  1918,  now  being 
collected  and  will  be  issued  in  form  of  Treasury  Decision  (Telegram  to  a 
subscriber,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  March  14, 
1919.) 


3258 

538 

1435 

3015 

3168 


3259 

537 

2972 


INC. 


434  TAX 


8-24-19. 


3260  Specific  Penalty  will  not  be  Asserted  if  Delinquent  Returns  are 
1605  Filed  by  May  1. — In  view  of  the  delay  in  the  final  passage  of  the 
1471  Revenue  Act  of  1918  and  the  short  period  allowed  for  filing  returns 
3025  thereunder,  it  has  been  decided  that  if  a return  is  filed  on  or  before 
3041  May  1,  1919,  by  an  individual,  partnership  or  corporation  under 
3165  the  provisions  of  such  Act,  the  specific  penalty  of  $1,000  will  not 

be  asserted. 

3261  Where  returns  of  income  are  filed  after  the  date  mentioned  above  or 
where  returns  of  information  at  the  source  are  filed  after  May  15, 

1919,  the  specific  penalty  will  be  asserted  unless  it  can  be  shown  that  the 
delay  was  due  to  a reasonable  cause,  and  offers  in  compromise  will  be  accepted 


in  the  minimum  amounts  stated  below: 

Delinquent  returns  of  income  by  individuals $5.00 

Delinquent  returns  of  income  by  corporations 10.00 

Delinquent  returns  of  information 5.00 


3262  Of  course  it  must  be  borne  in  mind  that  the  above  does  not  relate 
to  cases  where  there  is  evidence  of  wilful  intent  or  hostility  toward  the 

administration  of  the  law.  Such  cases  will  be  taken  care  of  in  the  same  manner 
as  heretofore. 

3263  Cards,  Form  7245A,  prepared  in  the  manner  indicated  in  Mim.  1480, 
dated  February  26,  1917,  should  accompany  every  original  delinquent 

return  filed  after  the  dates  m.entioned  above  as  the  last  dates  for  filing  returns 
before  the  specific  penalty  will  be  asserted.  (IT-Mim.  2077,  signed  by 
Commissioner  Daniel  C.  Roper,  and  dated  March  13,  1919.) 


{Decision.) 

(Act  of  October  3,  1913.) 

A Certain  Massachusetts  Trust  Held  Not  to  be  an  Association  Under  the 

Act  of  October  3,  1913. 


Supreme  Court  of  the  United  States. 


Alvah  Crocker  et  ah.  Trustees,  Petitioners, 
vs. 

John  F.  Malley,  Collector  of  Internal 
Revenue. 


On  Writ  of  Certiorari  to 
the  United  States  Cir- 
cuit Court  of  Appeals 
for  the  First  Circuit. 


[March  17,  1919.] 


Mr.  Justice  FIolmes  delivered  the  opinion  of  the  Court. 

3264  This  is  an  action  to  recover  taxes  paid  under  protest  to  the  Collector 
1689  of  Internal  Revenue  by  the  petitioners,  the  plaintiffs.  The  taxes 
3076  were  assessed  to  the  plaintiffs  as  a joint-stock  association  within  the 
meaning  of  the  Income  Tax  Act  of  October  3,  1913,  c.  16,  Section  II, 
G.  (a),  38  Stat.  114,  166,  172,  and  were  levied  in  respect  of  dividends  received 
from  a corporation  that  itself  was  taxable  upon  its  net  income.  The  plain- 
tiffs say  that  they  were  not  an  association  but  simply  trustees,  and  subject 
only  to  the  duties  imposed  upon  fiduciaries  by  Section  II,  D.  The  Cir- 
cuit Court  of  Appeals  decided  that  the  plaintiffs,  together,  it  would  seem,  with 
those  for  whose  benefit  they  held  the  property,  were  an  association,  and 
ordered  judgment  for  the  defendant,  reversing  the  judgment  of  the  District 
Court.  250  Fed.  Rep.  817. 


INC. 


435  TAX 


3265  The  facts  are  these.  A Maine  paper  manufacturing  corporation 
with  eight  shareholders  had  its  mills  on  the  Nashua  River  in  Massa- 
chusetts and  owned  outlying  land  to  protect  the  river  from  pollution.  In 
1912  a corporation  was  formed  in  Massachusetts.  The  Maine  corporation 
conveyed  to  it  seven  mills  and  let  to  it  an  eighth  that  was  in  process  of  construc- 
tion, together  with  the  outlying  lands  and  tenements,  on  a long  lease,  receiv- 
ing the  stock  of  the  Massachusetts  corporation  in  return.  The  Maine 
corporation  then  transferred  to  the  plaintiffs  as  trustees  the  fee  of  the  prop- 
erty subject  to  lease,  left  the  Massachusetts  stock  in  their  hands,  and  was 
dissolved.  By  the  declaration  of  trust  the  plaintiffs  declared  that  they  held 
the  real  estate  and  all  other  property  at  any  time  received  by  them  thereunder, 
subject  to  the  provisions  thereof,  ‘for  the  benefit  of  the  cestui  que  trusts 
(who  shall  be  trust  beneficiaries  only,  without  partnership,  associate  or  other 
relation  whatever  inter  sese)’  upon  trust  to  convert  the  same  into  money  and 
distribute  the  net  proceeds  to  the  persons  then  holding  the  trustees’  receipt 
certificates — the  time  of  distribution  being  left  to  the  discretion  of  the  trustees, 
but  not  to  be  postponed  beyond  the  end  of  twenty  years  after  the  death  of 
specified  persons  then  living.  In  the  meantime  the  trustees  were  to  have 
the  powers  of  owners.  They  were  to  distribute  what  they  determined  to  be 
fairly  distributable  net  income  according  to  the  interests  of  the  cestui  que 
trusts  but  could  apply  any  funds  in  their  hands  for  the  repair  or  develop- 
ment of  the  property  held  by  them,  or  the  acquisition  of  other  property, 
pending  conversion  and  distribution.  The  trust  was  explained  to  be  be- 
cause of  the  determination  of  the  Maine  corporation  to  dissolve  without  wait- 
ing for  the  final  cash  sale  of  its  real  estate  and  was  declared  to  be  for  the 
benefit  of  the  eight  shareholders  of  the  Maine  Company  who  were  to  receive 
certificates  subject  to  transfer  and  subdivision.  Then  followed  a more 
detailed  statement  of  the  power  of  the  trustees  and  provision  for  their  com- 
pensation, not  exceeding  one  per  cent,  of  the  gross  income  unless  with  the 
written  consent  of  a majority  in  interest  of  the  cestui  que  trusts.  A similar 
consent  was  required  for  the  filling  of  a vacancy  among  the  trustees,  and  for 
a modification  of  the  terms  of  the  trust.  In  no  other  matter  had  the  bene- 
ficiaries any  control.  The  title  of  the  trust  was  fixed  for  convenience  as 
The  Massachusetts  [sic:  in  fact — Wachusett]  Realty  Trust. 

3266  The  declaration  of  trust  on  its  face  is  an  ordinary  real  estate  trust  of 
the  kind  familiar  in  Massachusetts,  unless  in  the  particular  that  the 

trustees’  receipt  provides  that  the  holder  has  no  interest  in  any  specific 
property  and  that  it  purports  only  to  declare  the  holder  entitled  to  a certain 
fraction  of  the  net  proceeds  of  the  property  when  converted  into  cash  ‘and 
meantime  to  income’.  The  only  property  expressly  mentioned  is  the  real 
estate  not  transferred  to  the  Massachusetts  corporation.  Although  the 
trustees  in  fact  have  held  the  stock  of  that  corporation  and  have  collected 
dividends  upon  it,  their  doing  so  is  not  contemplated  in  terms  by  the  instru- 
ment. It  does  not  appear  very  clearly  that  the  eight  Adaine  shareholders 
might  not  have  demanded  it  had  they  been  so  minded.  The  function  of  the 
trustees  is  not  to  manage  the  mills  but  simply  to  collect  the  rents  and  income 
of  such  property  as  may  be  in  their  hands,  with  a large  discretion  in  the 
application  of  it,  but  with  a recognition  that  the  receipt  holders  are  entitled 
to  it  subject  to  the  exercise  of  the  powers  confided  to  the  trustees.  In  fact, 
the  whole  income,  less  taxes  and  similar  expenses,  has  been  paid  over  in  due 
proportion  to  the  holders  of  the  receipts. 

3267  There  can  be  little  doubt  that  in  Massachusetts  this  arrangement 
would  be  held  to  create  a trust  and  nothing  more.  ‘The  certificate 

holders  . . . are  in  no  way  associated  together  nor  is  there  any  pro- 

vision in  the  [instrument]  for  any  meeting  to  be  held  by  them.  The  only 
act  which  (under  the  [declaration  of]  trust)  they  can  do  is  to  consent  to  an 
alteration  ...  of  the  trust’  and  to  the  other  matters  that  we  have 


INC. 


436 


TAX 


mentioned.  They  are  confined  to  giving  or  withholding  assent,  and  the  giving 
or  withholding  it  ‘is  not  to  be  had  in  a meeting  but  is  to  be  given  by  them 
individually’.  ‘The  sole  right  of  the  cestui  que  trust  is  to  have  the  property 
administered  in  their  interest  by  the  trustees,  who  are  the  masters,  to  receive 
income  while  the  trust  lasts,  and  their  share  of  the  corpus  when  the  trust 
comes  to  an  end’.  Williams  v.  Milton^  215  Mass.  1,  10,  11;  ihid,  8.  The 
question  is  whether  a different  view  is  required  by  the  terms  of  the  present 
act.  As  by  D.  above  referred  to  trustees  and  associations  acting  in  a fiduciary 
capacity  have  the  exemption  that  individual  stockholders  have  from  taxation 
upon  dividends  of  a corporation  that  itself  pays  an  income  tax,  and  as  the 
plaintiffs  undeniably  are  trustees,  if  they  are  to  be  subjected  to  a double 
liability  the  language  of  the  statute  must  make  the  intention  clear.  Gould 
V.  Gould,  245  U.  S.  151,  153  [Tf2732].  United  States  v.  Isham,  17  Wall.  496, 
504. 

3268  The  requirement  of  G.  (a)  is  that  the  normal  tax  thereinbefore 
imposed  upon  individuals  shall  be  paid  upon  the  entire  net  income 

accruing  from  all  sofirces  during  the  preceding  year  “to  every  corporation, 
joint-stock  company  or  association,  and  every  insurance  company,  organized 
in  the  United  States,  no  matter  how  created  or  organized,  not  including 
partnerhips.”  The  trust  that  has  been  described  would  not  fall  under  any 
familiar  conception  of  a joint-stock  association,  whether  formed  under  a 
statute  or  not.  Smith  v.  Anderson,  15  Ch.  D.  247,  273,  274,  277,  282.  Eliot 
v.  Freeman,  220  U.  S.  178,  186.  If  we  assume  that  the  words  ‘no  matter  how 
created  or  organized’  apply  to  ‘association’  and  not  only  to  ‘insurance  com- 
pany’, still  it  would  be  a wide  departure  from  normal  usage  to  call  the  bene- 
ficiaries here  a joint-stock  association  when  they  are  admitted  not  to  be 
partners  in  any  sense,  and  wTen  they  have  no  joint  action  or  interest  and  no 
control  over  the  fund.  On  the  other  hand  the  trustees  by  themselves  cannot 
be  a joint-stock  association  within  the  meaning  of  the  act  unless  all  trustees 
with  discretionary  powers  are  such,  and  the  special  provision  for  trustees  in 
D.  is  to  be  made  meaningless.  We  perceive  no  ground  for  grouping  the  two — 
beneficiaries  and  trustees — together,  in  order  to  turn  them  into  an  association,, 
by  uniting  their  contrasted  functions  and  powers,  although  they  are  in  no 
proper  sense  associated.  It  seems  to  be  an  unnatural  perversion  of  a well- 
known  institution  of  the  law. 

3269  We  do  not  see  either  that  the  result  is  affected  by  any  technical 
analysis  of  the  individual  receipt  holder’s  rights  in  the  income  received 

by  the  trustees.  The  description  most  in  accord  with  what  has  been  the  prac- 
tice would  be  that,  as  the  receipts  declare,  the  holders,  until  distribution  of 
the  capital,  were  entitled  to  the  income  of  the  fund  subject  to  an  unexercised 
power  in  the  trustees  in  their  reasonable  discretion  to  divert  it  to  the  improve- 
ment of  the  capital.  But  even  if  it  were  said  that  the  receipt  holders  were 
not  entitled  to  the  income  as  such  until  they  got  it,  we  do  not  discern  how 
that  would  turn  them  into  a joint-stock  company.  Moreover  the  receipt 
holders  did  get  it  and  the  question  is  what  portion  it  was  the  duty  of  the  trus- 
tees to  withhold. 

32  70  We  presume  that  the  taxation  of  corporations  and  joint-stock  com- 
panies upon  dividends  of  corporations  that  themselves  pay  the 
income  tax  was  for  the  purpose  of  discouraging  combinations  of  the  kind 
now  in  disfavor,  by  which  a corporation  holds  controlling  interests  in  other 
corporations  which  in  their  turn  may  control  others,  and  so  on,  and  in  this 
way  con'centrates  a power  that  is  disapproved.  There  is  nothing  of  that 
sort  here.  Upon  the  whole  case  we  are  of  opinion  that  the  statute  fails 
to  show  a clear  intent  to  subject  the  dividends  on  the  Massachusetts  corpo- 
ration’s stock  to  the  extra  tax  imposed  by  G.  (a). 


INC. 


437  TAX 


3271  Our  view  upon  the  main  question  opens  a second  one  upon  which 
the  Circuit  Court  of  Appeals  did  not  have  to  pass.  The  District 
Court  while  it  found  for  the  plaintiffs,  ruled  that  the  defendant  was  entitled 
to  retain  out  of  the  sum  received  by  him  the  amount  of  the  tax  that  they  should 
have  paid  as  trustees.  To  this  the  plaintiffs  took  a cross  writ  of  error  to  the 
Circuit  Court  of  Appeals.  There  can  be  no  question  that  although  the 
plaintiffs  escape  the  larger  liability,  there  was  probable  cause  for  the  defend- 
ant’s act.  The  Commissioner  of  Internal  Revenue  rejected  the  plaintiff’s 
claim,  and  the  statute  does  not  leave  the  matter  clear.  The  recovery  there- 
fore will  be  from  the  United  States.  Rev.  Sts.  §989.  The  plaintiffs,  as 
they  themselves  alleged  in  their  claim,  were  the  persons  taxed,  whether  they 
were  called  an  association  or  trustees.  They  were  taxed  too  much.  If 
the  United  States  retains  from  the  amount  received  by  it  the  amount  that  it 
.should  have  received,  it  cannot  recover  that  sum  in  a subsequent  suit. 

J udgment  of  the  Circuit  Court  of 
Appeals  reversed. 

Judgment  of  the  District  Cotirt 
Affirmed. 


(T.  D.  2810.) 

3272  Extension  of  time  in  which  taxpayers  living  or  temporarily  residing 
1507  in  the  Territory  of  Alaska  may,  pursuant  to  the  requirements  of  the 
3026  Revenue  Act  of  1918,  file  returns  of  income  for  the  year  1918  with 
the  Collector  of  Internal  Revenue  for  their  respective  districts. — 
Because  of  the  fact  that  it  will  be  impossible  to  put  into  the  hands  of  tax- 
payers residing  or  located  in  the  Territory  of  Alaska  the  blank  forms  and 
instructions  prescribed  by  this  Department  for  the  use  of  taxpayers  in  making 
returns  pursuant  to  the  new  Revenue  Act,  in  time  for  such  returns  to  be  filed 
on  or  before  the  due  date — March  15,  1919 — an  extension  of  time  to  June 
15,  1919,  is  hereby  granted  to  all  taxpayers  living  or  residing  temporarily 
in  the  Territory  of  Alaska.  This  extension  shall  not  be  construed  as  extending 
the  payment  of  the  second  installment  due  June  15,  1919,  and  subsequent 
installments,  therefore  two  installments  will  be  due  June  15,  1919.  (T.  D. 

2810,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  March  21,  1919.) 


(T.  D.  2811.) 

3273  Preliminary  edition  of  Regulations  45  amended  (1)  by  the  addition  of 
3259  a new  Article  numbered  307,  concerning  the  allowance  of  credit  for 

a personal  exemption  and  for  dependents  to  a non-resident  alien 
individual,  and  (2)  by  the  addition  of  a new  Article  numbered  316,  concerning 
the  allowance  of  credit  to  non-resident  alien  employes. — The  preliminary 
edition  of  Regulations  45  is  hereby  amended  by  the  addition  of  two  new 
Articles,  Nos.  307  and  316,  respectively,  and  reading  as  follows: 

3274  Article  307,  Credit  for  a personal  exemption  and  for  dependents  in 
537  case  of  nonresident  alien  individual. — (1)  The  follov.dng  is  an  incom- 

2972  plete  list  of  countries  which  either  impose  no  income  tax  or  in  imposing 
an  income  tax  allow  the  similar  credit  required  by  the  Statute: 
Argentina;  Brazil;  Canada;  Cuba;  France;  Italy;  Mexico;  Union  of  South 
Africa.  (2)  The  following  is  an  incomplete  list  of  countries  which  in  imposing 
an  income  tax  do  not  allow  the  similar  credit  required  by  the  Statute:  Aus- 
tralia; Great  Britain  and  Ireland;  Japan;  New  Zealand.  A nonresident  alien 
individual  who  is  a citizen  or  subject  of  any  country  on  the  first  list  is  entitled 

438 


INC. 


TAX 


3-27-19. 


for  the  purpose  of  the  normal  tax  to  such  credit  for  a personal  exemption  and 
for  dependents  as  his  family  status  may  warrant.  (See  Articles  302-305)* 
[1l 2969-2972].)  If  he  is  a citizen  or  subject  of  any  country  on  the  second  list 
he  is  not  entitled  to  any  such  credit.  If  he  is  a citizen  or  subject  of  a country 
which  is  on' neither  list,  then  to  secure  credit  for  a personal  exemption  or  for 
dependents  or  both  he  must  prove  to  the  satisfaction  of  the  Commissioner  that 
his  country  does  not  impose  an  income  tax  or  that  in  imposing  an  income 
tax  it  grants  the  similar  credit  required  by  the  Statute.  (See  Article  306, 
[There  is  no  such,  yet.]) 

3275  Article  316.  Allowance  of  credits  to  nonresident  alien  employee.— 
54]  A nonresident  alien  employee,  provided  he  is  entitled  under  Section 
2977  216  of  the  Statute  to  credit  for  a personal  exemption  or  for  dependents 

or  both  (see  Articles  301-307,  particularly  the  list  of  countries  in 
Article  307,  [^3274]),  may  claim  the  benefit  of  such  credit  by  filing  with  his 
employer  Form  1115,  duly  filled  out  and  executed  under  oath.  On  the  filing 
of  such  a claim  the  employer  shall  examine  it.  If,  on  such  examination,  it 
appears  that  the  claim  is  in  due  form,  that  it  contains  no  statement  which, 
to  the  knowledge  of  the  employer,  is  untrue,  and  that  such  employee,  on  the 
face  of  the  claim,  is  entitled  to  credit,  and  that  such  credit  has  not  yet  been 
exhausted,  such  employer  need  not,  until  such  credit  be  in  fact  exhausted, 
withhold  any  tax  from  payments  of  salary  or  wages  made  to  such  employee. 
Every  employer  with  whom  affidavits  of  claim  on  Form  1115  are  filed  by 
employees  shall  preserve  such  affidavits  until  the  following  calendar  year, 
and  shall  then  file  them,  attached  to  his  annual  withholding  return  (see 
Article  367,  [^3002])  on  Form  1042  (revised),  with  the  Collector,  on  or  before 
March  1st.  In  case,  however,  when  the  following  calendar  year  arrives, 
such  employer  has  no  withholding  to  return,  he  shall  forward  ail  such  affidavits 
of  claim,  so  filed  with  him  by  employees,  directly  with  the  Commissioner 
(Sorting  division),  with  a letter  of  transmittal,  on  or  before  March  1.  In 
all  other  cases  benefit  of  the  credits  allowed  against  net  income  for  the  purpose 
of  the  normal  tax  may  not  be  received  by  a nonresident  alien  by  filing  a 
claim  with  the  withholding  agent,  but  only  by  claiming  them  upon  filing  a 
return  of  income  as  prescribed  in  Article  403  [^3015].  (T.  D.  2811,  signed 

by  Commissioner  Daniel  C.  Roper,  and  dated  March  22,  1919.) 


327  6 Substantial  Loss  Because  of  Material  Reduction  of  Value  of  Inventory 
II 1-9  for  taxable  year  1918. — Referring  to  Subsection  14  of  Section  234, 
2215  new  Revenue  Act.  Will  loss  resulting  from  sale  consist  of  inventory 
2963  value  at  close  of  taxable  year,  plus  selling  expenses,  less  selling  price.^ 
Or  will  it  consist  only  of  difference  between  inventory  value  and  selling 
price  Will  loss  resulting  from  fall  in  market  value  of  goods  still  on  hand 
consist  of  difference  between  inventory  value  at  close  of  taxable  year  and 
market  value  at  time  of  filing  claim.  (Answer.)  Your  telegram,  February 
22.  Losses  deductible  under  Section  234  consist  of  decrease  in  value  of  goods 
inventoried  as  evidenced  by  sale  or  otherwise  and  do  not  include  selling 
expenses  deductible  during  taxable  year  in  which  sale  is  made.  Loss  due 
to  decline  in  market  value  of  goods  on  hand  is  difference  between  inventory 
v«alue  at  end  of  taxable  year  and  market  value  at  time  of  filing  claim.  (Tele- 
gram to  the  Department  from  E.  G.  Shorrock  & Co.,  Seattle,  Washington,, 
and  the  reply  thereto  signed  by  Commissioner  Daniel  C.  Roper,  and  dated 
March  3,  1919.) 


INC. 


439 


TAX 


3277  Manner  of  Determining  Amount  of  Exempt  Interest  From  Liberty 
'975  Bond  Holdings. — Referring  K (b)  Form  1040,  client  has  $30,000 
2869  Table  13  (d),  column  6,  and  still  owns  them;  also  $100,000  (b) 
column  6,  made  up  $50,000  Second  converted  into  Thirds  from  which 
$2,062.50  interest  was  received  and  $50,000  Thirds  from  which  $744.90 
interest  was  received.  Please  wire  me  collect,  Pasadena,  Central  Building, 
if  allowed  exemption  of  $50,000  can  be  claimed  against  the  $50,000  Second 
Liberty  converted  into  Thirds  or  whether  only  $5,000  can  be  claimed  against 
Second  Liberty  converted  into  Thirds  and  remaining  $45,000  claimed  against 
balance  of  $95,000  of  the  two  issues.  If  latter  is  the  case  would  taxable 
interest  be  represented  by  fifty  ninety-fifths  of  total  interest  received  from  the 
two  issues  less  interest  on  $5,000  Second  Liberty  converted  into  Thirds. 
(Answer.)  Your  telegram  March  7.  Exemption  may  be  claimed  on  interest 
received  from  $50,000  principal  of  Second  loan  bonds  converted  into  Thirds. 
(Telegram  from  Frederick  J.  Winston,  Pasadena,  Cal.,  and  the  reply  there- 
to signed  by  Commissioner  Daniel  C.  Roper,  and  dated  March  12,  1919.) 


3278  Manner  of  Determining  Amount  of  Exempt  Interest  From  Liberty 
975  Bond  Holdings. — Receipt  is  acknowledged  of  your  letter  of  March  1, 
2869  1919,  requesting  information  as  to  the  exemption  which  may  be 

3277  claimed  by  an  individual  against  interest  received  on  Liberty  Bonds 
held  under  the  following  conditions: 

$100,000  1st  Liberty  Loan  33^%  Bonds,  converted  into  43^% 

Bonds  issued  May  9,  1918,  upon  which  the  individual  re- 


ceived  $2,125.00 

$100,000  3rd  Liberty  Loan  434%  Bonds,  issued  May  9,  1918, 

upon  which  he  received 2,125.00 


$30,000  4th  Liberty  Loan  434%  Bonds,  upon  which  he  re- 
ceived no  interest 

3279  In  reply  you  are  advised  that  an  individual  is  exempt  from  normal 
income  tax  upon  all  interest  received  on  Liberty  Loan  Bonds.  If 

the  individual  in  question  held  at  the  date  of  filing  his  return  for  1918  the 
$30,000  4th  Liberty  Loan  434%  Bonds  originally  subscribed  for  by  him,  he 
will  be  entitled  to  exemption  from  surtax  upon  the  interest  received  on  one 
and  one-half  (l34)  times  this  amount,  or  $45,000,  which  may  be  applied 
against  his  holdings  of  First  Liberty  Loan  334%  Bonds  converted  into 
434%  Bonds,  and  the  Third  Liberty  Loan  434%  Bonds.  In  addition  to 
this  he  will  be  allowed  exemption  from  tax  upon  $5,000  Liberty  Loan  Bonds, 
which  is  provided  for  in  If 7 of  the  Second  Liberty  Loan  Act,  making  a 
total  exemption  from  tax  of  the  interest  received  upon  $50,000  of  the  $200,000 
Bonds  of  the  First  and  Third  series  above  mentioned. 

3280  The  taxpayer  will,  therefore,  be  subject  to  surtax  upon  $3,187.50, 
the  interest  received  on  $150,000  worth  of  his  First  Liberty  Loan 

334%  Bonds  converted  into  434%  Bonds  issued  May  9,  1918,  and  his  Third 
Liberty  Loan  434%  Bonds  issued  on  the  same  date.  (Letter  to  The  Corpo- 
ration Trust  Company,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated 
March  20,  1919.) 


(T.  D.  2812.) 

3281  Correction  in  Form  1120. — Attention  is  directed  to  an  error  in  the 
title  of  Schedule  K,  Form  1120,  “Corporation  Income  Profits  Tax 
Return”  (Supplementary  Page  41).  The  title  of  this  schedule  reads 
“Changes  in  invested  capital  from  end  of  pre-war  period  to  beginning  of 
taxable  year  not  shown  in  Schedule  A.”  It  should  read  “Changes  in 
invested  capital  from  end  of  pre-war  period  to  beginning  of  taxable  year  not 
shown  in  Schedule  D.”  (T.  D.  2812,  signed  by  Commissioner  Daniel  C. 

Roper,  and  dated  March  22,  1919.) 


INC. 


440 


TAX 


3282  Old  ownership  certificates  acceptable  until  May  1 or  Tune  1,  1919. 

650  — Department  will  accept  all  ownership  certificates  on  old  form 

2999  already  filed  by  ov/ners  of  bonds  covering  interest  on  bonds  domestic 

3000  corporation  or  foreign  items.  If  not  filed  old  certificates  will  be 
, 3060  accepted  from  bondholders  within  continental  limits  of  the  United 

States  until  May  1,  1919,  ^nd  from  bondholders  outside  the  United 
States  until  June  1,  1919.  (Telegram  to  Chas.  H.  Hubbell,  First  National 
Bank,  Cleveland,  Ohio,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated 
March  28,  1919.) 

3283  Releasing  the  two  per  cent,  tax  withheld  against  nonresident  foreign 

3003  corporations  on  dividends. — Receipt  is  acknowledged  of  your  letter 

dated  March  11,  1919,  requesting  information  in  regard  to  releasing 
the  2%  tax  withheld  on  account  of  dividends  paid  by  you  to  nonresident 
alien  corporations  during  the  year  1918.  Ifin  reply  you  are  advised  that 
you  should  release  the  amount  withheld,  and  pay  same  to  the  respective 
nonresident  alien  corporations  from  whom  it  was  withheld,  and  send  a 
statement  of  the  individual  amounts  released  to  the  Commissioner  of  Internal 
Revenue,  Sorting  Division,  Washington,  D.  C.  (Letter  to  Bonbright  & 
Company,  New  York,  N.  Y.,  signed  by  J.  H.  Callan,  Assistant  to  the  Com- 
missioner, and  dated  March  24,  1919.) 


3284  Manner  of  determining  amount  of  exempt  interest  from  Liberty 

975  Bond  holdings. — Referring  to  our  letter  March  9 and  your  tele- 
2869  graphic  reply  dated  March  15,  also  to  Instructions  K (b)  at  bottom 
3278  of  page  2,  Form  1040,  particularly  to  that  portion  of  paragraph  2 
reading  “Periods  during  which  your  holdings  of  that  class  of  obliga- 
tions remained  unchanged.”  Are  we  to  understand  that  taxpayers  are 
deemed  to  have  owned  bonds  of  various  classes  during  the  periods  covered 
by  coupons  clipped  from  such  classes  of  bonds. ^ Example.  Taxpayer 
bought  First  in  1917  and  has  bought  no  bonds  since.  On  May  15,  1918, 
he  converted  his  dj^s  into  First  4s.  In  this  case  are  we  to  understand  that 
so  far  as  taxation  is  concerned  the  taxpayer  ov/ned  dj^s  until  December  15, 
1917,  and  4s  thereafter.^  Are  we  to  understand  that  from  January  1 until 
December  dl  was  the  period  in  1918  during  which  holdings  of  4%  bonds 
remained  unchanged.^  Please  wire  reply.  (Answer.)  Answering  your 
telegram  March  17.  Individual  who  on  May  15,  1918,  converted  First 
Liberty  d3^%  Bonds  into  First  Liberty  4s  held  First  Liberty  4s  for  entire 
year  1918  for  purposes  of  income  tax.  Any  amount  paid  at  time  of  con- 
version for  adjustment  of  interest  to  be  subtracted  from,  amount  received 
at  first  interest  payment  after  conversion  and  only  the  difference  between 
amount  received  and  amount  paid  to  be  included  in  return  of  taxpayer. 
(Telegram  from  Chas.  H.  Hubbell,  First  National  Bank,  Cleveland,  Ohio, 
and  the  answer  thereto,  signed  by  Commissioner  Daniel  C.  Roper,  and 
dated  March  25,  1919.) 


3285  The  10%  Undistributed  Profits  Tax,  Being  Considered  an  Income 
2037  Tax,  Is  Not  Deductible. — Replying  to  your  communication  of  March 
2897  14,  1919,  you  arc  informed  that  the  10%  tax  which  was  imposed 

on  corporations’  undistributed  net  income  by  Section  10(b)  of  the 
Revenue  Act  of  September  8,  1916,  as  amended  by  the  Revenue  Act  of 
October  3,  1917,  is  not  an  allowable  deduction  from  the  gross  income  of  a 
corporation  shown  on  an  income  tax  return.  ' ' (Letter  to  The  Corporation 
Trust  Company,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  April  1, 
1919.) 


INC. 


441 


TAX 


(T.  D.[2815.) 


3286  Returns  of  Income  By  or  For  Nonresident  Alien  Individuals. — 

538  Nonresident  alien  individuals  or  their  authorized  agents  should 
543  use  form  1040  (revised)  or  1040  A (revised)  in  making  returns  of 
1435  income  derived  from  sources  within  the  United  States,  regardless 
3015  of  amount,  unless  the  tax  on  such  income  has  been  fully  paid  at 
3168  the  source.  If  a nonresident  alien  individual  is  not  liable  for  any 

3258  tax  which  has  been  withheld  at  the  source,  no  refund  of  such  tax 
will  be  permitted  unless  such  a return  is  filed  and  a statement  is  at- 
tached thereto  indicating  the  amounts  of  ta-x  withheld  and  the  names  and 
post  ofiice  addresses  of  all  withholding  agents.  Unless  a nonresident  alien 
individual  shall  render  a return  of  income,  the  t^ix  will  be  collected  on  the 
basis  of  his  gross  income  (not  his  net  income)  from  sources  within  the  United 
States. 

3287  In  filling  out  form  1040  (revised)  or  form  1040  A (revised)  the  income 
reported  in  each  case  should  be  the  income  from  sources  within  the 

United  States,  as  defined  in  article  91  [1i2876]  of  Regulations  45,  and  the 
deductions  taken  should  be  those  allowed  under  article  271  [^2964]  of  the 
Regulations.  In  items  28  and  33  of  form  1040  (revised)  and  in  items  O 
and  P of  form»1040  A (revised)  the  tax  must  be  computed  at  12  per  cent 
instead  of  6 per  cent.  No  credit  may  be  taken  for  item  40  in  form  1040 
(revised). 

3288  A nonresident  alien  individual,  similarly  to  a citizen  or  resident, 

3259  is  entitled  for  the  purpose  of  the  normal  tax  to  credit  dividends 
3273  from  domestic  or  resident  foreign  corporations,  interest  on  obli- 
gations of  the  United  States,  a personal  exemption,  and  $200  for 

each  dependent,  except  that  if  he  is  a citizen  or  subject  of  a country  which 
imposes  an  income  tax  a personal  exemption  or  credit  for  dependents  is  allowed 
him  “only  if  such  country  allows  a similar  credit  to  citizens  of  the  United 
States  not  residing  in  such  country.”  “If  such  country  allows  a similar 
credit”  means  if  such  country  in  imposing  its  income  tax  allows  a personal 
exemption  or  a credit  for  dependents,  as  the  case  may  be,  and  allows  it  with- 
out discrimination  to  citizens  of  the  United  States  not  residing  in  such 
country.  To  satisfy  the  requirement  of  a similar  credit  it  is  not  necessary 
that  the  personal  exemption  or  credit  for  dependents,  as  the  case  may  be, 
should  be  the  satae  as  that  allowed  by  the  United  States  statute.  For 
countries  that  allow  and  do  not  allow  similar  credits  see  T.  D.  2811  of  March 
22,  1919  [113273]. 

3289  See  generally  Title  II  of  the  Revenue  Act  of  1918  and  Regulations  45, 
and  particularly  articles  2,  91,  92,  271,  305,  311-315,  361-372,  403, 

443,  1121,  1131  and  1132.  [See  blue  sheet  facing  page  300.]  (T.  D.  2815, 

signed  by  Commissioner  Daniel  C.  Roper,  and  dated  April  2,  1919.) 


(T.  D.  2816.) 

3290  A Certain  Massachusetts  Trlist  Held  not  to  be  an  Association  under 
3264  the  Act  of  Oct.  3,  1913. — -The  appended  decision  of  the  United  States 
Supreme  Court  in  the  case  of  Alvah  Crocker  et  al.,  Trustees,  v. 
John  F.  Malley,  Collector  of  Internal  Revenue  [for  the  decision  in  full,  see 
1[3264],  is  published  for  the  information  of  internal  revenue  officers  and  others 
concerned.  (T.  D.  2816,  signed  by  Commissioner  Daniel  C.  Roper,  and 
dated  April  2,  1919.) 


INC. 


442  TAX 


i-18-id. 


329 1 Substantial  Loss  Because  of  Material  Reduction  of  Value  of  Inventoiy 
1119  for  Taxable  Year  1918. — Loss  in  inventory  see  Article  261,  Regulations 
2215  45.  Regulation  states  that  after  one  claim  has  been  allowed  no 

2963  further  claim  can  be  considered.  Does  this  mean  that  if  after  claim 
is  made  for  loss  on  certain  lines  of  goods  losses  should  be  sustained 
on  other  lines  of  goods  no  claim  in  respect  of  those  other  lines  will  be  con- 
sidered.? In  other  words  must  the  first  claim  cover  all  loss  on  all  the  inven- 
tory.? Kindly  wire.  (Answer.)  Your  telegram  April  1.  Corporations 
may  file  claim  for  abatement  based  on  revaluation  of  inventories  at  time  of 
filing  return  or  any  time  thereafter  during  1919.  This  does  not  preclude 
corporation  from  filing  amended  claim  during  1919,  but  after  one  claim  has 
been  allowed  no  further  claim  may  be  made.  If  any  part  of  the  claim  is 
disallowed,  the  remainder  of  tax  shall  on  notice  and  demand  be  paid  by 
the  taxpayer  to  the  Collector,  with  interest  at  the  rate  of  one  percentum 
per  month  from  the  time  the  tax  would  have  been  due  had  no  such  claim 
been  filed.  (Telegram  from  E.  G.  Shorrock  & Co.,  Seattle,  Washington, 
and  the  reply  thereto  signed  by  Commissioner  Daniel  C.  Roper,  and  dated 
April  3,  1919.) 


3292  Status  of  Undistributed  Profits,  Unduly  Accumulated,  if  Invested 
746  in  United  States  Bonds. — In  reply  to  your  letter  of  March  20,  1919, 
2995  you  are  advised  that  any  corporation  which  permits  its  gains  and 
.profits  to  accumulate  for  the  purpose  of  preventing  the  imposition 
of  the  surtax  upon  its  stockholders  and  members  will  be  subject  to 
the  provisions  of  Section  220,  of  the  Revenue  Act  of  1918,  regardless  of 
whether  or  not  such  gains  and  profits  are  invested  by  the  corporation  in 
obligations  of  the  United  States.  (Letter  to  The  Corporation  Trust  Com- 
pany, signed  by  Commissioner  Daniel  C.  Roper,  and  dated  April  9,  1919.) 


3293  Interrogatories  on  Ownership  Certificates  to  be  Answered  Fully. — 
2999  All  information  called  for  on  ownership  certificates  must  be  supplied. 

669  Debtor  corporation  or  its  authorized  agent  will  be  held  responsible 
for  proper  execution  of  certificates  but  not  as  to  misstatements  by 
bond  owners.  Payment  of  bond  interest  should  be  refused  unless  data  is 
complete.  Information  necessary  for  efficient  administration  of  Revenue 
Act.  (Telegram  to  the  Southern  Pacific  Company,  New  York,  N.  Y., 
signed  by  Commissioner  Daniel  C.  Roper,  and  dated  April  7,  1919.) 


3294  Consolidated  Returns:  Public  Service  Corporations  not  Excepted. — 
1405  Reply  your  wire  April  second.  Requirements  Treasury  Decision 
1418  2662  that  public  service  corporations  subject  to  regulation  by  Public 

3233  Service  Commission  should  not  make  consolidated  return  not  applic- 
able under  Revenue  Act  of  1918.  (Telegram  to  Miller,  Mack  & 
Fairchild,  Milwaukee,  Wis.,  signed  by  Commissioner  Daniel  C.  Roper, 
dated  April  9,  1919.) 


3296  Consolidated  Returns  not  Permitted:  Stock  of  Two  Corporations 
1411  Owned  “by  the  Same  Interests,’^  the  Percentage  of  Holdings  in  the 
3235  Two  Companies  Differing. — [An  example  of  a ruling  in  a specific 
case.]  Receipt  Is  acknowledged  of  your  letter  dated  March  31, 

1919,  to  which  you  attach  a letter  from . 1[It  appears  that  there  are 

two  corporations,  one  owning  and  operating  properties  In  the  Hawaiian 
Islands  and  the  other  owning  and  leasing  various  pieces  of  property  in  Cali- 


INC. 


443  TAX 


fornia.  The  stock  of  the  California  corporation  is  held  by  the  members 
of  one  family,  four  male  members  of  the  family  each  owning  five-twenty- 
fourths"  and  a sister  one-sixth  of  the  entire  stock.  The  Hawaiian  corporation 
is  held  by  the  same  family  principally,  with  the  exception  that  one-sixth  of 
the  stock  is  held  by  each  of  the  four  male  members  afore-m.entioned,  one-sixth  j 

by  the  sister  afore-mentioned  and  one-sixth  by  the  husband  of  a deceased 
sister  to  the  other  stockholders.  IfThe  affairs  and  operations  of  the  two 
corporations  have  in  the  past  been,  and  are  now  being,  actively  conducted 
bv  and  in  the  control  of  the  male  m.embers  of  the  family.  The  two  corpora- 
tions, it  is  stated,  are  in  purpose  and  effect  only  one  enterprise.  ^In  accord- 
ance with  regulations  No.  45,  v/here  substantially  all  of  the  stock  of  two 
or  more  corporations  is  held  by  the  same  interests,  such  holdings  must  be  in  ^ 
substantially  the  same  proportions  in  order  to  require  a consolidated  return. 

It  is  therefore  held  that  these  corporations  should  file  separate  returns. 

(Letter  to  The  Corporation  Trust  Company,  signed  by  Commissioner  Daniel 
C.  Roper,  and  dated  April  11,  1919.) 


3296  Interest  on  Food  Administration  Grain  Corporation  Notes. — Interest 
975  on  Food  Administration  Grain  Corporation  notes  is  not  exempt  from 
2868  incomm  and  excess  profits  taxes.  (Telegram  to  The  Corporation 
Trust  Company,  signed  by  Commissioner  Daniel  C.  Roper,  and 
dated  April  13,  1919.) 


3297  Exempt  Status  of  Interest  on  Victory  Liberty  Loan  Notes. — The 
3169  Victory  Liberty  Loan,  which  will  be  offered  for  popular  subscription 

on  April  21,  will  take  the  form  of  4^%  three/four  year  Convertible 
Gold  Notes  of  the  United  States,  exempt  from  State  and  local  taxes,  except 
estate  and  inheritance  taxes,  and  from  normal  Federal  income  taxes  [^3173]. 
The  Notes  will  be  convertible,  at  the  option  of  the  holder,  throughout  their 
life  into  3^%  three/four  vear  Convertible  Gold  Notes  of  the  United  States 
exempt  from  all  Federal,  State  and  local  taxes,  except  estate  and  inheritance 
taxes  [113172].  In  like  manner  the  3%%  Notes  will  be  convertible  into  the 
Notes. 

3298  The  amount  of  the  issue  will  be  ^4,500,000,000,  which,  with  the 
deferred  installments  of  incom.e  and’profits  taxes  payable,  in  respect 

to  last  year’s  income  and  profits,  during  the  period  covered  by  the  maturity 
dates  of  Terasury  certificates  of  indebtedness  now  outstanding,  will  fully 
provide  for  the  retirem_ent  of  such  certificates.  The  issue  will  be  limited 
to  $4,500,000,000  except  as  it  mmy  be  necessary  to  increase  or  decrease  the 
amount  to  facilitate  allotment.  Oversubscripitons  will  be  rejected  and 
allotments  made  on  a graduated  scale  similar  in  its  general  plan  to  that 
adopted  in  connection  with  the  First  Liberty  Loan.  Allotment  will  be 
made  in  full  on  subscriptions  up  to  and  including  $10,000. 

3299  The  Notes  of  both  series  will  be  dated  and  bear  interest  from  IMay 
20,  1919,  and  will  mature  on  May  20,  1923.  interest  will  be  payable  on 

December  15,  1919,  and  thereafter  sema-annually  on  June  15  and  December 
15,  and  at  miaturity.  All  or  any  of  the  Notes  may  be  redeemed  before 
maturity  at  the  option  of  the  United  States  on  June  15  or  December  15, 
1922,  at  par  and  accrued  interest.  (Official  statement  by  Secretary  of  the 
Treasury  Carter  Glass,  April  14,  1919.) 


INC. 


444  TAX 


4-21-19. 


(It;  Mim.  2101.) 

' ) 3300  Extension  of  Time  for  Completing  Corporate  Returns  and  for  Filing 

3158  Certain  Returns  not  the  Basis  for  Assessment  of  Tax. — In  view  of 
3165  the  short  time  between  the  date  on  which  forms  were  available  and 
3167  the  due  date  (March  15),  of  calendar  year  returns  required  under  the 
Revenue  Act  of  1918,  notice  was  given  through  the  public  press  and  other- 
• wise  that  tentative  returns  (Forms  103 1-T  and  1040-T),  accompanied  by  a 

first  installment  of  one-fourth  of  the  estimated  tax  due  would  be  accepted  on 
l)  that  date,  and  that  in  such  cases  forty-five  days  would  be  given  in  which  to 

file  complete  returns,  but  that  interest  at  the  rate  of  one-half  of  1%  per 
month  upon  the  amounts  by  which  such  installment  payments  fall  short  of 
the  correct  amounts  would  be  collected. 

3301  In  the  case  of  corporations  which  filed  Form  103 1-T  on  or  before 
March  15,  a further  extension,  where  needed,  to  June  15,  1919,  in 

which  to  file  complete  returns  on  Form  1120  is  hereby  granted,  but  all  such 
H corporations  will  be  required  to  pay  on  or  before  June  15  a sum  sufficient, 

with  the  amiount  paid  on  March  15,  to  equal  one-half  the  tax  due  as  shown 
bv  the  return  on  Form  1120,  together  with  interest  at  the  rate  of  one-half 
of  1%  per  mionth  on  any  defficiency  in  the  first  installment. 

3302  It  is  not  deemed  necessary  to  grant  an  extension  of  time  beyond  the 
forty-five  days  originally  granted  for  the  completion  of  personal 

returns,  except  on  special  request  therefor  for  sufficient  reasons  given,  but 
the  above  ruling  as  to  interest  on  deficient  installments  applies  to  them. 

3303  An  extension  of  time  in  which  to  file  returns  of  corporations  making 
returns  for  a fiscal  year  ended  either  on  January  31  or  February 

. 28,  1919,  will  on  request  be  granted  to  June  15,  1919,  but  such  extension 

I shall  not  operate  to  extend  the  due  date  of  any  installment  of  tax  after  the 

first.  Interest  at  the  rate  of  one-half  of  1%  per  month  will  be  collected 
from  the  time  the  first  installment  would  have  been  payable  if  the  extension 
had  not  been  requested. 

3304  The  time  for  filing  returns  of  information  (Forms  1096  and  1099) 
fiduciary  returns  (Form  1041),  withholding  returns  (Form  1042, 

accompanied  by  Form  1098  and  Form  1013),  returns  of  partnerships  and 
personal  service  corporations  required  to  file  returns  on  a calendar  year 
basis,  and  all  other  returns  required  under  the  income  tax  and  profits  tax 
provisions  of  the  law  which  are  not  the  basis  for  the  assessment  of  the  tax, 
^ is  also  extended  to  June  15,  1919.  (It.:  Mim.  2101,  signed  by  Commissioner 

f Daniel  C.  Roper,  and  dated  April  14,  1919.) 


3305  Extension  of  Time  to  June  15,  1919,  Applies  Equally  to  Certain 
3167  Fiscal  Year  Corporations. — Replying  your  telegram  April  15,  general 
3300  extension  to  June  15  applies  to  corporations  with  fiscal  years  ended 
in  1918  which  filed  tentative  return  on  or  before  March  15  and 
need  additional  time  for  [completion  of  return.  (Telegram  to  Kennedy 
M.  Thompson,  New  York,  N.  Y.,  signed  by  Acting  Commissioner  J.  FI. 
Callan,  and  dated  April  18,  1919.) 


INC. 


445  TAX 


3306  Consolidated  Returns:  Public  Service  Corporations,  Including 
1418  Railroads,  Not  Excepted. — Receipt  is  acknowledged  of  your  letter, 
3233  dated  April  8,  1919,  in  which  you  state: 

3294  (..  “In  connection  with  the  Revenue  Act  of  1917,  Title  II,  the 

Bureau  of  Internal  Revenue  made  provision  for  consolidated  re- 
turns for  War  Excess  Profits  Tax  purposes. 

“Treasury  Decision  2662  [^[1418],  issued  March  6,  1918,  provided 
in  that  railroads,  gas,  electric,  water  and  other  public  service 
corporations,  when  operated  independently  and  not  physically  connected 
or  merged — particularly  when  situated  in  different  jurisdictions  and 
subject  to  regulation  by  Public  Service  Commission — will  not  be 
required  or  permitted,  without  special  permission  obtained  in  advance, 
to  make  a consolidated  return. 

“The  Revenue  Act  of  1918,  Section  240,  makes  statutory  provision 
for  consolidated  returns,  both  for  Income  and  for  War  Profits  and 
Excess  Profits  Tax  purposes,  setting  forth  quite  definitely  just  what  shall  be 
considered  to  be  affiliated  corporations.  The  amplifying  Regulations 
of  the  Department  as  contained  in  Regulations  No.  45,  Part  II-A, 
contain  nothing  indicating  that  the  rule  relating  to  public  service  cor- 
porations laid  down  by  the  Department  in  connection  with  the  Revenue 
Act  of  1917  will  be  held  to  apply  to  the  Revenue  Act  of  1918,  Section  240. 

“We  shall  appreciate  word  from  the  Department  as  to  whether  or  not 
public  service  corporations  which  otherwise  would  be  deemed  to  be 
affiliated  corporations  are  to  be  taken  out  of  that  class  because  of  the 
fact  that  they  are  public  service  corporations  and  otherwise  meet  the 
conditions  outlined  in  Treasury  Decision  2662.” 

3307  In  reply  you  are  advised  that  subdivision  (b)  [^1420]  of  Treasury 
Decision  2662  issued  March  6,  1918,  in  connection  with  the  Revenue 

Act  of  October  3,  1917,  does  not  apply  to  the  Revenue  Act  of  1918.  In 
other  words,  public  service  corporations  which  otherwise  would  be  deemed 
to  be  affiliated  corporations  are  not  to  be  taken  out  of  that  class  because 
of  the  fact  that  they  are  public  service  corporations  and  otherwise  meet  the 
conditions  outlined  in  Treasury  Decision  2662.  (Letter  to  The  Corporation 
Trust  Company,  signed  by  Acting  Commissioner  J.  H.  Callan,  and  dated 
April  17,  1919.) 


3308  Extension  to  June  15  is  a Blanket  Extension. — Comment:  To 
3300  remove  any  possible  doubt  we  have  requested  and  have  received 
3305  official  word  that  a further  extension  of  time  to  June  15,  1919,  for 
filing  complete  return  on  Form  1120,  is  granted  to  any  corporation, 
calendar  or  1918  fiscal,  that  filed  a tentative  return  (Form  1031T)  on  or 
before  March  15,  1919,  and  that  such  corporation  need  not  make  application 
for  such  extension,  the  extension  being  automatic  and  universal.  The 
Government  naturally  expects  that  corporations  will  file  their  returns  as 
soon  as  conditions  warrant. — The  Corporation  Trust  Company,  April  21, 
1919. 


INC.  446 


TAX 


4-30-19. 


3309  Claims  for  Refund  may  be  Filed  with  the  Commissioner  Direct. — 

2511-  I have  been  advised  by  the  Claim  Department  of  your  office  that 
2526  Claims  for  Refund  should  be  sent  direct  to  Washington  provided 
3048  there  is  attached  thereto  the  actual  receipt  of  the  collector.  On 
the  other  hand  I note  that  Form  46,  Revised  March,  1918,  has 
printed  on  the  face  of  it: 

“Important” 

“This  claim  should  be  forwarded  to  the  Collector  of  Internal 
Revenue  to  whom  the  tax  was  paid  and  must  be  accompanied  by 
Collector’s  receipt  therefor.” 

3310  (Answer.)  Replying  to  your  letter  of  March  22,  1919,  you  are 
advised  that  claims  for  refund  may  be  forwarded  direct  to  the  Com- 
missioner of  Internal  Revenue,  Claims  Division,  Income  Tax.  (Letter  from 
H.  C.  Hopson,  New  York,  N.  Y.,  and  the  reply  thereto,  signed  by  J.  H. 
Callan,  Assistant  to  the  Commissioner,  and  dated  March  29,  1919.) 


3311  Interest  on  Victory  Liberty  Loan  4%%  Notes  Exempt  from  Income 
3169  Tax  on  Corporations. — [See  7th  word,  5th  line  of  ^3297.]  In  answer 
3297  to  inquiries  the  Treasury  Department  to-day  stated  that  the  interest 
on  the  per  cent  notes  of  the  Victory  Liberty  Loan  is  exempt 
from  the  income  tax  on  corporations,  as  well  as  from  the  normal  Federal 
income  tax  on  individuals.  The  4^^  per  cent,  notes  are  exempt,  under  the 
terms  of  the  Department  Circular  offering  the  Victory  Liberty  Loan  for 
subscription,  “both  as  to  principal  and  interest,  from  all  taxation  now  or 
liereafter  imposed  by  the  United  States,  any  State,  or  any  of  the  possessions 
of  the  United  States,  or  by  any  local  taxing  authority,  except  (a)  estate  or 
inheritance  taxes,  and  (b)  graduated  additional  income  taxes,  commonly 
known  as  surtaxes,  and  excess- profits  and  v/ar-profits  taxes,  now  or  hereafter 
imposed  by  the  United  States,  upon  the  income  or  profits  of  individuals, 
partnerships,  associations,  or  corporations.”  (Official  announcement  by 
the  Treasury  Department,  April  23,  1919.) 


3312  Extension  of  Time  for  Filing  Returns  by  Corporations  whose  Busi- 
1533  noss  is  Transacted  and  v/hose  Books  are  Kept,  Abroad. — Replying 
3027  your  telegram  April  14,  advise  that  Article  443  [now  Art.  4-45]  Regu- 
lations 45,  relative  extensions,  applicable  in  case  of  domestic  cor- 
poration whose  records  kept  and  business  transacted  abroad.  (Telegram 
to  H.  C.  Hopson,  New  York,  N.  Y.,  signed  by  ikcting  Commissioner  J.  H. 
Callan,  and  dated  7\pril  19,  1919.) 

3313  Compensation  as  Special  Counsel,  Received  from  a Municipality, 
1013  is  not  Exempt  Income. — A counsellor  at  law  is  engaged  by  a munici- 
2875b  pality  as  special  counsel,  to  act  in  connection  with  the  regular  City 

Attorney  in  handling  a certain  piece  of  litigation.  Is  he  regarded 
as  an  officer  or  employee  of  a political  subdivision  of  a state,  so  that  his 
compensation  for  his  services  is  not  taxable  under  Article  71  of  Regulations 
45,  sentence  2 [now  Art.  85].^  (Answer.)  In  reply  to  the  first  question, 
you  are  advised  that  under  the  ruling  of  this  office,  the  compensation  paid 
by  a State  to  “special  counsel,”  such  as  described  above,  is  taxable  income, 
and  not  exempt  from  income  tax.  (Part  of  letter  from  Collins  & Corbin, 
Jersey  City,  N.  J.,  and  the  answer  thereto,  signed  by  J.  H.  Callan,  Assistant 
to  the  Commissioner,  and  dated  April  15,  1919.) 


IMC. 


447 


TAX 


3314  Interest,  on  Accounts  Current  and  on  Deposits,  Accruing  to  Non- 
553  resident  Alien  Individuals  and  Foreign  Partnerships:  Withholding 
598  Liability  of  Debtors. — This  office  acknowledges  receipt  of  your  letter 

2996a  dated  March  17,  1919,  in  which  you  request  information  as  to  whether 
commission  merchants,  private  bankers,  and  others  are  required 
under  Section  221  (a)  of  the  Revenue  Act  of  1918,  to  withhold  any  part  of 
interest  accruing  on  mercantile  accounts  current,  or  upon  moneys  held  on 
deposit,  to  nonresident  alien  individuals  or  foreign  partnerships,  if  the  prin- 
cipal amounts  so  due,  as  well  as  the  interest,  are  at  all  times  subject  to  call, 
and  payable  on  demand.  Ifin  reply  you  are  advised  that  interest  upon 
deposits  or  accounts  current,  accruing  on  the  books  of  citizens  or  residents 
of  the  United  States,  domestic  pairtnerships  or  corporations  is  subject  to  the 
deduction  of  the  tax  at  the  source,  only  when  the  recipient  is  a nonresident 
alien  individual.  The  amount  to  be  deducted  is  8%  of  the  interest  credited 
on  the  books  of  the  debtor,  at  the  time  of  crediting  same.  Such  tax  as  is 
withheld  should  be  retained  by  the  withholding  agent  until  the  end  of  the 
calendar  year  and  remitted  to  the  Collector  of  Internal  Revenue,  accom- 
panied by  a return  on  Form  1042  in  the  usual  manner.  (Letter  to  Hughes, 
Rounds,  Schurman  & Dwight,  New  York,  N.  Y.,  signed  by  J.  H.  Callan, 
Assistant  to  the  Commissioner,  and  dated  April  22,  1919.) 

3315  Consolidated  Eetums;  Two  Domestic  Corporations,  the  one  owning 

1410  a Foreign  Corporation,  and  the  other  Owned  by  that  Foreign  Cor- 
3235  poration. — Receipt  is  acknowledged  of  your  letter  dated  April  11, 
3238  1919,  in  v/hich  you  state;  “A  client  of  mine,  a New  Jersey  Cor- 

poration owns  all  of  the  outstanding  stock  in  a foreign  corporation, 

which  in  turn  owns  all  of  the  outstanding  stock  in  a New  York  Corporation. 
Although  under  Article  636  [^3238]  of  Regulations  No.  45  relating  to  the 
Income  Tax  a domestic  corporation  is  not  required  or  permitted  to  file  a 
consolidated  return  with  a foreign  corporation,  it  seems  to  me  that  the  New 
Jersey  and  New  York  Corporations  above-mentioned  are  affiliated  as  that 
term  is  defined  in  Article  633  [^3235],  and  that,  on  that  account  the  New 
Jersey  Corporation  should  file  a consolidated  return  for  both,  under  the  pro- 
visions of  Section  240  of  the  Revenue  Act.  ^Kindly  advise  me  at  your 
earliest  convenience  whether  in  the  opinion  of  your  office  I am  correct  in  this 
interpretation  of  the  law.” 

In  reply  you  are  advised  that  in  accordance  with  Section  240  of  the 
Revenue  Act  of  1918  it  wdll  be  necessary  for  the  New  Jersey  Corporation 
and  the  New  York  Corporation  above-mentioned  to  file  a consolidated 
return,  excluding  the  foreign  corporation.  (Letter  to  a subscriber,  signed 
by  Acting  Deputy  Commissioner  P.  S.  Talbert,  and  dated  April  23,  1919.) 


3316  Old  Ownership  Certificates  Acceptable  Covering  Interest  Payments 
3282  due  May  1,  1919. — Replying  your  telephone  inquiry  to-day  old 
forms  ownership  certificates  filed  with  respect  to  interest  payments, 
due  May  1,  1919,  will  be  accepted  by  this  office.  (Telegram  to  M.  F.  Frey, 
Guaranty  Trust  Company,  New  York,  N.  Y.,  signed  by  Commissioner 
Daniel  C.  Roper,  and  dated  April  29,  1919.) 


3317  Installment  Sales:  Default  and  Inability  to  Repossess. — Your 
2849  telegram  April  23.  When  vendee  defaults  in  installment  payments 
and  vendor  is  unable  to  recover  personal  property  sold,  the  vendor 
should  report  as  loss  on  the  return  for  that  year  the  difference  between  the 
total  amount  actually  received  and  the  cost  plus  amounts  returned  as  profits 
from  sale  during  former  years.  (Telegram  to  Greenbaum,  Wolff  & Ernst, 
New  York,  N.  Y.,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated 
April  26,  1919.) 


INC. 


448  TAX 


3318  Withholding  at  the  Source  on  Bond  Interest,  Tax-Free  and  Other- 
wise.— Receipt  is  acknowledged  of  your  letter  dated  March  18,  1919, 

containing  several  inquiries  which  are  repeated  and  answered  in  the  order 
set  forth  in  your  letter: 

♦ ♦if:***** 

3319  “At  what  rate  is  the  tax  to-be  actually  deducted  from  coupons  paid 
553  to  non-resident  aliens,  nonresident  corporations,  and  nonresident 
572  partnerships  if  the  bonds  are  not  tax-free?”  (Answer.)  Such 

2996  interest  is  subject  to  withholding  at  the  rate  of  8%  in  the  case  of  non- 
resident alien  individuals  and  10%  in  the  case  of  non-resident  alien 
corporations.  No  tax  is  required  to  be  withheld  from  interest  when  the 
bonds  in  question  are  owned  by  a non-resident  alien  partnership. 

3320  “At  what  rate  is  the  tax  to  be  actually  deducted  from  coupons  paid 

608  to  non-resident  aliens,  nonresident  corporations,  and  nonresident 

609  partnerships  if  the  bonds  are  tax-free?”  (Answer.)  The  normal 

610  tax  of  2%  is  required  to  be  withheld  in  such  cases. 

2996 

3321  “At  what  rate  is  the  tax  to  be  actually  deducted  from  coupons  when 
602  not  accompanied  by  an  ownership  certificate,  and  the  owner  is 
612  unknown?”  (Answer.)  When  coupons  are  presented  for  col- 

2996  lection  unaccompanied  by  an  ownership  certificate,  the  normal  tax 
300 la  of  2%  is  required  to  be  withheld  if  the  bonds  contain  a tax-free 
covenant  clause  and  the  normal  tax  of  8%  if  the  bonds  do  not  contain 
such  clause.  (Part  of  letter  to  Mississippi  Valley  Trust  Company,  St. 
Louis,  Mo.,  signed  by  Acting  Commissioner  J.  H.  Callan,  and  dated  April 
18,  1919.) 


3322  Taxes,  on  Profits  on  Sale  of  Property,  Paid  by  Vendee  for  the  Vendor. 

2841  — A vendee  of  a business  agrees  that  in  addition  to  the  purchase 

price  of  the  business  he  will  pay  the  income  and  excess  profit  taxes 
of  the  vendor  arising  from  the  sale  of  said  business.  Query.  • Does  the  pay- 
ment of  the  said  taxes  by  the  vendee  constitute  income  to  the  vendor  which 
the  vendor  would  have  to  report  on  his  income  tax  statement  and  pay  a 
tax  thereon?  As  extremely  urgent  please  reply  by  telegram  as  promptly 
as  possible.  (Answer.)  Your  telegram  April  30.  Income,  excess  profits 
and  war  profits  taxes  paid  by  vendee  for  vendor  on  profits  from  sale  of  prop- 
erty to  vendee  constitute  additional  taxable  income  to  vendor.  (Telegram 
of  Inquiry  from  The  Corporation  Trust  Company,  and  the  reply  thereto 
signed  by  Commissioner  Daniel  C.  Roper,  and  dated  May  2,  1919.) 


3323  Continued  Use  of  Old  Ownership  Certificates  With  Respect  to  Interest 
3282  Due  on  or  Prior  to  September  1 and  October  1,  1919. — Pending 
3316  modification  of  ownership  certificates  revised  February,  1919,  old 
forms  of  ownership  certificates  may  be  accepted  with  respect  to  in- 
terest due  on  and  prior  to  September  1,  1919,  when  received  from  contin- 
ental United  States  and  may  be  accepted  with  respect  to  Interest  due  on 
and  prior  to  October  1,  1919,  when  received  from  abroad.  (Official  an- 
nouncement from  the  Bureau  of  Internal  Revenue,  May  3,  1919.) 


INC. 


449  TAX 


3324  Credits  to  Nonresident  Aliens,  Citizens  of  Countries  which  in  Impos- 
537  ing  Income  Taxes  Levy  no  Income  Taxes  on  United  States  Citizens 
2962a  not  Residing  Therein, — Reference  is  made  to  your  letter  of  March 
3274  22,  1919,  in  which  you  refer  to  Treasury  Decision  2811  [1f3273]  and 

ask  to  be  advised  concerning  the  application  of  the  ruling  contained 
therein  in  cases  where  an  individual  is  a citzien  or  subject  of  a country  which 
imposes  an  income  tax  but  which  tax  does  not  apply  to  nonresident  aliens. 
^In  reply  you  are  advised  that  a citizen  or  subject  of  a country  which  imposes 
an  income  tax  but  does  not  levy  a tax  on  income  derived  from  such  country 
by  citizens  of  the  United  States  not  residing  therein  is  permitted  to  claim 
the  credits  provided  for  in  paragraphs  (c)  and  (d),  Section  216  of  the  Revenue 
Act  of  1918  in  preparing  a return  of  income  derived  from  sources  within  the 
United  States.  (Letter  to  The  Corporation  Trust  Company,  signed  by 
Commissioner  Daniel  C.  Roper,  and  dated  May  1,  1919.) 


(T.  D.  2836.) 

3326  Tax  Exemptions  of  Liberty  Bonds  and  Victory  Notes.  - The  appended 
965  circular,  issued  under  date  of  April  23,  1919,  with  reference  to  the 
2868  tax  exemptions  of  Liberty  Bonds  and  Victory  Notes,  is  published  for 
3169  the  information  of  internal-revenue  officers  and  others  concerned. 
3297  (T.  D.  2836,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated 

3311  May  7,  1919.) 

3326  Tax  Exemptions  of  Liberty  Bonds  and  Victory  Notes.— Liberty  bonds 
and  Victory  notes  issued  undler  authority  of  the  acts  of  Congress 
approved  April  24,  1917,  September  24,  1917,  April  4,  1918,  July  9,  1918, 
September  24,  1918,  and  March  3,  1919,  are  entitled,  respectively,  to  the 
exemptions  from  taxation  set  forth  in  said  acts,  from  which  the  statements  in 
this  circular  are  summarized  and  to  which  they  are  subject. 

I.  4 per  cent  and  434  bonds  are  exempt  from  all  Federal,  State,  and 

local  taxation,  except  {a)  estate  or  inheritance  taxes  and  {b)  Federal 
income  surtaxes  and  profits  taxes,  as  follows: 

1.  First  Liberty  loan  converted  4 per 

cent  bonds  of  1932-1947  (first  4s). 

2.  First  Liberty  loan  converted  434 

per  cent  • bonds  of  1932-1947 
(first  434s,  issue  of  May  9,  1918). 

3.  First  Liberty  loan  second  con- 

verted 434  per  cent,  bonds  of 
1932-1947  (first  434s,  issue  of 
October  24,  1918). 

4.  Second  Liberty  loan  4 per  cent 

bonds  of  1927-1942  (second  4s). 

5.  Second  Liberty  loan  converted  434 

per  cent  bonds  of  1927-1942  (sec- 
ond 434s). 

6.  Third  Liberty  loan  434  per  cent 

bonds  of  1928  (third  434s). 

7.  Fourth  Liberty  loan  434  per  cent 

bonds  of  1933-1938  (fourth  434s). 

8.  Victory  Liberty  loan  4^4  per  cent 

convertible  gold  notes  of  1922- 
1923  (4J4  per  cent  Victory  notes). 

II.  4 per  centjand  434  bonds  are  entitled  to  limited  exemptions  from 

Federal  income  surtaxes  aad  profits  taxes,  as  follows: 

450  TAX 


Are  exempt,  both  as  to  principal  and 
interest,  from  all  taxation  now  or 
hereafter  imposed  by  the  United 
States,  any  State,  or  any  of  the 
possessions  of  the  United  States,  or 
by  any  local  taxing  authority  ex- 
cept {a)  estate  or  inheritance  taxes, 
and  {b)  graduated  additional  income 
taxes,  commonly  known  as  sur- 
taxes, and  excess-profits  and  war- 
profits  taxes,  now  or  hereafter 
imposed  by  the  United  States,  upon 
the  income  or  profits  of  individuals, 
partnerships,  associations,  or  cor- 
porations. 


INC. 


4 per  cent  and  per  cent  Liberty  bonds  (but  not  4J^  per  cent  Victory  notes) 
^ 't  are  entitled  to  certain  limited  exemptions  from  graduated  additional  income 
taxes,  commonly  known  as  surtaxes,  and  excess-profits  and  war-profits 
taxes,  now  or  hereafter  imposed  by  the  United  States,  upon  the  income 
or  profits  of  individuals,  partnerships,  associations,  or  corporations,  in 
respect  to  the  interest  on  principal  amounts  thereof,  as  follows:  ^ 

$5,000  in  the  aggregate  of  first  4s,  first  (issues  of  May  9 and  October 
24,  1918)  second  4s  and  43^s,  third  434s,  fourth  4J4s,  Treasury 
certificates,  and  war-savings  certificates. 

30,000  of  first  434s  (issue  of  October  24,  1918,  only),  until  the  expiration 
of  two  years  after  the  termination  of  the  war. 

30,000  of  fourth  434s,  until  the  expiration  of  two  years  after  the  termina- 
tion of  the  war. 

30.000  in  the  aggregate  of  first  4s,  first  434s  (issues  of  May  9 and  October 
ber  24,  1918),  second  4s  and  434s,  third  434s,  and  fourth  434s, 
as  to  the  interest  received  on  and  after  January  1,  1919,  until  the 
expiration  of  five  years  after  the  termination  of  the  war. 

45.000  in  the  aggregate  of  first  4s,  first  434s  (issue  of  May  9,  1918,  only), 
second  4s  and  434s,  and  third  434s,  as  to  the  interest  received  after 
Januarv  1,  1918,  until  the  expiration  of  tv^o  vears  after  the  termin- 
ation of  the  war;  this  exemption  conditional  on  original  subscrip- 
tion to,  and  continued  holding  at  the  date  of  the  tax  return  of 
two-thirds  as  many  bonds  of  the  fourth  Liberty  loan. 

20.000  in  the  aggregate  of  first  4s,  first  434s  (issues  of  May  9,  and  October 
24,  1918),  second  4s  and  434s,  third  434s,  and  fourth  434s,  as  to 
the  interest  received  on  and  after  January  1,  1919;  this  exemption 
conditional  upon  original  subscription  to,  and  continued  holding  at 
the  date  of  the  tax  return  of  one-third  as  many  notes  of  the  Vic- 
tory Liberty  loan,  and  extending  through  the  life  of  such  notes  of 
the  Victory  Liberty  loan. 

160,000  total  possible  exemptions  from  Federal  income  surtaxes  and  profits 
taxes,  subject  to  conditions  aboye  summarized. 

III.  334  cent  bonds  and  per  cent  notes  are  exempt  from  all  Federal, 
State,  and  local  taxation,  except  estate  or  inheritance  taxes,  as  follows: 

1.  First  Liberty  loan  1 

334  per  cent  bonds  of  | Are  exempt,  both  as  to  principal  and  interest,  from 
1932-1947.  I all  taxation  (except  estate  or  inheritance  taxes) 

2.  Victory  Liberty  loan  !>  now  or  hereafter  imposed  by  the  United  States, 

any  State,  or  any  of  the  possessions  of  the  United 
States,  or  by  any  local  taxing  authority. 


I 


3%  per  cent  con- 
vertible gold  notes  of 
1922-1923. 


(Circular  appended  to  T.  D.  2836.) 


3327  Advisable  to  Make  Return  even  though  no  Net  Income,  if  Due  to 
1142  Deductible  Losses  Claimed. — Reference  is  made  to  your  letter  of 
3013  March  10,  1919,  in  which  you  ask  the  following  question:  “An 
individual  has  had  a loss  determined  in  1918  by  the  Courts  that  will 
exceed  all  income.  In  view  of  the  fact  that  the  income  is  large,  and  my 
client  has  always  filed  a report,  would  it  be  wise  to  file  a report  this  year 
and  thus  dispose  of  the  matter  rather  than  to  omit  such  filing  and  eventually 
have  the  Government  take  up  the  matter  of  the  non-filing,  etc.”  Ifin  reply 
you  are  advised  that  if  this  individual’s  net  income  for  1918  was  less  than 

INC.  451 


TAX 


the  exemption  to  which  he  was  entitled  according  to  his  marital  status  ori 
December  31,  1918,  he  is  not  required  to  file  an  income  tax  return.  However, 
as  you  state  he  has  filed  a return  for  all  previous  years  it  would  be  advisable 
for  hirn  either  to  fill  out  a return  showing  his  total  income  and  deductions, 
or  notify  the  Collector  of  the  circumstances  which  precluded  his  rendering 
a return  for  1918,  in  order  that  it  may  be  determined  whether  the  loss,  which  ( 
he  has  sustained,  is  deductible  for  income  tax  purposes.  [‘||3328,  below,  is 
a part  of  this  same  letter.] 


3328  Full  Credit  for  all  Allowable  Deductions  to  be  Taken  in  Computing 
736  Net  Income  Subject  to  Surtax.— In  reply  to  your  second  inquiry  r 
2829  you  are  informed  that  if  Item  J,  page  2 of  Form  1040  shows  a net 
loss,  the  amount  of  same  may  be  deducted  from  the  total  of  Items 
K^a  an4  K-b  as  shown  on  line  L before  bringing  this  item  forward  to  line 
15,  page  1 of  the  return.  (Letter  to  Alexander  John  Lindsay,  New  York, 
N.  Y.,  signed  by  J.  A.  Callan,  Assistant  to  the  Commissioner,  and  dated 
May  6,  1919.) 


(1.  T.— Min.  2129.) 

3329  Collectors  Authorized  to  Accept  Tentative  Returns  Form  1031  T, 
3305  v/hen  Filed  by  Corporations  having  Fiscal  Year  ending  January  31 

and  February  28,  1919. — A form  letter  has  been  prepared  by  this 
office  for  use  in  replying  to  requests  of  corporations  for  an  extension  of  time 
where  their  fiscal  year  ends  in  1919  for  the  reason  that  the  return  form  has 
not  yet  been  prepared.  In  granting  this  extension  the  corporations  are  ad- 
vised that  they  may  file  tentative  returns  on  Form  1031  T and  pay  one-fourth 
of  the  estimated  tax  with  interest  on  such  paym^ent  from  the  original  due 
date  to  the  time  of  filing  the  tentative  return,  and  that  any  deficiency  in  the 
first  instalment  as  shown  by  the  completed  return  must  be  paid  together 
with  interest  thereon  from  the  original  due  date  at  the  rate  of  one-half  of 
one  per  centum  per  month  at  the  time  of  filing  the  completed  return. 

3330  The  filing  of  tentative  return  1031  T automatically  extends  the  time 
where  needed  for  filing  completed  returns,  not  beyond  the  due  date 

of  the  second  instalment  of  the  tax.  The  second  instalment  will  be  due  five 
and  one-half  months  after  the  close  of  the  corporation’s  fiscal  year  ending 
in  1919.  (IT — Mim.  2129,  signed  by  Commissioner  Daniel  C.  Roper,  and 
dated  May  6,  1919.) 


INC 


452 


TAX 


5-23-19. 


(T.  D.  2840.) 

3331  Due  Date  for  Payment  of  Second  Installment  of  Income  and  War 
2341  Profits  and  Excess  Profits  Taxes  Based  on  Calendar  Year  Returns.— 

3036  Taxpayers  and  collectors  are  notified  that  June  15,  1919,  is  the  date 

3037  named  for  payment  of  the  second  installment  of  income  and  war 
profits  and  excess  profits  taxes  based  on  returns  for  the  calendar 

year  1918,  and  for  payment  of  the  second  installment  of  other  taxes  the  first 
installment  of  which  was  due  on  March  15;  but,  since  June  15  falls  on  Sun- 
day, such  payments  reaching  the  collector  on  Monday,  June  16,  1919,  will 
be  accepted  in  full  without  interest  or  penalty.  Taxpayers  are  urged  to  make 
payment  on  or  before  that  date,  and  their  attention  is  called  to  the  fact  that 
Section  250  (a)  of  the  Revenue  Act  of  1918,  specifying  when  tax  payments 
are  due,  omits  the  ten-day  period  of  grace  allowed  under  the  former  law. 
Failure  to  pay  the  second  installment  on  or  before  June  16,  1919,  will  necessi- 
tate the  addition  of  penalties  and  interest,  as  provided  by  law.  (T.  D. 
2840,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  May  13,  1919.) 


3332  Obligation  to  Render  Undistributed  Profits  Tax  Returns  by  Cor- 
746  porations  with  Fiscal  Years  ending  in  1918.— Receipt  is  acknow- 
2995  lodged  of  your  letter  of  recent  date,  in  which  you  inquire  whether 
corporations  having  a fiscal  year  ended  on  July  31,  1918,  are  required 
[under  Sec.  10  (b).  Revenue  Act  of  1916  as  amended  by  Revenue  Act  of 
1917]  to  file  Corporation  Undistributed  Net  Income  Tax  Returns  (Form  1112) 
and  how  the  undistributed  net  income  to  be  shown  in  the  return  is  to  be 
computed.  1[In  reply,  you  are  advised  that  corporations  having  a fiscal 
year  ended  on  the  last  day  of  any  month  subsequent  to  May  31,  1918,  will 
not  be  required  to  render  returns  on  Form  1112  for  the  period  covered  by  such 
fiscal  year.  [Returns  of  undistributed  profits  were  required  to  be  made 
within  60  days  after  end  of  6 months  after  end  of  taxable  year.  Time  for 
making  returns  by  corporations  with  fiscal  years  ending  June  3(),  1918,  would 
have  been  on  or  before  March  1,  1919.  The  Revenue  Act  of  1918,  repealing 
the  old  law,  became  effective  February  25,  1919.]  (Letter  to  Oppenheim, 
Collins  and  Company,  New  York,  N.  Y.,  signed  by  Acting  Deputy  Com- 
missioner P.  S,  Talbert,  and  dated  May  13,  1919.) 


3333  Stock  Dividends  Under  the  Act  of  September  8,  1916. — The  Ma- 

815  comber  vs.  Eisner  case,  argued  in  April  before  the  Supreme  Court, 
a motion  to  advance  having  been  concurred  in  by  the  Government, 
was  restored  to  the  Docket  by  the  Court  on  May  19,  1919,  for  further  argu- 
ment. (Memorandum  by  The  Corporation  Trust  Company.) 


(T.  D.  2843). 

3334  Salaries  of  State  Officials  and  Salaries  and  Wages  of  Employees 
2875b  of  a State  are  not  Liable  to  Income  Tax  Imposed  by  the  Revenue 

Act  of  1918. — Section  213  (a)  of  the  Revenue  Act  of  1918  provides 
that  gross  income  shall  include  ‘‘gains,  profits,  and  income  derived  from 
salaries,  wages,  or  compensation  for  personal  service  * * * of  whatever 

kind  and  in  whatever  form  paid.” 

3335  In  accordance  with  an  opinion  of  the  Attorney-General,  dated  May 
6,  1919,  and  based  on  the  well-settled  rule  that  governmental  agencies 

of  the  States  are  not  subject  to  taxation  by  the  Federal  Government,  it  is 
held  that  salaries  of  State  officials  and  salaries  and  wages  of  employees  of  a 
State  are  not  subject  to  the  income  tax  imposed  by  the  said  Revenue  Act 
of  1918.  (T.  D.  2843,  signed  by  Commissioner  D.  C.  Roper,  and  dated 
May  17,  1919.) 


INC. 


453  TAX 


(T.  D.  2844.) 


3336  Taxpayers  Residing  or  Traveling  Abroad  to  pay  at  the  Time  of  Filing 
3027  Returns  only  the  Installments  of  Tax  Past  Due  without  Interest  at 
the  Rate  of  One-half  of  One  per  Centum  per  Month  and  other  Install- 
ments as  they  Fall  Due. — The  final  edition  of  Regulations  45  is  amended 
by  changing  Article  445  to  read  as  follows: 

Art.  445.  Extension  of  Time  in  the  Case  of  Persons  Abroad. — In  view 
of  the  disturbed  conditions  abroad  and  the  consequent  interference  with 
the  usual  channels  of  communication,  an  extension  of  time  for  filing  returns 
of  income  for  1918  and  subsequent  years  and  for  paying  the  tax  is  hereby 
granted  in  the  case  of  nonresident  alien  individuals  and  nonresident  foreign 
corporations,  or  their  proper  representatives  in  the  United  States,  and  of 
American  citizens  residing  or  traveling  abroad,  including  persons  in  military 
or  naval  service  on  duty  outside  the  United  States,  for  such  period  as  may 
be  necessary,  not  exceeding  ninety  days  after  proclamation  by  the  President 
of  the  end  of  the  war  with  Germany.  The  installments  of  tax  which  are 
actually  due  must  be  paid  at  the  time  of  filing  the  return  and  the  other 
installments  shall  be  paid  as  they  fall  due.  In-  all  such  cases  an  affidavit 
must  be  attached  to  the  return,  stating  the  causes  of  the  delay  in 
filing  it,  in  order  that  the  Commissioner  may  determine  that  the  failure  to 
file  the  return  in  time  was  due  to  a reasonable  cause  and  not  to  wilful  neglect 
and  that  the  return  was  filed  without  any  unnecessary  delay.  If  the  show- 
ing justifies  the  conclusion  that  the  failure  to  file  the  return  in  time  was 
excusable,  no  penalty  will  be  imposed.  This  extension  is  granted  as  a matter' 
of  general  expediency  to  all  persons  abroad  owing  income,  war  profits,  and 
excess  profits  taxes  to  the  Federal  Government  and  is  not  granted  upon  the 
request  of  any  particular  taxpayer.  Accordingly,  in  the  case  of  taxpayers 
who  take  advantage  of  this  general  extension  of  time  for  the  filing  of  returns 
and  the  payment  of  tax  no  interest  will  be  collected  from  such  taxpayers, 
but  where  a request  is  made  by  a taxpayer  and  an  extension  is  granted  for 
other  reason's  by  the  Commissioner,  interest  will  be  collected  at  the  rate 
of  one-half  of  one  per  centum  per  month  from  the  time  the  tax  would  have 
been  due  if  no  extension  had  been  granted.  (T.  D.  2844,  signed  by  Com- 
missioner Daniel.  C.  Roper,  and  dated  May  17,  1919.) 


INC.  454 


TAX 


(T.  D.  2840.) 

3 331  Due  Date  for  Pa3nnent  of  Second  Installment  of  Income  and  War 
2341  Profits  and  Excess  Profits  Taxes  Based  on  Calendar  Year  Returns.— 

3036  Taxpayers  and  collectors  are^notifiedThat  June  15,  1919,  is  the  date 

3037  named  for  payment  of  the  second  installment  of  income  and  war 
profits  and  excess  profits  taxes  based  on  returns  for  the  calendar 

year  1918,  and  for  payment  of  the  second  installment  of  other  taxes  the  first 
installment  of  which  was  due  on  March  15;  but,  since  June  15  falls  on  Sun- 
day, such  payments  reaching  the^collector  on  Monday,  June  16,  1919,  will 
be  accepted  in  full  without  interesbor  penalty.  Taxpayers  are  urged  to  make 
payment  on  or  before  that  date,  and  their  attention  is  called  to  the  fact  that 
Section  250  (a)  of  the  Revenue  Act  of  1918,  specifying  when  tax  payments 
are  due  omits  the  ten-day  period  of  grace  allowed  under  theMormer  law. 
Failure  to  pay  the  second  installment  on  or  before  June  16,  1919,  will  necessi- 
tate the  addition  of  penalties  and  interest,  as  provided  by  law.  (T.  D. 
2840,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  May  13,  1919.) 

3332  Obligation  to  Render  Undistributed  Profits  Tax  Returns  by  Cor- 
746  porations  with  Fiscal  Years  ending  in  1918.— Receipt  is  acknow- 
2995,  ledged  of  your  letter  of  recent  date,  in  which  you  inquire  whether 
corporations  having  a fiscal  year  ended  on  July  31,  1918,  are  required 
[under  Sec.  10  (b).  Revenue  Act  of  1916  as  amended  by  Revenue  Act  of 
1917]  to  file  Corporation  Undistributed  Net  Income  Tax  Returns  (Form  1112) 
and  how  the  undistributed  net  income  to  be  shown  in  the  return  is  to  be 
computed.  ^In  reply,  you  are  advised  that  corporations  having  a fiscal 
year  ended  on  the  last  day  of  any  month  subsequent  to  May  31,  1918,  will 
not  be  required  to  render  returns  on  Form  1112  for  the  period  covered  by  such 
fiscal  year.  [Returns  of  undistributed  profits  were  required  to  be  made 
within  60  days  after  end  of  6 months  after  end  of  taxable  year.  Time  for 
making  returns  by  corporations  with  fiscal  years  ending  June  30,  1918,  would 
have  been  on  or  before  March  1,  1919.  The  Revenue  Act  of  1918,  repealing 
the  old  law,  became  effective  February  25,  1919.]  (Letter  to  Oppenheim, 
Collins  and  Company,  New  York,  N.  Y.,  signed  by  Acting  Deputy  Com- 
missioner P.  S.  Talbert,  and  dated  May  13,  1919.) 


3333  Stock  Dividends  Under  the  Act  of  September  8,  1916. — The  Ma- 
815  comber  vs.  Eisner  case,  argued  in  April  before  the  Supreme  Court, 

a motion  to  advance  having  been  concurred  in  by  the  Government, 
was  restored  to  the  Docket  by  the  Court  on  May  19,  1919,  for  further  argu- 
ment. (Memorandum  by  The  Corporation  Trust  Company.) 

(T.  D.  2843V 

3334  Salaries  of  State  Officials  and  Salaries  and  Wiges  of  Employees 
2875b  of  a State  are  not  Liable  to  Income  Tax  Imposed  by  the  Revenue 

Act  of  1918. — Section  213  (a)  of  the  Revenue  Act  of  1918  provides 
that  gross  income  shall  include  “gains,  profits,  and  income  derived  from 
salaries,  wages,  or  compensation  for  personal  service  * * * whatever 

kind  and  in  whatever  form  paid.” 

3336  In  accordance  with  an  opinion  of  the  Attorney-General,  dated  May 
6,  1919,  and  based  on  the  well-settled  rule  that  governmental  agencies 
of  the  States  are  not  subject  to  taxation  by  the  Federal  Government,  it  is 
held  that  salaries  of  State  officials  and  salaries  and  wages  of  employees  of  a 
State  are  not  subject  to  the  income  tax  imposed  by  the  said  Revenue  Act 
of  1918.  (T.  D.  2843,  sicned  by  Commissioner  D.  C.  Roper,  and  dated 
May  17,  1919.) 


(T.  D.  2844.) 


3336  Taxpayers  Residing  or  Traveling  Abroad  to  pay  at  the  Time  of  Filing 
3027  Returns  only  the  Installments  of  Tax  Past  Due  without  Interest  at  ' 

the  Rate  of  One-half  of  One  per  Centum  per  Month  and  other  Install- 
ments as  they  Fall  Due. — The  final  edition  of  Regulations  45  is  amended 
by  changing  Article  445  to  read  as  follows: 

Art.  445.  Extension  of  Time  in  the  Case  of  Persons  Abroad. — In  view 
of  the  disturbed  conditions  abroad  and  the  consequent  interference  with 
the  usual  channels  of  communication,  an  extension  of  time  for  filing  returns 
of  income  for  1918  and  subsequent  years  and  for  paying  the  tax  is  hereby 
granted  in  the  case  of  nonresident  alien  individuals  and  nonresident  foreign 
corporations,  or  their  proper  representatives  in  the  United  States,  and  of 
American  citizens  residing  or  traveling  abroad,  including  persons  in  military 
or  naval  service  on  duty  outside  the  United  States,  for  such  period  as  may 
be  necessary,  not  exceeding  ninety  days  after  proclamation  by  the  President 
of  the  end  of  the  war  with  Germany.  The  installments  of  tax  which  are 
actually^ue  must  be  paid  at  the  time  of  filing  the  return  and  the  other 
installments  shall  be  paid  as  they  fall  due.  In  all  such  cases  an  affidavit 
must  be  attached  to  the  return,  stating  the  causes  of  the  delay  in 
filing  it,  in  order  that  the  Commissioner  may  determine  that  the  failure  to 
file  the  return  in  time  was  due  to  a reasonable  cause  and  not  to  wilful  neglect 
and  that  the  return  was  filed  without  any  unnecessary  delay.  If  the  show- 
ing justifies  the  conclusion  that  the  failure  to  file  the  return  in  time  was 
excusable,  no  penalty  will  be  imposed.  This  extension  is  granted  as  a matter 
of  general  expediency  to  all  persons  abroad  owing  income,  war  profits,  and 
excess  profits  taxes  to  the  Federal  Government  and  is  not  granted  upon  the 
•request  of  any  particular  taxpayer.  Accordingly,  in  the  case  of  taxpayers 
who  take  advantage  of  this  general  extension  of  time  for  the  filing  of  returns  ( 

and  the  payment  of  tax  no  interest  will  be  collected  from  such  taxpayers, 
but  where  a request  is  made  by  a taxpayer  and  an  extension  is  granted  for 
other  reasons  by  the  Commissioner,  interest  will  be  collected  at  the  rate 
of  one-half  of  one  per  centum  per  month  from  the  time  the  tax  w'ould  have 
been  due  if  no  extension  had  been  granted.  (T.  D.  2844,  signed  by  Com- 
missioner Daniel.  C.  Roper,  and  dated  May  17,  1919.) 


3337  Claims  on  Account  of  Inventory  Losses.— It  is  desired  to  call  your 
2963  attention  to  the  fact  that  the  telegram  addressed  by  this  office  to 
3291  E.  G.  Shorrock  and  Company  of  Seattle,  Washington,  which  is 
published  in  your  Income  Tax  Service  [^[3291]  and  which  was  in 
reply  to  an  inquiry  from  that  company  in  regard  to  the  filing  of  a claim  for 
abatement  as  a result  of  the  re-valuation  of  inventories  for  the  year  1918 
was  based  on  the  provisions  of  Article  261  of  Preliminary  Income  Tax  Regu- 
lations 45,  which  has  since  been  modified  by  the  last  edition  of  the  Regu- 
lations as  expressed  in  Articles  261  to  268  thereof.  (Letter  to  The  Cor- 
poration Trust  Company,  signed  by  Commissioner  Daniel  C.  Roper,  and 
dated  May  21,'T919.) 


3338  On  the  Use  of  Ownership  Certificates. — Receipt  is  acknowledged 

2999  of  your  letter  dated  April  11,  1919,  referring  to  the  confusion  existing 

3000  in  the  minds  of  debtor  corporations,  paying  agents  and  bondholders 
3060  in  regard  to  the  use  of  ownership  certificates.  Forms  1000,  1001  and 

1001-A,  in  connection  with  interest  derived  from  foreign  bonds.  Your 
statement  is  noted  that  the  wording  on  Form  1000  would  seem  to  indicate 
that  it  may  be  used  by  nonresident  alien  individuals,  fiduciaries  or  corpora- 


INC. 


454  TAX 


5-29-19 


tions,  with  respect  to  interest  on  foreign  bonds  which  do  not  contain  a tax- 
free  covenant  clause. 

3339  In  reply  you  are  advised  that  Form  1000,  Revised  February,  1919, 
in  common  with  other  ownership  certificates  issued  during  that 

month,  is  undergoing  modification,  and  it  is  believed  that  the  wording  of 
the  new  forms  will  clearly  show  the  purposes  for  which  they  are  intended. 

3340  Form  1000  R.evised  should  only  be  used  by  nonresident  alien  indi- 
viduals, fiduciaries  and  corporations,  when  the  bonds  are  issued 

'by  domestic  or  resident  corporations,  whether  or  not  the  bonds  contain  a 
tax-free  covenant  clause.  This  form  is  also  prescribed  for  the  use  of  non- 
resident alien  partnerships  when  the  bonds  issued  by  domestic  or  resident 
corporations  contain  a tax-free  covenant  clause.  A foreign  corporation 
not  engaged  in  trade  or  business  within  the  United  States,  which  has  a fiscal 
agent  in  the  United  States  is  not  a resident  corporation.  Income  derived 
by  non-resident  alien  individuals,  fiduciaries,  partnerships  or  corporations, 
from  bonds  issued  by  nonresident  foreign  corporations  or  foreign  govern- 
ments is  not  subject  to  Federal  income  tax  and  Form  1001-A  has  been 
devised  as  the  proper  form  on  which  to  report  such  income. 

3341  Citizens  or  residents  of  the  United  States  who  do  not  desire  to  claim 
exemption  from  having  tax  paid  at  the  source  on  income  derived 

from  bonds  containing  a tax-free  covenant  clause  issued  by  nonresident 
foreign  corporations  or  foreign  governments,  having  a paying  agent  in  this 
country,  should  use  Form  1000  Revised,  and  if  such  individuals  wish  to 
claim  exemption  from  having  tax  paid  at  the  source.  Form  1001-A  should 
be  used.  When  a domestic  partnership  is  the  owner  of  such  bonds  Form 
1000  Revised  should  be  executed.  (Letter  to  The  Corporation  Trust  Com- 
pany, signed  by  Acting  Commissioner  J.  H.  Callan,  and  dated  May  20, 
1919.) 


3342  Withholding  on  Deposits  of  Nonresident  Foreign  Corporations.— 

572  Is  withholding  of  ten  per  cent  required  from  interest  on  bank  deposits 
600  paid  or  credited  to  nonresident  foreign  corporations.^  Please  reply 
3314  collect.  (Answer.)  Tax  should  be  withheld  at  rate  of  ten  per 
cent  from  interest  credited  on  and  after  February  25,  1919,  on  bank 
deposits  of  nonresident  alien  corporations  not  having  office  or  place  of  busi- 
ness in  United  States.  [Note  that  the  question  at  1f3314  relates  to  indi- 
viduals and  partnerships  solely.]  (Telegram  from  The  Equitable  Trust 
Company  of  New  York  and  the  answer  thereto,  signed  by  Commissioner 
Daniel  C.  Roper  and  dated  May  23,  1919.) 


3343  Consolidated  Return  of  Fiscal  Year  Parent  and  Affiliated  'Calen- 
3240  dar  Year  Public  Utility. — We  are  asking  for  a ruling  relating  to 
consolidated  returns  on  the  state  of  facts  contained  below,  and  ask 
for  your  ruling  by  telegram,  collect.  IfA  corporation  owns  all  the  capital 
stock  of  another  corporation.  The  corporation  owning  the  capital  stock 
makes  its  Income  Tax  Return  on  fiscal  year  basis  ending  Mar.  31,  1919 — 
the  other  corporation  makes  its  Income;Tax  Return  on  calendar  year  basis 
ending  Dec.  31st.  IfIt  is  our  understanding  that  under  Article  533  such 
corporations  will  be  deemed  to  be  affiliated,  as  95%  of  the -stock  of  the  cor- 
poration whose  fiscal ’year  ends  Dec.  31st  is  owned  by  the  corporation  whose 
fiscal  year  ends  Mar.  31st.  ^[Under  Article  638  whenever  the  fiscal  year 
of  one  of  the  affiliated  corporations  differs  from  the  fiscal  of  the  parent  or 
principal  corporation  the  Commissioner  should  be  fully  advised  by  the 
taxpayer  in  order  that  provision  may  be  made  for  assessing  the  tax  inTespect 

455  TAX 


INC. 


to  the  period  prior  to  the  beginning  of  the  fiscal  year  of  the  parent  or  principal 
company.  The  question  therefore  arises  as  to  the  return  for  the  three- 
month  period  of  the  corporation  whose  fiscal  year  ends  Dec.  31st  and  it 
appeared  to  us  that  if  your  ruling  would  be  to  the  effect,  that  the  return 
should  be  made  on  the  basis  of  the  fiscal  year  of  the  parent  corporation,  such 
corporation  being  the  corporation  holding  95%  of  the  stock  of  the  second 
corporation,  that  there  should  be  a return  made  for  the  corporation  whose 
year  ended  Dec.  31st  for  the  period  between  Dec.  31,  1917,  and  Mar.  31, 
1918,  and  then  a consolidated  return  made  for  the  year  Mar.  31,  1918,  to 
Mar.  31,  1919.  lIThe  corporation  whose  taxable  year  ends  Dec.  31st  and 
whose  stock  is  held  by  corporation  having  its  taxable  year  end  Mar.  31st 
is  a Public  Service  Corporation.  I assume  from  letter  of  Acting  Commis- 
sioner J.  H.  Callan  to  The  Corporation  Trust  Co.,  dated  April  17,  1919,  and 
found  in  Corporation  Income  Tax  Service  as  paragraph  3307,  that  it  would 
make  no  difference  whether  one  or  both  corporations  v/ere  Public  Service 
Corporations  and  they  would  not  be  taken  out  of  the  class  of  affiliated  cor- 
porations because  of  that  fact.  %A  tentative  return  was  filed  covering  cor- 
poration whose  fiscal  year  ended  Dec.  31st  with  a statement  that  it  was 
understood  that  a consolidated  return  would  probably  be  required,  and  that 
an  adjustment  would  be  made  for  the  first  three  months  of  1918.  There 
was  also  a tentative  return  filed  for  a corporation  whose  fiscal  year  ended 
Mar.  31,  1918.  1[On  the  foregoing  state  of  facts  will  you,  therefore,  wire  us — 
first:  should  there  be  a consolidated  return  filed;  second:  shall  the  cor- 
poration whose  taxable  year  ends  Dec.  31st  file  an  Income  Tax  report  for 
the  period  between  Dec.  31,  1917,  and  Mar.  31,  1918;  third:  should  the 
taxpayer  file  a statement  giving  the  reasons  for  filing  the  return  for  the 
period  between  Dec.  31st  and  Mar.  31st;  fourth:  in  computing  the  normal 
tax  on  income  for  the  three-month  period  should  the  exemption  be  $500, 
one-fourth  of  the  $2,000  allowed,  under  Section  236;  fifth:  if  the  company 
whose  stock  is  owned  by  the  principal  company  is  a Public  Service  Corpora- 
tion would  a consolidated  return  be  required. 

(Answer  to  above  Inquiry.) 

3344  Your  letter  sixth.  Consolidated  return  including  parent  and  fully 
owned  public  service  subsidiary  corporation  should  be  filed  for  fiscal 
year  parent  ended  March  31,  1918.  Tax  is  computed  in  first  instance  on 
basis  of  twelve  month  period  ended  March  31,  1918,  with  full  deductions 
under  revenue  act  of  nineteen  eighteen  and  then  prorated.  With  return  file 
complete  statement  facts.  (Letter  of  inquiry  from  The  Cleveland  Trust 
Company,  Cleveland,  Ohio,  and  the  answer  thereto,  signed  by  Acting  Com- 
missioner J.  H.  Callan,  and  dated  May  20,  1919.) 


(T.  D.  2847.) 

3346  Corporations  are  not  Entitled  to  Deduct  from  Gross  Income  the 
1102  Amount  of  Contributions  to  Religious,  Charitable,  Scientific  or 
1118  Educational  Corporations  or  Associations,  although  such  Contribu- 
2962  tions  may  be  made  to  Red  Cross  or  other  War  Activities. — The 
3209  Revenue  Act  of  1918  contains  two  sections  relating  to  deductions 
which  may  be  made  in  ascertaining  net  income  subject  to  tax.  Sec- 
tion 214  relates  to  individuals  and  allows  as  deductions: 

(1)  All  ordinary  and  necessary  expenses  paid  or  incurred  during  the 
taxable  year  in  carrying  on  any  trade  or  business,  etc. 

(2)  All  interest  paid  or  accrued  within  the  taxable  year  on  indebtedness 
etc.,  (with  certain  exceptions). 

(3)  Taxes  paid  or  accrued  within  the  taxable  year  etc.,  (with  certain 

exceptions). 


INC. 


456  TAX 


6-3-19 


(4r-10)  Certain  allowance  for  losses,  bad  debts,  exhaustion,  wear  and  tear 
of  property  of  various  sorts. 

(11)  Contributions  or  gifts  made  within  the  taxable  year  to  corporations 
) organized  and  operated  exclusively  for  religious,  charitable,  scientific,  or  edu- 

cational purposes,  or  for  the  prevention  of  cruelty  to  children  or  animals, 
no  part  of  the  net  earnings  of  which  inures  to  the  benefit  of  any  private 
stockholder  or  individual,  etc. 

3346  Section  234  relates  to  corporations,  and  allows  as  deductions: 

(1)  All  ordinary  and  necessary  expenses  paid  or  incurred  during  the 
taxable  year  in  carrying  on  any  trade  or  business,  including  a reason- 

j able  allowance  for  salaries  or  other  compensation  for  personal  services 

actually  rendered,  and  including  rentals  or  other  payments  required  to  be 
made  as  a condition  to  the  continued  use  or  possession  of  property  to  which 
the  corporation  has  not  taken  or  is  not  taking  title,  or  in  which  it  has  no 
equity. 

(2)  All  interest  paid  or  accrued  within  the^taxable  year  on  its  indebted- 
ness (with  certain  exceptions). 

I (3)  Taxes  paid  or  accrued  within  the  taxable  year,  etc.,  (with  certain 

" exceptions). 

(4  et  seq.)  Losses  sustained  of  a certain  character,  bad  debts,  allow- 
ances for  exhaustion,  wear  and  tear,  etc.  ' 

3347  The  question  is  presented  whether  corporations  are  entitled  to 
deduct  from  their  gross  income  for  the  purpose  of  the  income  tax, 

the  amount  of  contributions  to  religious,  charitable,  scientific  or  educational 
corporations  or  associations,  this  question  arising  most  frequently  with 
reference  to  contributions  made  to  the  Red  Cross  and  other  war  activities. 

3348  It  will  be  observed  that  there  is  no  express  deduction  permitted 
corporations  of  such  contributions,  as  in  the  case  of  individuals,  and 

^ unless,  therefore,  they  fall  within  the  definition  of  some  item  of  deduction 

allowed  to  corporations,  they  cannot  be  allowed.  The  only  head  within 
which  it  might  be  suggested  that  such  contributions  could  be  included  is 
that  of  ordinary  and  necessary  expenses  paid  or  incurred  in  carrying  on  any 
trade  or  business,  including  reasonable  salaries  or  other  compensation, 
rentals,  and  payments  for  use  of  property,  provided  for  in  paragraph  11. 
Practically  these  same  deductions  are  permitted  in  section  214  in  the  case 
of  individuals,  and  had  such  words  included  the  contributions  or  gifts  men- 
tioned in  paragraph  11  of  Section  214,  it  would  have  been  unnecessary  to 
put  in  such  paragraph,  as  they  would  have  been  covered  by  paragraph  1 
of  such  section. 

I 3349  The  Attorney  General,  in  an  Opinion  dated  May  19,  1919,  states 

the  view  that  ordinary  and  necessary  expenses  contemplated  by 
paragraph  1 of  sections  214  and  234  were  not  intended  to  include  all  necessary 
expenses  because  the  two  immediately  succeeding  paragraphs  provide  for 
deducting  Interest  and  taxes,  both  of  which  are  necessary  expenses;  also 
the  provision  in  regard  to  allowance  for  salaries,  compensation,  rentals,  etc., 
indicates  that  all  of  the  expenses,  which  are  contemplated  under  the  terms 
I used  in  paragraph  1 of  these  sections,  are  expenses  incurred  directly  in  the 

maintenance  and  operation  of  the  business,  and  not  all  those  which  may  be 
beneficial  and  even  necessary  In  the  broader  sense. 

3350  In  addition  to  the  above  considerations  and  to  the  fact  that  there  Is 
express  provision  for  deducting  contributions  or  gifts  in  the  case  of 
individuals,  which  is  wanting  in  the  section  providing  for  deductions  to  be 
made  by  corporations,  reference  to  the  legislative  history  of  the  Revenue 
A Act  of  1918  (Congressional  Record  for  September  17,  1918),  shows  that  an 

amendment  providing  that  corporations  might  make  deductions  of  coii- 


iNC.  457 


TAX 


tributions  or  gifts,  as  in  the  case  of  individuals,  came  to  a vote  and  was 
defeated,  the  principal  reason  assigned  in  the  debate  being  that  it  would 
be  dangerous  to  authorize  directors  to  be  generous  with  the  money  of  their 
stockholders  even  for  such  laudable  purposes. 

3351  It  is  concluded,  therefore,  that  corporations  are  not  entitled  to 
deduct  from  their  gross  income  for  the  purpose  of  the  income  tax 
the  amount  of  contributions  made  to  religious,  charitable,  scientific  or  edu- 
cational corporations  or  associations,  although  such  contributions  may  be 
made  to  the  Red  Cross  or  other  war  activities.  (T.  D.  2847,  signed  by 
Commissioner  Daniel  C.  Roper,  and  dated  May  24,  1919.) 


(T.  D.  2849.)  ( 

3352  Correcting  Item  20,  Schedule  it,  Page  2 of  Form  1120,  Corporation 
1096  Income  and  Profits  Tax  Return. — Form  A,  revised  (Mining)  and  Form 
2167  N (Oil  and  Gas)  have  been  prepared  for  the  use  of  taxpayers  engaged 

in  mining  or  in  the  production  of  oil  and  gas.  A sufficient  supply 
will  be  sent  to  Collectors  of  Internal  Revenue  for  distribution. 

3353  These  forms  are  prescribed  to  facilitate  the  compilation  and  presen-  , 

tation  of  certain  information  required  for  the  audit  and  examination 

of  the  returns  of  these  classes  of  taxpayers.  If,  however,  It  is  more  con- 
venient to  use  other  methods  of  tabulation,  the  Information  so  furnished, 
if  complete,  will  be  accepted  in  lieu  of  those  forms. 

3354  The  Information  called  for  by  these  forms  should  be  filed  with  the 
returns  in  complete  detail,  either  on  the  forms  prescribed  or  In  other 

suitable  manner.  This  requirement  is  necessary  for  the  reason  that  deple- 
tion sustained  must  be  taken  into  consideration  In  the  computation  of  Invested 
capital,  regardless  of  whether  or  not  a deduction  for  it  is  claimed  or  has  been 
claimed  for  it  In  the  past  by  the  taxpayer. 

3355  This  requirement  applies  to  individual  as  well  as  corporate  tax-  1 

payers.  (T.  D.  2849,  signed  by  Commissioner  Daniel  C.  Roper, 

and  dated  May  27,  1919.) 


( 


INC 


458 


TAX 


6-4-19. 


3356  Questions  and  Answers  about  Inventory  Losses.  Compiled  and 

1119  Arranged  by  Tax  Committee  of  the  Southern  Wholesale  Dry 

2963  Goods  Association. — These  questions  were  asked  at  the  Conven- 

tion of  the  Southern  Wholesale  Dry  Goods  Association,  held  at 

Louisville,  Kentucky,  April  17th.  At  the  suggestion  of  the  Hon.  Daniel 
C.  Roper,  Commissioner  of  Internal  Revenue,  these  questions  were  sub- 
mitted to  the  Advisory  Tax  Board  at  Washington  and  explained  by  a 
committee  from  the  Association’  composed  of  Alessrs.  W.  J.  D.  Bell, 
Lynchburg;  Harry  Dumesnil,  Louisville;  C.  C.  Henking,  Huntington, 
and  Norman  H.  Johnson,  Richmond.  Each  of  the  answers  is  made  by  the 
Advisory  Board,  and,  therefore,  is  authoritative. 

3357  Comment:  [The  Tax  Committee  of  the  Southern  Wholesale 
Dry  Goods  Association,  consisting  of  W.  J.  D.  Bell,  Chairman, 

W.  R.  King,  Vice-Chairman,  Harry  Dumesnil,  C.  C.  Henking,  C.  L. 
Sanger,  James  J.  Ragan  and  Norman  H.  Johnson,  Secretary,  recently 
issued  a pamphlet  entitled  “Questions  and  Answers  on  Inventories  and  the 
Abatement  Clause  of  the  Internal  Revenue  Act  of  1918”  containing  fifty 
eight  questions  and  the  answers  thereto.  By  the  courtesy  of  the  Com- 
mittee, through  its  Secretary,  we  are  permitted  to  reproduce  below  ^ 3358 
to  T[  3370.  Those  questions  and  answers  which  we  have  not  reproduced 
were  rather  more  specific  in  their  character  than  those  we  have  given; 
hence  their  exclusion  here.  The  foreword  at  ^ 3356,  above,  is  the  fore- 
word of  the  pamphlet  as  issued  by  the  Tax  Committee. — The  Corporation 
Trust  Company.] 

3958  Q*  1*  Are  copies  of  inventory  required  by  the  Department  to  be  filed  with 
return? 

Ans.  No.  But  it  should  be  understood  by  all  taxpayers  that  all  original  ipventqry 
sheets  and  all  papers  which  would  have  an^  bearing  on  a claim  for  loss  in  inventories 
(including  sales  slips)  should  be  retained  for  a period  of  not  less  than  five  years. 

It  is  recommended  that  the  taxpayer  attach  to  his  return  for  the  taxable  year  1918, 
and  for  all  subsequent  years,  a summarized  analysis  of  his  inventories. 

3359  Q*  2.  Are  these  copies  of  inventory  necessary  whether  a claim  in  abatement 
is  filed  or  not? 

Ans.  See  answer  to  Question  1.  However,  it  is  recommended  to  the  taxpayer  that 
all  such  records  be  maintained  in  order  to  facilitate  a proper  verification  of  the  return  at  any 
time  deemed  advisable  by  the  Commissioner. 

Loose-leaf  ledgers  are  recommended,  whereby  control  can  be  secured  of  each  classifica- 
tion or  lot  of  goods  upon  which  claim  is  to  be  made. 

Therein  should  be  recorded  quantities  and  values  as  returned  on  the  inventory  at  the 
close  of  the  taxable  year  1918;  and  there  should  be  recorded  in  summary  form  each  day  or 
week,  the  quantities  sold  and  the  values  thereof,  and  all  items  of  sales  should  be  carried 
forward,  according  to  established  classification  adopted  by  the  taxpayer,  to  the  time  when 
the  quantities  as  reported  in  the  inventory  shall  have  been  accounted  for. 

At  the  time  of  filing  the  return,  on  or  about  Jane  15,  1919,  the  taxpayer  should  compute 
his  loss  from  sales  to  that  date,  by  deducting  from  the  total  sales  a reasonable  and  propor- 
tionate allowance  for  operating  and/or  selling  expense.  I'he  net  result  ascertained  should 
be  deducted  from  the  inventory  value  of  the  goods  included  in  the  1918  inventory  sold  to 
that  date,  and  the  resultant  loss  brought  down. 

The  taxpayer  should  then  reduce  the  balances  remaining  unsold  to  the  then  market 
value,  and  add  the  loss  thus  ascertained  to  the  losses  ascertained  from  sales. 

The  sum  total  of  these  computations  would  represent  the  total  loss  upon  which  the 
amount  of  tax  to  be  claimed  in  abatement  is  to  be  computed  and  this  amount  may  be  de- 
ducted from  the  second  installment  of  tlie  tax;  Provided,  proper  bond  is  furnished  on 
Form  1124  in  accordance  with  Article  268  of  Regulations  45. 

Should  any  goods  unsold,  upon  which  claini  in  abatement  has  been  filed  at  the  time 
of  filing  the  return,  be  disposed  of  by  sale  at  some  future  period  within  the  taxable  year 
1919,  the  taxpayer  will  continue  to  record  the  sales  effected,  deducting  therefrom  the 
proportionate  cost  of  operating  and/or  selling  expense. 

The  gain  or  loss  would  then  be  ascertained  by  computing  the  difference  between  the 
adjusted  sales  values  and  the  inventory  value  established  at  the  time  of  filing  the  claim  in 
abatement. 


INC. 


459  TAX 


If  at  the  close  of  the  taxable  year  1919  there  remains  any  commodity  unsold,  the  tax- 
payer shall  adjust  the  Inventory  value  to  the  market  price  (ignoring  mere  temporary 
fluctuations  in  price  or  value),  at  the  close  of  the  taxable  year  and  compute  the  amount 
of  gain  or  loss. 

Such  gain  or  loss  shall  be  combined  with  the  gain  or  loss  on  sales  between  the  time  of 
filing  the  return  and  the  close  of  the  taxable  year  1919. 

If  it  is  shown  that  the  taxpayer  has  sustained  a loss  additional  to  that  shown  In  the  claim 
in  abatement  a claim  for  refund  should  be  made  on  Form  46  for  the  amount  of  tax  overpaid. 

Should  it  be  shown  that  the  amount  deducted  in  the  claim  in  abatement  at  the  time  of 
filing  the  return  for  the  taxable  year  1918  is  in  excess  of  the  tax  based  upon  actual  losses 
sustained  throughout  the  taxable  year  1919,  the  taxpayer  must  remit  to  the  Collector  the 
additional  amount  of  tax  involved  with  interest  at  the  rate  of  1%  per  month  from  the  time 
of  filing  the  return  until  the  date  of  filing  the  final  adjustment  of  taxes  for  the  taxable  year 
1918  on  account  of  inventory  losses.  An  example  is  given  for  the  information  of  your 


association: 

Assume  an  inventory  at  December  31,  1918,  200,000  yds.  at  15c $30,000  00 


Assume  sales,  between  January  1,  1919,  and  June  1,  1919, 

100,000  yds.  at  12J^c $12,500  00 

Cost  of  manufacturing  and/or  selling  based  upon  data  ascertained 

from  1918  operations,  say  in  this  case  15%  of  sales  values 1.875  00 


Net  proceeds  from  sales $10,625  00 

The  inventory  cost  at  15c.  per  yd.  amounted  to $15,000  00 

Net  loss  upon  which  tax  can  be  claimed  in  abatement $4,375  00 


Assume  that  the  market  price  at  June  1,  1919  (on  the  assumption 
that  the  taxpayer  will  prepare  his  claim  on  June  1,  rather  than 
delay  until  June  15,  1919),  on  this  class  of  goods  was  12c. 

There  would  remain  unsold  at  that  time  100,000  yds.  originally 
inventoried  at  15c.  to  be  reduced  to  12c.  or  at  a loss  of  3c. 

per  yd.  aggregating 3,000  00 


Total  amount  upon  which  tax  could  be  claimed  in  abatement 
at  the  time  of  filing  the  return  on  or  before  June  1,  1919, 


would  be $7,375  00 

Now,  between  June  1,  1919,  and  December  31,  1919,  assume 
that  the  taxpayer  sells  50,000  yds.  at  a price  of  15c.  per  yard, 

amount  of  sale  would  be $7,500  00 

Deducting  therefrom  operating  and/or  selling  expense  at  the 
same  rate  of  15%  (or,  if  ascertainable,  the  adjusted  percentage 
for  1919) 1,125  00 

Net  proceeds  from  sale $6,375  00 

Cost  of  this  material  as  adjusted  at  June  1,  1919,  on  the  basis 

of  12c.  per  yd 6,000  00 

Gain  on  these  transactions $375  00 


Further,  assume  that  the  remaining  50,000  yards  were  unsold  at 
the  close  of  the  taxable  year  1919,  and  that  the  market  price 
had  risen  to  17c.  per  yard,  the  taxpayer  would.  In  this  case,  have 
to  readjust  his  Inventory  value  to  the  17c.  basis,  and  account 
for  the  element  of  appreciation,  in  this  case  (5c.  per  yard 
over  adjusted  figure  as  of  June  1) 2,500  00 


Total  gains 2,875  00 

Adjusted  loss  upon  which  tax  Is  to  be  abated  or  refunded,  as  the 

case  may  be $4,500  00 

See  also  answer  to  Question  No.  27. 


3360  Q.  5.  Does  the  claim  in  abatement  apply  to  all  goods  charged  In  1918,  though 
not  received  until  after  inventory? 

Ans.  All  goods  where  title  has  actually  passed  to  the  taxpayer,  must  be  included  In 
the  inventory,  and  as  a result  thereof  are  eligible  for  consideration  in  any  claim  in  abate- 
ment. 

It  is  necessary  that  title  shall  have  passed  to  the  taxpayer  in  1918,  and  the  goods  merely 
ordered  for  future  delivery  and  for  which  no  transfer  of  title  has  been  effected,  should  be 
excluded.  See  Article  1581  of  Regulations  45. 

3361  Q.  6.  Where  Inventory  is  taken  on  December  1 or  15,  can  a claim  be  made 
for  all  goods  invoiced  up  to  December  31,  1918? 

Ans.  It  is  presumed  that  your  question  refers  either  to  a fiscal  year  ending  November 

INC.  460  TAX 


( 


/ 


6-4-19. 


30,  1918,  or,  in  the  second  instance,  to  a calendar  year  ending  December  31,  since  no  fiscal 
year  can  be  considered  except  at  the  close  of  some  month  in  the  year. 

In  the  first  instance,  no  goods  to  which  title  has  not  passed  to  the  vendee  at  and  Including 
November  30,  1918,  can  be  considered  as  inventory  items. 

In  the  second  instance,  all  goods  to  which  title  has  passed  to  the  vendee  up  to  December 

31,  1918,  must  be  included  in  the  inventory. 

Where  the  fiscal  year  ended  on  November  30,  1918,  the  claim  in  abatement  can  only 
apply  to  goods  which  are  the  preperty  of  the  taxpayer  up  to  that  date,  but  no  claim  can 
be  made  on  any  materials  which  have  become  the  property  of  the  taxpayer  between  Decem- 
ber 1 and  31,  inclusive,  of  that  year. 

3362  Q*  14.  Can  more  than  one  claim  be  filed? 

Ans.  Two  claims  may  be  filed,  one  at  time  of  filing  the  return,  and  one 
adjusting  the  entire  claim  for  losses  at  the  close  of  the  taxable  year  1919, 

The  first  would  represent  a claim  in  abatement;  the  second,  a claim  for  refund.  It 
is  possible  that  an  additional  amount  of  tax  may  become  due  from  the  taxpayer  with 
interest  at  the  rate  of  1%  per  month  from  the  time  of  making  the  deduction  until  the  time 
of  filing  the  final  statement,  which  would  be  brought  about  by  the  fact  that,  in  the  disposi- 
tion of  unsold  goods  as  to  the  1918  inventory  after  the  filing  of  the  original  return,  and  the 
claim  in  abatement,  gains  may  result  from  subsequent  sales.  It  will  therefore  be  necessary 
for  the  taxpayeV  to  prepare  a statement  which  will  fully  reflect  the  corrected  amount  of  any 
claim  to  which  he  may  be  entitled  for  losses  in  inventory  of  1918,  and  this  statement  must 
definitely  embrace  the  total  amount  of  inventory  value  as  recorded  on  the  books  of  the 
taxpayer  at  the  end  of  the  taxable  year  1918,  and  be  capable  of  proper  audit. 

The  following  is  suggested  as  a possible  outline  to  be  used  in  making  final  statement  of 
adjustment  at  the  close  of  the  taxable  year  1919.  This  is  based  upon  the  illustration  given 
in  answer  to  Question  2 which  applies  to  one  item  of  inventory  only,  but  it  must  be  under- 
stood that  the  final  statement  referred  to  herein,  must  cover  the  entire  Inventory  value  as 
at  the  end  of  the  taxable  year  1918. 

Quantity.  Value. 


1.  Inventory  close  of  taxable  year  1918 200,000  $30,000  00 

2.  Sales  from  1918  inventory  during  taxable  year  1919 150,000  20,000  00 

3.  Less  deductions  from  sales  for  selling  expense 3,000  00 

4.  Net  sales  proceeds  (Item  2 value  less  Item  3) 17,000  00 

5.  Balance  of  1918  inventory  on  hand  at  close  of  taxable  year. . . 50,000  8,500  00 

(Quantity  Item  1 less  Item  2.) 

(Value  priced  at  market  close  of  taxable  year  1919.) 

6.  Net  sales  proceeds  and  balance  of  Inventory 25,500  00 

(Item  4 plus  Item  5,  values.) 

7.  Loss  (Item  1 value  less  Item  6) 4,500  00 

8.  Gain 

9.  Amount  of  claim  in  abatement  or  for  refund  filed  (date ) 7,375  00 


(In  this  illustration  an  excessive  claim  in  abatement  of  tax  based  upon  a loss  of  inventory 
values,  amounting  to  $2,875  is  assumed.  Tax  upon  this  amount  with  interest  at  one  per 
cent,  per  month  between  the  date  of  making  the  deduction  and  final  statement  will  be 
assessed  in  this  case.) 

Should  the  taxpayer  elect  not  to  file  a claim  in  abatement  at  the  time  of  filing  his  return, 
but  rather  to  wait  until  the  end  of  the  taxable  year  1919,  then,  in  that  case,  but  one  claim 
would  be  filed. 

3363  Q*  20.  Suppose  we  arc  unable  to  sell  them  (Discontinued  off  colors  in  broken 
lots.)  ? 

Ans.  If  the  salable  colors  had  been  disposed  of  and  the  stock  broken  before  the  close 
of  the  taxable  year  1918,  the  element  of  obsolescence  if  definitely  determined  should  be 
taken  into  account  in  both  the  inventory  made  at  the  close  of  the  taxable  year  1918  and 
that  made  at  the  close  of  the  taxable  year  1919.  If  “it  is  impossible  to  get  the  market  value 
for  such  colors  in  broken  stocks”  the  taxpayer  will  be  required  to  await  the  sale  of  such 
broken  stocks  in  order  to  determine  the  loss  involved;  but  it  is  believed  that  in  practically 
all  instances  a reasonable  and  fair  estimate  of  the  market  value  can  be  made. 

If  the  salable  colors  were  disposed  of  after  the  close  of  the  taxable  year  1918,  the  ac- 
companying obsolescence  of  the  remaining  stock  takes  place  in  the  year  1919,  and  the 
deduction  must  be  taken  not  as  a loss  in  inventory,  but  as  obsolescence  occurring  in  the 
taxable  year  1919. 

3364  Q*  25.  We  take  stock  on  January  1.  During  December  we  shipped  out  quite 
a lot  of  ginghams  at  the  high  price,  and  in  January  were  forced  to  rebate  our 

customers  on  sales  made  in  December.  Are  we  allowed  to  charge  this  rebate  in  our  claim? 

Ans.  In  cases  where  rebates  have  been  made  on  sales  reported  in  the  1918  Income  'I'ax 
Return,  a separate  schedule  should  be  submitted  and  the  total  tliercof  may  be  included 
in  the  taxpayer’s  claim  in  abatement. 


INC. 


461 


TAX 


This  schedule  should  be  prepared  in  such  manner  as  to  reflect: 

(a)  The  date  of  each  rebate;  (b)  the  name  and  address  of  each  party  securing  the  benefit 
thereof;  l’(c)  a description  fo  the  goods;  (d)  the  quantities;  (e)  the  sales  value  of  each  item; 
and  (f)  the  amount  rebated. 

3365  Q*  26.  Suppose  I ship  some  ginghams  at  the  high  price  in  January  and  have 
to  rebate  my  customers;  am  I entitled  to  put  that  on  the  claim? 

Ans.  Rebates  made  during  the  taxable  year  1919  on  sales  made  during  such  year  (pro- 
vided the  goods  to  which  the  rebate  applies  were  included  in  the  inventory  at  the  close  of 
the  taxable  year  1918)  will  be  considered  as  an  adjustment  of  sales  values  in  arriving  at  the 
loss  on  inventories  for  the  taxable  year  1918,  and  will  be  treated  as  outlined  in  Question 
No.  2.  This  cannot  go  in  the  rebate  claim,  but  the  rebate  may  be  considered  in  determining 
the  sale  price  for  the  purpose  of  determining  an  inventory  loss. 

It  must  be  understood  that  rebates  made  on  goods  acquired  and  sold  subsequent  to  the 
end  of  the  taxable  year  1918  cannot  be  considered  in  any  manner  as  a 1918  inventory  loss. 

3966  Q*  27.  Do  we  have  to  file  a complete  Inventory  of  all  of  our  stock,  or  just  the 
stock  on  which  we  ask  an  abatement? 

Ans.  See  Question  No.  1.  You  are  required  to  file  with  your  original  claim  and  at  the 
close  of  the  taxable  year  1919,  summarized  statements  covering  all  adjustments  involved. 

To  conform  to  good  accounting  practices,  the  taxpayer  should  consider  these  summaries 
in  the  light  of  controlling  accounts  and  the  sum  totals  thereof  should  equal  the  total  inven- 
tories, maintained  in  detail  by  the  taxpayer. 

It  must  be  understood  that  claim  for  losses  in  Inventories  of  the  taxable»year  1918  are 
to  embrace  all  items  of  the  taxpayer’s  inventory  so  that  gains  made  in  any  sales  of  certain 
items  or  classes  will  be  used  to  offset  losses  in  others  and  the  net  result  as  to  the  entire 
inventory  determined. 

Thus  if  the  final  computation  shows  a net  gain  over  all  Inventory  Items  sold,  no  claim 
for  loss  In  any  particular  item  or  items  can  be  sustained. 

3367  Q*  28.  How  should  Inventory  have  been  taken,  at  cost  or  market? 

Ans.  The  taxpayer  is  permitted  to  take  his  Inventory  at  the  close  of  the 
taxable  year  1918  at  (a)  cost  or  (b)  cost  or  market,  whichever  is  the  lower. 

3363  Q*  34.  When  can  this  claim  for  abatement  be  filed? 

Ans.  Claim  for  net  loss  cannot  be  made  before  November  1,  1919.  Claim 
in  abatement  for  loss  in  Inventory  must  be  filed  at  the  time  of  filing  the  return  for  the 
taxable  year  1918. 

3339  Q*  37.  Where  the  claim  In  abatement  is  allowed,  what  effect  has  that  on 
1919  profits? 

Ans.  Where  a claim  for  Inventory  loss  is  finally  allowed,  this  means  that  the  net  in- 
come for  1919 — as  established  by  usual  accounting  methods — will  be  correspondingly 
higher  as  reported  in  the  return  for  the  taxable  year  1919.  In  other  words,  an  item  of 
loss  which  would  normally  find  its  way  into  1919  operating  accounts  is  thrown  back  against 
1918  income.  This  Department  recommends  that  the  accounting  records  of  the  taxpayer 
be  not  changed,  but  that  any  adjustment  of  inventories  be  recorded  in  distinct  accounts, 
supported  by  adequate  detailed  schedules. 

In  arriving  at  the  net  operating  profits  for  any  year,  the  Income,  excess  and  war  profits 
taxes  to  be  paid  on  such  profits  are  not  taken  into  consideration.  Such  taxes,  therefore, 
are  theoretically  paid  out  of  surplus  for  the  year.  If  at  a subsequent  date  any  of  such 
taxes  are  refunded,  they  should  not  be  recorded  in  the  operating  accounts,  but  should  be 
credited  directly  to  surplus. 

337  0 Q.  47.  Individual  income  of  partnerships.  How  do  you  file  plea  of  abate- 
ment when  partnership  files  no  blank  or  form  like  a corporation  does? 

Ans.  See  Article  321  of  Regulation  45. 

A claim  in  abatement  arising  from  a loss  in  1918  partnership  inventory  must  be  made  by 
each  individual  partner  as  to  his  distributive  share  of  recomputed  net  income.  To  this 
claim  should  be  attached  the  statement  of  the  partnership  showing  the  loss  in  inventory 
supported  In  the  same  manner  as  such  claims  are  supported  by  corporations  and  Individuals. 
The  statement  filed  as  to  the  partnership  as  a whole  will  be  used  by  the  Department  for 
the  purposes  of  record  and  verification  and  any  adjustments  which  may  be  found  necessary 
will  be  spread  pro-rata  over  the  claims  of  the  individuals.  At  the  close  of  the  taxable 
year  1919  a properly  authorized  member  of  the  partnership  shall  compile  the  final  state- 
ment of  adjustment  in  accordance  with  the  methods  outlined  in  Question  2 and  elsewhere, 
attaching  thereto  the  proportionate  amounts  of  adjustment  affecting  each  individual 
member  of  the  partnership.  On  the  determination  of  the  net  result,  each  individual  partner 
shall  file  a claim  for  refund  (if  any  refund  is  due),  or  in  the  event  that  the  claimin  abatement 
was  in  excess  of  the  actual  losses  sustained,  eaeh  individual  will  remit  to  the  Collector  of 
his  District,  his  share  of  the  additional  amount  of  tax  ascertained  from  the  adjusted  state- 
ment, with  interest  at  the  rate  of  1%  per  month  from  the  time  of  deduction  from  the 
second  installment  to  the  time  when  such  remittance  is  made.  (For  source  and  authority 
see  ^ 3356  and  3357.) 


INC. 


462  TAX 


(T.  D.  2850.) 

3371  Instructions  Relative  to  Acceptance  of  Certificates  of  Indebtedness 
435  in  Payment  of  Income  and  Profits  Taxes  Due  June  16,  1919. — 

2428  Income  and  profits  taxes  due  June  16,  1919,  may  be  paid  in  Treasury 
3128  certificates  of  indebtedness  of  Tax  Series  of  1919,  dated  August  20, 
1918,  maturing  July  15,  1919,  Series  T.2,  dated  January  16,  1919, 
maturing  June  17,  1919,  and  Series  T.3,  dated  March  15,  1919,  maturing  June 
16,  1919.  No  other  certificates  of  indebtedness  will  be  accepted  in  payment 
of  the  taxes  due  on  said  date.  Certificates  of  the  three  series  mentioned  will 
be  accepted  by  collectors  of  internal  revenue  at  par,  without  interest,  when 
tendered  in  amounts  not  in  excess  of  the  amount  of  such  taxes  due  June 
16,  1919.  They  will  be  so  accepted  at  any  time  on  or  before  June  16,  1919. 
If  so  accepted  before  June  16,  1919,  full  interest  to  June  16,  1919,  will  be 
paid  as  below  stated. 

3372  Coupons  maturing  on  June  16,  1919,  should  be  detached  from  cer- 
tificates of  Series  T.3,  and  coupons  maturing  on  or  before  May  15, 

1919,  should  be  detache_d  from  certificates  of  the  Tax  Series  of  1919,  before 
presentation  to  the  collector,  and  should  be  separately  presented  for  pay- 
ment in  the  ordinary  course  when  due.  Coupons  maturing  July  15,  1919, 
must,  however,  be  attached  to  certificates  of  the  Tax  Series  of  1919  and 
surrendered  to  the  collector  with  such  certificates  for  cancellation;  and  col- 
lectors will  not  accept  any  certificates  of  the  Tax  Series  of  1919  which  have 
not  attached  thereto  the  coupon  No.  5 maturing  July  15,  1919. 

3373  Accrued  interest  on  certificates  of  Series  T.2  (which  were  issued 
without  coupons  attached)  from  January  16,  1919,  to  June  16,  1919, 

and  accrued  interest  on  certificates  of  the  Tax  Series  of  1919  from  May 
15,  1919  (the  last  coupon  payment  date),  to  June  16,  1919,  will  be  remitted 
to  the  taxpayer  by  the  Federal  Reserve  Bank  by  check  and  the  collector 
must  furnish  to  the  P'ederal  Reserve  Bank  the  name  and  address  of  the  tax- 
payer and  the  amount  and  serial  numbers  of  the  certificates  presented  in 
each  case. 

3374  The  procedure  above  provided  will  automatically  adjust  accrued 
interest  in  respect  of  all  Treasury  certificates  of  indebtedness  used 

in  payment  of  taxes  due  June  16,  1919,  whether  presented  on  or  before  said 
date  and  no  other  payment  or  credit  will  be  allowed  or  made  on  account 
of  interest  in  connection  therewith, 

3375  Interest  on  Treasury  certificates  accepted  in  payment  of  taxes  ceases 
to  accrue  on  (a)  the  date  of  the  maturity  of  tlie  certificates,  or  (b) 

the  date  the  tax  is  due — whichever  of  said  dates  be  earlier.  The  provisions 
hereof  in  relation  to  the  payment  of  interest  to  June  16,  1919,  do  not  apply 
to  Treasury  certificates  of  indebtedness  accepted  in  payment  of  taxes  due 
prior  to  that  date.  Any  Treasury  certificates  of  indebtedness  accepted  in 
payment  of  taxes  becoming  due  before  June  16,  1919,  must  be  dealt  witli 
separately,  and  accrued  interest  will  be  paid  only  to  date  the  tax  the  was  due 
and  upon  surrender  with  the  certificates  of  any  coupons  maturing  subse- 
quent to  the  date  the  tax  was  due.  Collectors  must  specially  notify  Federal 
Reserve  Banks  in  each  case  when  Treasury  certificates  are  accepted  in  pay- 
ment of  taxes  becoming  due  prior  to  June  16,  1919.  The  15th  day  of  June 
being  a Sunday,  the  Bureau  of  Internal  Revenue  has  ruled  that  the  taxes 
which  by  the  terms  of  the  Revenue  Bill  of  1918  are  due  on  that  date  become 
due  on  June  16th. 

3376  In  order  to  avoid  unnecessary  dislocation  of  funds,  it  is  of  importance 
that  Treasury  certificates  of  indebtedness  of  the  three  series  men- 
tioned be  used  by  taxpayers  to  tlic  utmost  extent  possible  in  payment  of 
their  taxes,  in  preference  to  making'Jcash  payment  of  their  taxes,  and  l''cdcral 
Reserve  Banks  and  collectors  of  internal  revenue  should  use  every  effort 
to  induce  taxpayers  who  are  the  holders  of  such  certificates  to  make  such 
use  of  them  and  to  facilitate  such  use  in  every  manner  in  their  power. 

INC.  463  ^ TAX 


3377  The  instructions  to  Collectors  dated  December  9,  1918  (T.  D.  2778), 
issued  by  the  Commissioner  of  Internal  Revenue  and  approved  by 

the  Secretary  of  the  Treasury,  and  the  instructions  to  Federal  Reserve 
Banks  dated  December  9,  1918,  issued  by  the  Treasurer  of  the  United  States 
and  approved  by  the  Assistant  Secretary  of  the  Treasury,  not  inconsistent 
herewith,  remain  in  full  force  and  effect. 

3378  There  seems  to  be  no  reason  to  anticipate  that  the  amount  of  taxes 
paid  as  of  June  16,  1919,  will  exceed  the  amount  of  Treasury  cer- 
tificates maturing  on  or  about  that  date.  It  seems  that  there  will  be  no 
unexpended  cash  proceeds  arising  from  the  payment  of  income  and  profits 
taxes  on  June  16,  1919,  and  therefore  no  redeposits  will  be  made;  nor  will 
payment  of  income  and  profits  taxes  by  credit  be  permitted. 

3379  Collectors  of  internal  revenue  will,  however,  be  instructed  to  deposit 
checks  received  on  and  after  June  1,  1919,  in  payment  of  income 

and  profits  taxes,  with  Federal  Reserve  Banks  and  branches,  following  to 
that  extent  substantially  the  procedure  adopted  in  IMarch.  As  to  this 
procedure  detailed  instructions  will  follow.  (T.  D.  2850  signed  by  Com- 
missioner Daniel  C.  Roper,  and  dated  AIa>  28,  1919.) 

(T.  D.  2851.) 

3380  Authority  of  Collectors  to  Accept  Uncertified  Checks.— Section  1314, 
435  Revenue  Act  of  1918,  provides  as  follows: 

2428  “That  collectors  may  receive  * * * uncertified  checks  in 

3130  payment  of  income,  war-profits  and  excess-profits  taxes  and  any 

other  taxes  payable  other  than  by  stamp,  during  such  time  and 
under  such  regulations  as  the  Commissioner,  with  the  approval  of  the 
Secretary,  shall  prescribe;  but  if  a check  so  received  is  not  paid  by  the 
bank  on  which  it  is  drawn  the  person  by  whom  such  check  has  been 
tenderecj  shall  remain  liable  for  the  payment  of  the  tax  and  for  all  legal 
penalties  and  additions  the  same  as  if  such  check  had  not  been  tendered.” 

3381  The  following  regulations  apply  to  all  Internal  Revenue  taxes  except 
those  payable  by  stamp: 

1.  Payment  of  tax  by  nneertified  checks. — Collectors  may  accept  uncer- 
tified checks  in  payment  of  taxes,  except  those  payable  by  stamp,  provide  d 
such  checks  are  collectible  at  par,  that  is,  for  their  full  amount,  without 
any  deduction  for  exchange  or  other  charges.  The  collector  will  stamp 
on  the  face  of  each  check  before  deposit  the  w^ords,  “This  check  is  in  pay- 
ment of  an  obligation  to  the  United  States  and  must  be  paid  at  par.  No 
Protest,”  with  his  name  and  title.  The  day  on  which  the  collector  receives 
the  check  will  be  considered  the  date  of  payment  so  far  as  the  taxpayer  is 
concerned,  unless  the  check  is  returned  dishonored.  If  one  check  is  remitted 
to  cover  two  or  more  persons’  taxes,  the  remittance  must  be  accompanied 
by  a letter  of  transmittal  stating  (a)  the  name  of  the  drawer  of  the  check; 
(b)  the  amount  of  the  check;  (c)  the  amount  of  any  cash,  money  order  or 
other  instrument  included  in  the  same  remittance;  (d)  the  name  of  each 
person  whose  tax  is  to  be  paid  by  the  remittance;  (e)  the  amount  of  the 
payment  on  account  of  each  person;  and  (f)  the  kind  of  tax  paid. 

3382  2.  Procedure  with  respect  to  dishonored  checks. — If  the  bank  on 
which  any  such  check  is  drawn  should  refuse  to  pay  it  at  par,  the 

check  should  be  returned  through  the  depositary  bank  and  be  treated  in  the 
same  manner  as  a bad  check.  All  expenses  incident  to  the  attempt  to  collect 
such  a check  and  the  return  of  it  through  the  depositary  bank  must  be  paid 
by  the  drawer  of  the  check  to  the  bank  on  which  it  is  drawn,  since  no  deduc- 
tion can  be  made  from  amounts  received  in  payment  of  taxes.  If  any  tax- 
payer whose  check  has  been  returned  uncollected  by  the  depositary  bank 
should  fail  at  once  to  make  the  check  good,  the  collector  should  proceed  to 
collect  the  tax  as  though  no  check  had  been  given.  A taxpayer  who  ten- 
ders a certified  check  in  payment  for  taxes  is  also  not  released  from  his 
obligation  until  the  check  has  been  paid.  (T.  D.  2851,  signed  by  Com- 
missioner Daniel  C.  Proper,  and  dated  Alay  28,  1919.) 

INC.  464  TAX 


(L-A4im.  2143.) 

3383  Withholding  as  td  Income  from  Securities  whose  Owner  is  Un- 
2996  known;  Meaning  of  Term  “Highest  Applicable  Rate.” — It  seems 
3321  that  there  has  been  some  misunderstanding  as  to  the  meaning  of  the 

following  sentence  in  Article  361,  Regulations  45: — “Withholding  in  all 
cases  at  the  highest  applicable  rate  is  also  required  from  interest  or  bonds  or 
other  securities  where  the  owner  of  such  securities  is  unknown  to  the  with- 
holding agent.” 

3384  The  “highest  applicable  rate”  as  used  above  is  (a)  2 per  cent  on 
interest  upon  bonds  or  other  obligations  of  domestic  or  resident 

foreign  corporations  containing  a so-called  tax-free  covenant  clause;  (b) 
8 per  cent  in  the  case  of  fixed  or  determinable  annual  or  periodical  income 
(other  than  dividends  from  corporations  liable  to  the  income  tax  and  interest 
on  corporate  bonds  containing  a tax-free  covenant  clause)  payable  to  an 
unknown  owner.  (L-Mim.  2143,  signed  by  Commissioner  Daniel  C.  Roper, 
and  dated  June  2,  1919.) 


(Amendment  to  T.  D.  2847.) 

3385  Donations  to  the  Red  Cross  or  other  War  Activities  by  Corporations. 

3345  — [Comment:  T.  D.  2847  has  been  reprinted  by  the  Government 

with  a foot-note  reading  as  follows:] 

This  Treasury  Decision  should  be  substituted  for  the  previous 
mimeograph  issue  of  T.  D.  2847,  the  words  “although  such  contribu- 
tions may  be  made  to  the  Red  Cross  or  other  war  activities”  appearing 
in  the  last  paragraph  [1|3351]  thereof  having  been  corrected  to  read 
“even  though  such  contributions  are  made  to  the  Red  Cross  or  other 
war  activities.”  (T.  D.  2847,  signed  by  Commissioner  Daniel  C.  Roper, 
and  dated  May  24,  1919.) 


(T.  D.  2856.) 

3386  An  Extension  of  Time  for  Filing  Returns  of  Partnerships,  Personal 
3329  Service  Corporations  and  Corporations  Having  a Fiscal  Year  Ending 

Either  on  January  31,  February  28,  March  31,  or  April  30*,  1919. — 
In  view  of  the  fact  that  the  necessary  forms  are  not  yet  available,  a further 
extension  of  time  to  July  15,  1919,  is  hereby  granted  to  partnerships  and 
personal  service  corporations  having  a fiscal  year  ending  January  31,  Febru- 
ary 28,  March  31,  or  April  30*,  1919.  Corporations  other  than  personal 
service  corporations,  having  a fiscal  year  ending  January  31,  February  28, 
March  31,  or  April  30*,  1919,  are  hereby  granted  an  extension  to  July  15, 
1919,  if  they  have  prior  to  the  date  of  this  decision  filed  tentative  return  on 
Form  103 1-T,  paying  one-fourth  of  the  estimated  tax,  or  if  they  shall  on 
or  before  June  15,  1919,  file  tentative  return  on  1031-T,  paying  one-fourth 
of  the  estimated  tax.  Any  deficiency  in  the  first  installment  as  shown  by 
the  completed  return  must  be  paid  with  interest  thereon  from  the  original 
due  date  at  the  rate  of  one-half  of  one  per  centum  a month  at  the  time  of 
filing  the  completed  return.  *See  1[3388. 

3387  This  extension,  in  the  case  of  corporations,  shall  not  operate  to  extend 
the  due  date  of  any  installment  of  tax  after  the  first.  In  the  case  of 

corporations  filing  1031-T,  the  time  for  filing  a completed  return  is  auto- 
matically extended  as  above  but  not  beyond  the  due  date  of  the  second 
installment  of  the  tax.  The  second  installment  will  be  due  five  and  one-half 
months  after  the  close  of  the  corporation’s  fiscal  year  ending  in  1919.  (T.  D. 

2856,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  June  7,  1919.) 

INC.  465  TAX 


3388  Extension  of  Time  for  Filing  Returns  of  Partnerships,  Personal 
3386  Service  Corporations  and  Corporations  Having  a Fiscal  Year  Ending 
on  April  30,  1919. — [Comment:  The  words  “or  April  30,  1919” 
appearing  in  T.  D.  2856  [1|3386]  were  inadvertently  inserted.  Our  under- 
standing to  this  effect  has  been  confirmed,  orally,  by  the  Bureau  of  Internal 
Revenue. — The  Corporation  Trust  Company.] 


(T.  D.  2857.) 

Original  Subscription  to  Victory  Notes. — For  the  purposes  of  the  addi- 
tional tax  exemption  for  Liberty  Bonds  granted  by  Section  2 (b) 
of  the  Victory  Liberty  Loan  Act,  approved  March  3,  1919,  Victory 
notes  of  either  series  issued  upon  conversion  of  Victory  notes  of  the 
other  series  which'  were  originally  subscribed  for  by  any  taxpayer  will  be 
deemed  to  have  been  originally  subscribed  for  by  such  taxpayer.  (T.  D. 
2857,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  June  7,  1919.) 


(T.  D.  2859.) 

3390  Amendment  to  Paragraph  Numbered  (3)  of  Article  184,  Final  Edition 
2924C  of  Regulations  45,  Dealing  with  the  Cost  of  War  Facilities  which  may 
be  Amortized. — The  paragraph  numbered  (3)  in  article  184  of  the 
final  edition  of  regulations  45  which  reads  as  follows: 

“(3)  In  the  case  of  other  property  the  basis  is  the  estimated  repro- 
duction cost  as  of  April,  1919,  of  such  property  in  its  then  condition. 

In  the  final  determination  such  cost  will  be  ascertained  under  stable 
postwar  conditions,  without  reference  to  such  date.”  / 

is  hereby  amended  to  read  as  follows:  ^ 

“(3)  In  the  case  of  other  property  the  basis  for  amortization  calcu- 
lation shall  be  the  estimated  value  of  the  property  to  the  taxpayer  in 
terms  of  its  actual  use  or  employment  in  his  going  business,  such  value 
in  no  case  to  be  less  than  the  sale  or  salvage  value  of  the  property,  pro- 
vided, however,  that  in  no  case  shall  the  preliminary  estimate  (for  pur- 
poses of  returns  to  be  made  in  1919)  of  the  amount  of  such  amortization 
exceed  25%  of  the  cost  of  ithe  property.  In  the  final  determination 
the  amount  of  the  amortization  allowance  will  be  ascertained  upon  the 
basis  of  stable  postwar  conditions  under  regulations  to  be  promulgated 
when  these  conditions  become  apparent.”  f 

(T.  D.  2859,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  June 
10,  1919.) 


3391  Amortization  Claims  for  1918  and  for  1919:  Amended  Returns 
2924  Involving  Amortization. — Reference  is  made  to  your  letter  of  May  21, 
1919,  requesting  information  relative  to  the  application  of  the  pro- 
visions of  Section  214  (a)  paragraph  9,  of  the  Revenue  Act  of  1918,  and 
Articles  181  to  188  of  Regulations  45,  final  edition,  to  the  1918  and  1919 
returns  of  taxpayers. 

3393  Your  questions,  are  answered  in  the  order  submitted  as  follows:  (1) 
A claim  for  amortization  applicable  to  the  portion  of  the  calendar 
year  1918  covered  by  the  return  of  the  taxpayer  for  the  taxable  year  1918 
shall  be  included  in  such  return,  and  if  such  amortization  is  not  claimed 
therein  it  may  not  be  taken  in  the  return  covering  the  taxable  year  1919. 
The  return  for  the  taxable  year  1919,  shall  provide  only  for  the  proper  amorti- 
zation applicable  to  such  taxable  year  ascertained  in  accordance  with  the 


3389 

3179 

3326 


TNC. 


466  TAX 


6-17-ld. 


provisions  contained  in  Article  185  of  Regulations  45.  However,  in  cases 
where  it  will  be  impracticable  to  accurately  determine  the  amortization 
during  the  calendar  year  1919,  any  returns  made  during  such  period  should 
include  amortization  allowances  tentatively  determined  in  accordance  with 
Articles  184  and  185  of  Regulations  45. 

3393  (2)  Returns  made  for  the  taxable  year  1918,  in  cases  where  the 

taxpayers  are  entitled  to  amortization  claims,  should  include 
such  claims  ascertained  as  provided  in  the  preceding  paragraph,  and  if 
subsequently  the  amortization  as  finally  determined  differs  essentially  from 
the  amount  claimed  in  the  returns  filed,  then  amended  returns  should  be 
made.  (Letter  to  The  Corporation  Trust  Company,  signed  by  Commis- 
sioner Daniel  C.  Roper,  and  dated  June  9,  1919.) 


3394  Duties  and  obligations  of  employers,  in  connection  with  with- 

2976  holding,  in  the  case  of  non-resident  aliens  employed  in  the  United 

3147  States. — Reference  is  made  to  your  letter  dated  April  15,  1919, 

containing  the  following  inquiries: 

‘T.  From  what  date  are  employers  responsible  for  deductions  on 
nonresident  aliens  as  defined  under  Treasury  Decision  2794?  Should  the 

tax  have  been  withheld  on  this  basis  during  1918? 

***** 

***** 

“4.  What  should  be  done  with  Form  1078  when  signed  by  alien? 
Should  the  employer  retain  it  as  authority  for  not  withholding  tax,  or 
should  it  be  sent  to  the  Collector,  and  if  so,  when.^'" 

3395  Referring  to  your  first  inquiry  you  are  advised  that  employers  will 
be  held  liable  for  the  deduction  of  income  tax  from  salaries,  wages, 

or  other  fixed  or  determinable  income  paid  to  nonresident  aliens  since 
September  17,  1915,  the  date  of  issuance  of  Treasury  Decision  2242  [11489, 
1[491,  1[493],  defining  a nonresident  alien  and  prescribing  certificate  of 
residence.  Form  1078.  Employers  should  be  governed  by  Articles  311 
to  316,  inclusive.  Regulations  45,  as  to  liability  to  withhold  income  tax 
during  1918  from  wages  paid  to  alien  employees. 

3396  Referring  to  your  second  inquiry  you  are  advised  that  eight  per 

3003  cent  income  tax  is  required  to  be  withheld  by  the  employer  from 

wages  paid  to  nonresident  alien  employees  only  on  and  after  February  25, 
1919.  As  nonresident  aliens  were  subject  to  a normal  tax  of  twelve  per 
cent  for  1918,  and  only  two  per  cent  was  required  to  be  withheld  during 
that  year,  the  balance  of  tax  due  should  be  accounted  for  in  the  individ- 
ual income  tax  returns. 

*********** 


3397  Referring  to  your  fourth  inquiry  you  are  advised  that  every  em- 
ployer with  whom  affidavits  of  claim  of  Form  1078  are  filed  by  em- 
ployees, should  make  a record  thereof  and  forward  the  certificates  to  the 
Commissioner  of  Internal  Revenue,  Sorting  Division,  Washington,  D.  C., 
not  later  than  the  twentieth  day  of  the  month  succeeding  that  during 
which  such  certificates  were  received.  (Letter  to  The  Corporation  Trust 
Company,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  May  21, 
1919.) 


INC. 


467  TAX 


3398  Duties  and  obligations  of  employers,  in  connection  with  with- 
2976  holding,  in  the  case  of  non-resident  aliens  employed  in  the  United 
3147  States. — Reference  is  made  to  your  letter  dated  March  25,  1919, 

transmitting  a copy  of  your  letter  dated  February  28,  1919,  in 
which  the  following  questions  are  submitted  with  respect  to  the  duty  of 
operators  of  bituminous  coal  mines  to  withhold  income  tax  from  salaries, 
wages  and  other  compensation  paid  to  nonresident  aliens  employed  in  this 
country. 

. ‘‘1.  For  what  years  will  the  Department  attempt  to  make  collection 
of  such  items? 

‘‘2.  In  the  absence  of  any  record  now  existing  as  to  the  nationality 
or  intentions  of  employees  who  have  left  the  service  of  a person  or  corpo- 
ration which  employed  them  during  past  years,  what  action  on  the  part 
of  the  employers  will  be  necessary  to  relieve  them  from  any  further  liability 
for  this  tax?  Is  not  the  burden  of  proof  on  the  Government  in  this  case? 

Will  a canvass  of  the  present  employees  with  a view  to  ascer- 
taining their  nationality  or  intentions  of  becoming  resident  taxpayers,  and 
a collection  of  the  taxes  due  from  them  be  a satisfactory  solution  of  the  case? 
If^so,  how  far  back  should  employers  attempt  to  make  this  collection? 

“4.  -It  is  customary  in  a great  many  mining  districts  to  let  out  a 
certain  portion  of  a mine  to  some  miner  who  is  usually  termed  a contractor 
who  employs  additional  labor  in  the  production  of  coal  from  the  section 
of  the  mine  assigned  to  him.  These  men,  usually  termed  ‘‘back  hands” 
sometimes  do  not  appear  upon  the  payroll  and  are  very  frequently  not 
officially  known  to  the  operator  or  employer.  Who  is  responsible  for  the 
collection  in  this  case,  the  operator  or  the  contractor?  The  operator  fre- 
quently does  not  know  the  amount  of  the  earnings  of  the  ‘back  hand’  or 
laborer  employed  by  the  contractor  and  the  latter  usually  keeps  no  books 
of  account. 

“5.  Many  employees,  not  only  in  the  mining  industry  but  in  other 
industries,  are  known  only  by  number.  Will  it  be  necessary  to  ascertain 
their  names  and  intentions  as  to  residence? 

“6.  Does  the  failure  of  the  employer  to  make  such  collections  make 
him  liable  for  the  full  amount  of  the  tax?  If  so,  how  far  back  of  the  present 
will  the  department  attempt  to  make  collections,  and  in  the  absence  of 
specific  information  as  to  the  nationality  of  past  employees,  upon  what 
evidence  will  they  base  their  action  during  the  past  period?” 

3399  In  reply  to  your  first  inquiry  you  are  advised  that  the  Depart- 
ment is  not  limited  to  as  years  in  regard  to  investigations  relative 

to  the  liability  of  employers  to  deduct  income  tax  at  the  source  from  fixed 
or  other  determinable  income  paid  to  nonresident  aliens  as  provided  by 
the  Revenue  Act  of  1918  and  the  acts  for  prior  years.  No  effort  will  be 
made  to  hold  employers  of  nonresident  aliens  liable  for  tax  prior  to  the 
issuance  of  Treasury  Decision  2242  [1[489,  11491,  1[498],  September  17, 
1915,  which  defined  a nonresident  alien  and  not  then  if  such  nonresident 
alien  had  been  employed  continuously  by  the  same  person  or  corporation 
for  a period  of  three  months  or  more. 

3400  ■ In  reply  to  your  second  inquiry  you  are  advised  that  aliens  em- 

ployed in  the  United  States  are  prima  facie  regarded  as  nonresident 
aliens,  and  in  case  where  withholding  has  not  occurred  it  will  be  necessary 
for  the  employer  to  furnish  written  proof  of  facts  which  overcome  that 
presumption.  The  burden  of  proof  is  on  the  employer.  The  records  of  a 
corporation,  such  as  the  cancelled  checks  representing  payment  to  its 
employees,  and  the  payrolls,  are  held  to  constitute  written  proof. 

3401  Referring  to  your  third  inquiry  you  are  advised  that  if  an  alien 
has  been  living  in  the  United  States  for  ns  much  as  one  year  im- 
mediately prior  to  the  time  he  entered  the  employment  of  the  withholding 


INC. 


468 


TAX 


6-17-19. 


agent,  or  if  he  has  been  regularly  employed  by  an  individual  resident  in 
the  United  States  or  by  a resident  corporation  in  the  same  city  or  county 
for  as  much  as  three  months  immediately  prior  to  any  payment  by  the 
employer,  he  may  be  treated  as  a resident  in  deciding  as  to  the  necessity 
of  withholding  part  of  such  payment,  provided  no  facts  are  known  to  the 
employer  showing  that  he  is  in  fact  a transient.  The  facts  with  regard 
to  the  length  of  time  the  alien  has  thus  lived  in  this  country  or  has  been 
so  regularly  employed  may  be  established  by  the  certificate  of  the  alien. 
The  employer  may  also  obtain  evidence  to  overcome  the  prima  facie  pre- 
sumption of  nonresidence  by  securing  from  the  alien  Form  1078,  revised, 
properly  executed  or  an  equivalent  certificate  of  the  alien  establishing 
residence.  Having  secured  such  evidence  from  the  alien,  the  employer 
may  rely  thereon  unless  the  statement  of  the  alien  was  false  and  he  has 
‘reasonable  cause  to  believe  it  was  false,  and  may  continue  to  rely  thereon 
until  the  alien  ceases  to  be  a resident. 

3402  Referring  to  your  fourth  inquiry  you  are  advised  that  in  case  the 
owner  or  operator  of  a mine  leases  a portion  thereof  to  a contractor 

whose  operations  are  separate  and  distinct  from  that  of  the  corporation, 
the  individuals  being  actually  employed  by  the  contractor,  the  duty  to 
withhold  is  that  of  the  contractor  and  not  of  the  corporation. 

3403  Referring  to  your  fifth  inquiry  you  are  advised  that  in  every  case 
where  the  employee  is  a nonresident  alien,  withholding  is  required, 

except  for  1918,  in  which  case  a claim  for  exemption  may  be  filed  in  accord- 
ance with  the  provisions  of  Article  307,  Regulations  45.’  The  name  and  ad- 
dress of  such  employee  should  be  secured  regardless  of  the  fact  that  for  the 
convenience  of  the  operator,  the  individual  is  known  by  number. 

3404  Referring  to  your  sixth  inquiry  you  are  advised  that  this  question 
appears  to  be  covered  by  the  answer  to  your  third  inquiry. 

3405  Replying  to  the  next  to  the  last  paragraph  of  your  letter  you  are 
advised  that  the  employer  who  fails  to  withhold  and  account  for 

income  tax  with  respect  to  income  paid  to  alien  employees,  may  submit 
any  evidence  which  will  substantiate  the  fact  that  such  employees  are 
residents  of  the  United  States  within  the  meaning  of  Article  312  to  316 
of  Regulations  45.  As  to  what  action  will  be  taken  by  the  Bureau  in  regard 
to  the  collection  of  income  tax  at  the  source,  you  are  advised  that  any 
investigations  deemed  necessary  for  the  proper  administration  of  the  revenue 
acts  will  be  made  in  order  that  taxpayers  may  satisfy  their  obligations  to 
the  Government. 

3406  Referring  to  the  inquiry  contained  in  your  letter  of  March  25, 
1919,  in  regard  to  aliens  who  have  been  employed  in  this  country 

by  the  corporation  for  a period  of  three  months,  you  are  advised  that 
such  circumstances  are  held  to  constitute  the  individual  a resident  of  the 
United  States  for  purpose  of  withholding,  and  no  further  tax  is  required 
to  be  withheld  at  the  end  of  that  period  provided  no  facts  are  known  to 
the  employer  tending  to  show  that  the  individual  is  a transient  as  described 
in  Article  312,  Regulations  45.  The  amount  of  tax  withheld  during  the 
three  months  should  not,  however,  be  refunded  to  the  employe,  but  should  be 
included  in  the  corporation’s  annual  list  return  of  income  tax  withheld 
at  the  source.  Form  1042.  (Letter  to  W.  B.  Reed,  Accounting  Secretary, 
National  Coal  Association,  Washington,  1).  C.,  signed  by  Commissioner 
Daniel  C.  Roper,  and  dated  May  26,  1919.) 


INC. 


469  TAX 


3407  Constructive  receipt  of  income  during  the  taxable  year  by  a dece- 
2862c  dent  prior  to  his  death. — Reference  is  made  to  your  letter  of  recent 
2862d  date,  relative  to  the  proper  treatment,  for  income  tax  purposes, 
3019  of  income  received  after  the  death  of  an  individual  in  1918.  You 
state  that  you  represent  a decedent  who  died  on  June  25,  1918, 
and  whose  accounts  were  kept  upon  a cash  receipt  and  disbursement  basis. 
On  June  1,  1918,  dividends  were  declared  on  stock  which  he  owned  but 
which  were  not  paid  until  July  1,  1918,  and  interest  accrued  on  bonds  and 
mortgages  during  his  lifetime  was  not  paid  until  after  his  death.  The 
question  presented  is  whether  the  dividends  and  interest  referred  to  should 
be  reported  in  the  return  for  the  period  from  January  1,  1918  to  the  date 
of  his  death  or  in  the  return  for  the  period  from  the  date  of  his  death  to 
December  31,  1918.  In  this  connection  you  are  advised  that  under  Sec- 
tion 213  of  the  Revenue  Act  of  1918,  income  which  is  credited  to  the  ac- 
count of  or  set  apart  for  a taxpayer  and  which  may  be  drawn  upon  by 
him  at  any  time  is  subject  to  tax  for  the  year  during  which  so  credited* 
or  set  apart,  although  not  yet  actually  reduced  to  possession.  Where  in- 
terest coupons  have  matured,  but  have  not  been  cashed,  such  interest 
payment,  though  not  collected  when  due  and  payable,  is  nevertheless  avail- 
able to  the  taxpayer  and  should  be  included  in  his  gross  income  for  the 
year  during  which  the  coupons  matured.  Dividends  on  corporate  stock 
are  subject  to  tax  when  set  apart  for  the  stockholder,  although  not  yet 
collected  by  him.  Similarly  interest  on  mortgages  should  be  included  in 
gross  income  for  the  year  in  which  it  becomes  due  and  payable.  (Regula- 
tions 45,  Articles  53  and  54.)  Therefore,  if  the  income  referred  to  in  your 
letter  was  made  available  to  the  decedent  during  1918  so  that  it  could  have 
been  drawn  upon  by  him  prior  to  his  death  it  should  be  reported  in  the 
return  for  the  period  from  January  1,  1918  to  June  25,  1918.  (Letter  to 
Douglas,  Armitage  and  McCann,  New  York,  N.  Y.,  signed  by  J.  H. 
Callan,  Assistant  to  the  Commissioner  (by  P.  T.  Talbert),  and  dated 
May  31,  1919.) 


3408  Returns  of  information  as  to  payments  to  employees  in  board  and 
3055  lodging,  etc. — Reference  is  made  to  your  letter  of  May  19,  1919, 
in  which  you  present  the  following  inquiry:  “As  Article  1062, 
Regulations  45,  appeared  in  the  preliminary  draft,  it  contained  two  sen- 
tences not  included  in  the  Revised  and  complete  regulations.  Are  we  to 
understand  from  the  omission  of  the  last  two  sentences  that  living  quarters 
and  board  are  to  be  ignored  in  making  returns  of  information.?”  It  is 
assumed  that  the  article  of  the  regulations  to  which  you  have  reference 
is  Article  1072,  which  relates  to  the  filing  of  returns  of  information  in  regard 
to  payments  made  to  employees.  The  portion  of  Article  1072  of  the  Pre- 
liminary Regularions  No.  45,  to  which  you  refer,  was  omitted  from  the 
last  edition  of  the  regulations  for  the  reason  that  the  subject  treated  in 
this  part  of  the  original  article  is  now  covered  by  Article  33  [Tf2842a], 
which  v/as  not  contained  in  the  preliminary  edition.  As  stated  in  the 
first  part  of  Article  1072,  returns  of  information  are  required  for  “all  em- 
ployees to  whom  payments  exceeding  $1000  a year  are  made,  whether 
such  total  sum  is  made  up  of  wages,  salaries,  commissions  or  compensation 
in  any  other  form,”  which  includes  those  cases  where  board  and  lodging 
are  consudered  a part  of  the  compensation  for  the  services  rendered.  (Let- 
ter to  The  Corporation  Trust  Company,  signed  by  Commissioner  Daniel 
C.  Roper,  and  dated  June  2,  1919.) 


INC. 


470  TAX 


6-17-19. 


(T.  D.  2858.) 

Status  of  dividends  received  by  a partnership  when  distributed  to  the 
members  thereof,  under  the  Act  of  1913. 

1.  Taxability  of  income  derived  from  or  through  partnership. 

A member  of  a partnership  need  not  include  as  a part  of  his  net 
income  subject  to  normal  tax  such  of  his  income  derived  from 
or  through  a partnership  as  had  been  received  by  the  partner- 
ship in  the  shape  of  dividends  on  stocks  owned  by  it  in  corpora- 
tions taxable  upon  their  net  income. 

2.  Construction  of  the  Act. 

The  law  is  so  framed  as  to  deal  with  the  gains  and  profits  of  a 
partnership  as  if  they  were  the  gains  and  profits  of  the  individual 
partners. 

3.  Judgment  for  defendant. 

Judgment  is  rendered  in  favor  of  defendant. 

4.  Judgment  of  District  Court  aifirmed. 

The  judgment  of  the  District  Court  has  been  affirmed  by  the  Circuit 
Court  of  Appeals. 

3409  The  appended  decision  of  the  District  Court  of  the  United  States 
for  the  Northern  District  of  Ohio,  Eastern  Division,  in  the  case  of 

United  States  of  America,  plaintiff,  v.  Harry  Coulby,  defendant  (251 
Fed.  982),  which  was  on  January  7,  1919,  affirmed  by  the  United  States 
Circuit  Court  of  Appeals,  Sixth  Circuit,  is  published  for  the  information 
of  internal  revenue  officers  and  others  concerned.  (T.  D.  2858,  signed  by 
Acting  Commissioner  J.  H.  Callan,  and  dated  June  9,  1919.) 

IN  THE  DISTRICT  COURT  OF  THE  UNITED  STATES,  NORTHE  RN 
DISTRICT  OF  OHIO,  EASTERN  DIVISION. 

(Affirmed  by  Circuit  Court  of  Appeals,  January  7,  1919.) 

United  States  of  America^  plaintiffs  vs.  Harry  Coulby ^ defendant . 

(Memorandum.) 

(June  26,  1918.) 

3410  WESTENHAVER,  District  Judge:  This  is  an  action  at  law  to 
recover  $588.45,  with  interest  and  penalties  thereon,  alleged  to 

be  due  as  unpaid  income  tax  for  the  nine  months  ending  December  31, 

, 1913  under  the  Federal  income  tax  law  of  1913.  A jury  trial  was  waived 

by  the  parties  and  the  case  has  been  submitted  to  me  for  decision  upon  an 
agreed  statement  of  facts.  Briefly  the  facts  are  these: 

3411  The  defendant,  during  the  period  in  question,  was  a member  of  a 
partnership  by  the  name  of  Pickands,  Mather  & Co.  This  partner- 
ship was  then  the  owner  of  stocks  in  certain  corporations  which  were  tax- 
able upon  their  net  income  under  the  provisions  of  section  G of  the  income- 
tax  law.  Dividends  were  declared,  and  paid  by  these  corporations  upon 

) the  stocks  held  therein  by  the  partnership.  The  defendant,  in  making 

return  of  his  income  for  taxation,  included  as  a part  of  his  gross  income 
his  share  of  the  profits  of  the  partnership,  but  deducted  therefrom  such 
part  thereof  as  was  derived  by  or  through  the  partnership  from  dividends 
on  stocks  in  these  corporations  taxable  upon  their  net  income. 

3412  Later,  on  or  about  June  27,  1917,  the  Commissioner  of  Internal 
Revenue  examined  the  defendant’s  return  and  disallowed  the  deduc- 

^ tions  thus  made  and  assessed  the  normal  tax  of  one  per  cent  against  the 

defendant  on  such  deduction.  Lhe  item  of  $588.45  represents  that  assess- 
ment. 

v.INC.  471  TAX 


3413  The  exact  question  presented  for  decision  is  whether  or  not  a mem- 
ber of  a partnership  must  include  as  a part  of  his  net  income  sub- 
ject to  the  normal  tax,  such  part  of  his  income  derived  from  or  through 
a partnership  which  has  been  received  by  that  partnership  as  dividends 
on  stocks  owned  by  it  in  corporations  taxable  upon  their  net  income  under 
section  G of  the  Federal  income  tax  law  of  1913. 

3414  Plaintiff’s  contention  that  profits  thus  derived  are  a part  of  the 
partner’s  net  income,  and  subject  to  the  normal  tax,  is  based  on 

the  following  paragraph  of  Section  D: 

Provided  further , That  any  persons  carrying  on  business  in  partnership 
shall  be  liable  for  income  tax  only  in  their  individual  capacity,  and  the 
share  of  the  profits  of  a partnership  to  which  any  taxable  partner  would 
be  entitled  if  the  same  were  divided,  whether  divided  or  otherwise,  shall 
be  returned  for  taxation  and  the  tax  paid,  under  the  provisions  of  this 
section. 

3415  An  examination  of  the  entire  income-tax  law  convinces  me  that 
plaintiff’s  contention  is  erroneous.  Section  B defines  what  shall 

constitute  the  net  income  of  a taxable  person;  it  includes  his  gains,  profits 
and  income  derived,  not  merely  from  salaries,  wages  or  compensation  for 
personal  service,  but  also  from  business,  trade,  commerce,  or  sales  or  deal- 
ings in  property,  or  the  transaction  of  any  lawful  business  carried  on  for 
gain  or  profit.  This  plainly  includes  such  gains  and  profits  derived  from  or 
through  a partnership. 

3416  Section  B also  states  v>^hat  deductions  shall  be  made  from  the  gross 
income  of  a taxable  person  in  order  to  ascertain  the  net  income 

for  the  purpose  of  levying  the  normal  tax.  Among  these  deductions  is  the 
amount  received  as  dividends  upon  the  stock  or  from  the  net  earnings  of 
any  corporation,  joint-stock  company,  association,  or  insurance  company 
which  is  taxable  upon  its  net  income. 

3417J  Section  provides  G for  the  normal  tax  upon  the  entire  net  income  of 
corporations.  It  expressly  excludes  partnerships  therefrom.  This  net 
income  of  corporations  is  subject  only  to  the  normal  tax,  such  as  is  levied 
on  the  income  of  any  natural  taxable  person,  and  not  to  the  additional 
tax  provided  for  by  subdivision  2 of  section  A.  This  income  from  cor- 
porations received  by  a natural  taxable  person  is  exempt  only  from  the 
normal  income  tax,  and  not  from  such  additional  tax. 

3418  Taking  these  provisions  as  a whole,  the  paragraph  of  section  D 
relating  to  partnerships  above  quoted,  must  be  considered  and 

construed  in  the  light  of  the  general  scheme  thus  outlined.  No  provision 
is  anywhere  made  requiring  a return  to  be  made  by  a partnership  upon 
its  income.  This  is  true  notwithstanding  section  D requires  copartner- 
ships, having  the  control,  receipt,  disposal  or  payment  of  fixed  income  of 
another  person  subject  to  tax,  to  make  a return  in  behalf  of  that  person 
and  to  deduct  the  same.  This  provision  deals  with  the  fiduciary  relation- 
ship of  guardians,  trustees,  executors,  and  so  forth,  having  the  possession 
and  control  of  other  person’s  property;  but,  as  regards  an  ordinary  part- 
nership and  its  ordinary  business,  the  statement  is  true  that  no  return  is 
required  to  be  made  under  the  Federal  Income  Tax  Law  of  1913  by  a 
partnership. 

3419  Partnerships  are  expressly  excluded  from  section  G,  requiring  re- 
turns and  payment  of  the  normal  tax  by  corporatoins.  If  Congress 

had  intended  that  partnerships,  as  such,  should  be  taxable  upon  their  net 
income,  the  logical  place  to  have  so  provided  w^ould  have  been  in  section 
G,  and  to  have  excluded  from  the  net  income  of  a natural  taxable  person, 
subject  to  the  normal  tax,  that  part  of  his  income  derived  from  a partner- 
ship just  as  is  provided  with  respect  to  his  income  derived  from  a cor- 
poration. 


INC. 


472  TAX 


6-17-19. 


3420  This  law,  therefore,  ignores  for  taxing  purposes  the  existence  of 
a partnership.  The  law  is  so  framed  as  to  deal  with  the  gains  and 

profits  of  a partnership  as  if  they  were  the  gains  and  profits  of  the  individual 
partner.  The  paragraph  above  quoted  so  provides.  The  law  looks  through  ’ 
the  fiction  of  a partnership  and  treats  its  profits  and  its  earniugs  as  those 
of  the  individual  taxpayer.  Unlike  a corporation,  a partnership  has  no 
legal  existence  aside  from  the  members  who  compose  it.  The  Congress, 
consequently,  it  would  seem,  ignored,  for  taxing  purposes,  a partnership's 
existence,  and  placed  the  individual  partner’s  share  in  its  gains  and  profits 
on  the  same  footing  as  if  his  income  had  been  received  directly  by  him 
without  the  intervention  of  a partnership  name. 

3421  It  follows  from  these  considerations  that  legally  the  defendant’s 
share  of  the  gains  and  profits  of  the  Pickands,  Mather  & Com- 
pany, derived  from  corporations  taxable  on  their  net  incomes,  is  to  be 
treated  as  if  the  same  had  been  received  by  him  directly  from  the  tax- 
paying  corporations. 

3422  The  contrary  contention  is  based  on  a literal  reading  of  the  words 
“the  share  of  the  profits  of  a partnership  to  which  any  taxable 

partner  would  be  entitled  if  the  same  were  divided,  whether  divided  or 
otherwise,  shall  be  returned  for  taxation  and  tax  paid.”  This  sentence 
follows  language  plainly  ignoring  the  existence  of  partnerships  for  taxing 
purposes.  Section  B had  already  provided  what  should  be  regarded  as 
net  income  in  language  sufficiently  comprehensive  to  include  the  gains  and 
profits  from  business  carried  on  in  a partnership  name.  The  words  just 
quoted  evidently  apply  only  to  the  possibility  that  a partnership  might 
not  divide  its  gains  and  profits,  but  retain  them  in  the  firm  name  or  business. 
It  was  to  meet  this  possibility  that  these  words  were  added,  and  not  to 
provide  an  unequal  and  unique  method  of  taxing  a partner’s  gains  and 
profits  from  a partnership. 

3423  The  contention  to  the  contrary  is  narrow  and  literal,  even  if  not 
lacking  in  plausibility.  It  is  a contention,  however,  contrary  to  the 

spirit  and  general  policy  of  the  Act;  it  destroys  uniformity  and  equality 
and  should  not  be  adopted  unless  required  by  the  express  language  of  the 
statute.  In  my  opinion,  the  language  of  the  statute  does  not  so  require, 
but,  on  the  contrary,  when  the  entire  act  is  examined,  it  does  give  a right 
to  the  deduction. 

3424  Counsel  for  plaintiff  invoke  the  legal  principles,  that  an  exemp- 
tion in  a tax  law  must  be  clearly  expressed  and  will  not  be  im- 
plied; that  power  to  tax  will  not  be  taken  away  unless  the  law-making 
power  has  done  so  in  clear  and  unequivocal  language  and  that,  inasmuch 
as  uniformity  and  equality  is  difficult,  if  not  impossible  of  attainment  in 
tax  laws,  the  inequality  which  might  result  from  the  Government’s  con- 
tention should  not  be  permitted  to  control  the  language  of  the  law.  Nu- 
merous authorities  illustrating  these  legal  principles  are  cited.  These 
principles  are  well  settled,  and,  I assume  ample  power  in  Congress  to  have 
assessed  defendant’s  income  derived  from  a partnership  in  the  manner 
contended  for.  It  is  my  opinion,  however,  that  Congress  has  not  done  so. 

3425  Counsel  for  plaintiff  call  attention  to  the  fact  that  the  h'ederal 
Income  Tax  Law  of  September  8,  1916  now  provides  that  mem- 
bers of  partnerships  shall  be  allowed  credit  for  their  proportionate  share 
of  partnership  gains  and  profits  derived  from  corporations  taxable  on  their 
net  income,  and  urge  that  this  is  a change  of  the  law,  and  evidences  a 
belief  of  the  law-making  body  that  the  1913  Income  Tax  Law  had  pro- 
vided differently.  I do  not  agree  with  this  contention.  In  myjopinion, 
this  provision  was  inserted  in  the  1916  Act  to  put  at  rest  the  present  con- 


INC. 


473  TAX 


trovefsy  rather  than  to  change  the  law,  and  is  to  be  regarded  only  as  a 
legislative  recognition  of  the  scope  and  intent  of  the  prior  law.  The  ap- 
plicable authorities,  in  my  opinion,  are  the  following:  Bailey  v.  Clark 
(21  Wall.  284);  Johnson  v.  Southern  Pacific  Company  (196  U.  S.  1);  Wet- 
more  V.  Markoe  (196  U.  S.  68). 

3426  Judgment  is  rendered  in  favor  of  defendant.  An  exception  may 
be  noted  on  behalf  of  plaintiff. 


3427  Dividends  received  from  foreign  corporations  subject  to  income 
1125  tax  are  exempt  from  normal  tax. — Receipt  is  acknowledged  of 
2698  your  letter  dated  May  9,  1919,  in  which  you  request  advice  as 
to  whether  Article  301  of  Regulations  45  contemplated  that  the 
normal  tax  imposed  by  Section  210  of  the  Revenue  Act  of  1918  does  not 
apply  to  dividends  received  from  foreign  corporations  deriving  any  income 
whatever  from  sources  within  the  United  States,  without  regard  to  the 
character  of  that  income  and  also  without  regard  to  the  proportion  which 
such  income  bears  to  the  entire  income  of  the  corporation.  In  reply  you 
are  advised  that  Section  216  (a)  of  the  Act  upon  which  Article  301  of  the 
Regulations  is  based,  provides  that  for  the  purpose  of  the  normal  tax 
only  there  shall  be  allowed  as  a credit  ‘‘the  amount  received  as  dividends 
from  a corporation  which  is  taxable  under  this  title  upon  its  net  income.’’ 
[See  1[2102  also.]  Therefore,  Article  301  of  the  Regulations  contemplates 
that  the  normal  tax  imposed  by  Section  210  of  the  Act  does  not  apply  to 
dividends,  regardless  of  the  amount  of  such  dividends,  received  from  a 
foreign  corporation  taxable  upon  income  from  sources  within  the  United 
States,  however  small  such  income  may  be.  (Letter  to  The  Corporation 
Trust  Company,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated 
June  9,  1919.) 


3428  Additional  capital  stock  tax  imposed  by  Revenue  Act  of  1918  as 
2037  a deduction. — In  reply  to  your  letter  of  May  21,  1919,  you  are 

advised  that  the  capital  stock  tax  imposed  by  Section  1000  (a) 
of  the  Revenue  Act  of  1918,  may,  for  the  purpose  of  computing  other  in- 
come subject  to  income,  excess  profits  and  war  profits  taxes,  be  deducted 
from  the  gross  income  for  the  year  for  which  such  taxes  accrue,  if  accounts 
of  the  corporate  taxpayers  are  kept  on  the  accrual  basis,  or  may  be  de- 
ducted from  gross  income  for  the  year  in  which  paid,  if  accounts  are  kept 
on  the  disbursements  basis.  (Letter  to  The  Corporation  Trust  Company, 
signed  by  Commissioner  Daniel  C.  Roper,  and  dated  June  7,  1919.) 


(T.  D.  2865.) 

3429  Interest  on  Victory  notes. — All  interest  accrued  on  4^  per  cent. 
3169  Victory  notes  at  the  date  of  any  conversion  by  the  taxpayer  into  3^4 
3326  per  cent.  Victory  notes  will,  for  the  purposes  of  computing  net  income, 

be  deemed  to  be  interest  upon  4^4  per  cent.  Victory  notes,  and  will  be 
entitled  only  to  the  exemptions  from  taxation  to  which  interest  on  per 
cent.  Victory  notes  is  entitled.  Any  and  all  amounts  received  by  any  tax- 
payer from  the  United  States  by  way  of  adjustment  of  accrued  interest  upon 
conversion  of  4J4  per  cent.  Victory  notes  into  3J4  per  cent.  Victory  notes  will 
be  deemed  to  be  interest  upon  4^  per  cent.  Victory  notes. 

3430  All  interest  accrued  on  3^4  per  cent.  Victory  notes  at  the  date  of 
any  conversion  by  the  taxpayer  into  4^  per  cent.  Victory  notes  will, 

for  the  purposes  of  computing  net  income,  be  deemed  to  be  interest  upon  3^4 
per  cent  Victory  notes,  and  will  be  entitled  to  the  exemptions  from  taxation 
to  which  Interest  on  3^4  P^r  cent.  Victory  notes  Is  entitled.  (T.  D.  2865, 
signed  by  Commissioner  Daniel  C.  Roper  and  dated  June  14,  1919.) 

474  TAX 


INC. 


6-24-19. 


3431  Tax  liability  and  withholding  obligation  on  [bond^linterest  collected 
613  and  paid  in  year  subsequent  to  that  injwhich^the[interest  became* due 

2862d  and  payable.— Income  tax  should  be  withheld  from  interest  payments 
2996  upon  bonds  at  rates  in  force  for  year  during  which  payment  was 

actually  made,  although  bond  interest  is  held  to  represent  income  for 
year  during  which  coupons  became  due  and  payable.  Any  tax  withheld 
and  paid  to  government  in  excess  of  taxpayer’s  liability  may  be  adjusted 
through  claim  for  refund.  (Telegram  to  the  Cleveland  Trust  Company, 
signed  by  Commissioner  Daniel  C.  Roper,  and  dated  June  9,  1919.) 

(T.  D.  2870.) 

3432  Amending  Article  1567,  final  edition  of  Regulations  45,  dealing 
1910  with  exchange  of  stock  for  stock  having  no  par  value,  and  fixing  an 
3107  aliquot  part  of  the  capital  when  required  by  statute  to  be  stated,  as 

the  par  value,  for  the  purposes  of  Section  202,  of  such  so-called  “no- 
par-value”  stock. — The  final  edition  of  Regulations  45  is  amended  by  changing 
Article  1567  [1f3107]  to  read  as  follows: 

“Art.  1567.  Exchange  of  stock  for  other  stock  of  no  greater  par  value. — 
In  general,  where  two  (or  more)  corporations  unite  their  properties  by  either 
(A)  the  dissolution  of  corporation  B and  the  sale  of  its  assets  to  corporation  A, 
or  (b)  the  sale  of  its  property  by  B to  A and  the  dissolution  of  B,  or  (c)  the 
sale  of  the  stock  of  B to  A and  the  dissolution  of  B,  or  (d)  the  merger  of  B into 
A,  or  (e)  the  consolidation  of  the  corporations,  no  taxable  income  is  received 
from  the  transaction  by  A or  B or  the  stockholders  of  either,  provided  the  sole 
consideration  received  by  B and  its  stockholders  in  (a),  (b),  (c)  and  (d)  is 
stock  or  securities  of  A,  and  by  A and  B and  their  stockholders  in  (e)  is  stock 
or  securities  of  the  consolidated  corporation,  in  any  case  of  no  greater  aggre- 
gate par  or  face  value  than  the  old  stock  and  securities  surrendered.  So-called 
‘no-par-value  stock’  issued  under  a statute  or  statutes  which  require  the  cor- 
poration to  fix  in  a certificate  or  on  its  books  of  account  or  otherwise  an  amount 
of  capital  or  an  amount  of  stock  issued  which  may  not  be  impaired  by  the 
distribution  of  dividends,  will  for  the  purpose  of  this  section  be  deemed  to 
have  a par  value  representing  an  aliquot  part  of  such  amount,  proper  account 
being  taken  of  any  preferred  stock  issued  with  a preference  as  to  principal. 
In  the  case  (if  any)  in  which  no  such  amount  of  capital  or  issued  stock  is  so 
required,  ‘no-par-value  stock’  received  in  exchange  will  be  regarded  for  pur- 
poses of  this  section  as  having  in  fact  no  par  or  face  value,  and  consequently 
as  having  ‘no  greater  aggregate  par  or  face  value’  than  the  stock  or  securities 
exchanged  therefor.”  (T.  D.  2870,  signed  by  Commissioner  Daniel  C.  Roper, 
and  dated  June  20,  1919.) 

(T.  D.  2869.) 

3433  Alien  Seamen;  Amendments  to  Articles  92  and  312  of  Regulations  45. 

— The  final  edition  of  Regulations  45  is  amended  by  inserting  im- 
mediately after  Article  92  a paragraph  to  be  known  as  Article  92a  as  follows: 

3434  Art.  92a.  When  the  wages  of  a non-resident  alien  seaman  are  de- 
2877  rived  from  sources  within  the  United  States. — While  resident  alien 

seamen  are  taxable  like  citizens  on  their  entire  income  from  whatever 
sources  derived,  nonresident  alien  seamen  are  taxable  only  on  income  from 
sources  within  the  United  States.  Ordinarily,  wages  received  for  services 
rendered  inside  the  territorial  United  States  are  to  be  regarded  as  from  sources 
within  the  United  States.  The  wages  of  an  alien  seaman  earned  on  a coast- 
wise vessel  are  from  sources  within  the  United  States,  but  wages  earned  by  an 
alien  seaman  on  a ship  regularly  engaged  in  foreign  trade  are  not  to  be  regarded 
as  from  sources  within  the  United  States,  even  though  the  ship  flies  the  Ameri- 
can flag,  or  although  during  a part  of  the  time  the  ship  touched  at  United 
States  ports  and  remained  there  a reasonable  time  for  the  transaction  of  its 
business.  The  presence  of  a seaman  aboard  a ship  which  enters  a port  for 
such  purposes  of  foreign  trade  is  merely  transitory  and  wages  earned  during 

INC.  475  TAX 


that  period  by  a nonresident  alien  seaman  are  not  taxable.  There  is  no  with- 
holding from  the  wages  of  alien  seamen  unless  they  are  nonresidents  within 
the  rules  laid  down  in  Articles  311  to  315.  Even  in  the  case  of  a nonresident 
alien  seaman,  the  employer  is  not  obliged  to  withhold  from  wages  unless  those 
wages  are  from  sources  within  the  United  States  as  defined  above.  As  to 
when  alien  seamen  are  to  be  regarded  as  residents  see  Art.  312a. 

3435  The  final  edition  of  Regulations  45  is  amended  by  inserting  im- 
2973a  mediately  after  Article  312  a paragraph  to  be  known  as  Article  312a 
as  follows: 

Art  312a.  Alien  Seaman,  When  to  be  regarded  as  residents. — In  order 

to  determine  whether  an  alien  seaman  is  a resident  within  the  meaning  of 
the  income  tax  law,  it  is  necessary  to  decide  whether  the  presumption  of  non- 
residence is  overcome  by  facts  showing  that  he  has  established  a residence  in 
the  territorial  United  States,  which  consists  of  the  States,  the  District  of 
Columbia,  and  the  Territories  of  Hawaii  and  Alaska,  and  excludes  other 
places.  Residence  may  be  established  on  a vessel  regularly  engaged  in  coast- 
wise trade,  but  the  mere  fact  that  a sailor  makes  his  home  on  a vessel  flying  the 
United  States  flag  and  engaged  in  foreign  trade  is  not  sufficient  to  establish 
residence  in  the  United  States,  even  though  the  vessel,  while  carrying  on 
foreign  trade,  touches  at  American  ports.  An  alien  seaman  may  acquire 
an  actual  residence  in  the  territorial  United  States,  within  the  rules  laid  down 
in  Article  3 12  although  the  nature  of  his  calling  requires  him  to  be  absent  from 
the  place  where  his  residence  is  established  for  a long  period.  Ap  alien  sea- 
man may  acquire  such  a residence  at  a sailor’s  boarding  house  or  hotel,  but 
such  a claim  should  be  carefully  scrutinized  in  order  to  make  sure  that  such 
residence  is  bona  fide.  The  filing  of  Form  1078  (Revised),  or  taking  out  first 
citizenship  papers  is  proof  of  residence  in  the  United  States  from  the  time 
the  form  is  filed  or  the  papers  taken  out,  unless  rebutted  by  other  evidence 
showing  an  intention  to  be  a transient.  The  fact  that  a head  tax  has  been 
paid  on  behalf  of  an  alien  seaman  entering  the  United  States  is  no  evidence 
that  he  has  acquired  residence,  because  the  head  tax  is  payable  unless  the 
alien  who  is  entering  the  country  is  merely  in  transit  through  the  country. 
An  alien  may  remain  a nonresident  although  he  is  not  in  transit  through  the 
country.  As  to  when  the  wages  of  alien  seamen  are  subject  to  tax,  see  Article 
92a.  (T.  D.  2869,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated 

June  20,  1919.) 


3436  Refund  of  amounts  withheld  from  nonresident  alien,  on  status 
3406  changing  to  that  of  resident. — Reference  is  made  to  your  telephone 

call  in  regard  to  a letter  addressed  to  you  under  date  of  May  26,  1919, 
upon  the  subject  of  the  withholding  provisions  of  the  Revenue  Act  of  1918. 
The  inquiry  was  made  as  to  whether  the  last  sentence  of  that  letter  [^3406], 
which  is  quoted  here,  is  correct: 

“The  amount  of  tax  withheld  during  the  three  months  should  not,  how- 
ever, be  refunded  to  the  employee,  but  should  be  included  in  the  corporation’s 
annual  list  return  of  income  tax  withheld  at  the  source.  Form  1042.” 

3437  In  reply  you  are  advised  that  where  the  status  of  an  alien  changes 
during  the  year  from  that  of  a" resident  to  that  of  a nonresident,  or 

from  that  of  a nonresident  to  that  of  a resident,  the  status  which  exists  at  the 
end  of  the  taxable  year  is  the  one  which  determines  his  right  to  exemption  as 
to  the  whole  year.  Where  an  employer  has  withheld  wages  from  a nonresi- 
dent during  part  of  the  year  and  thereafter  the  employee  became  a resident 
(before  the  employer  has  paid  over  to  the  United  States  the  amount  withheld), 
the  employer  is  authorized  on  receiving  proof  of  the  change  to  refund  to  the 
employee  the  amounts  which  had  been  withheld  from  him  during  the  earlier 
part  of  the  taxable  year,  while  his  status  was  that  of  a nonresident. 

3438  The  ruling  contained  in  this  letter  supersedes  all  other  rulings  in  con- 
flict [therewith.  (Letter  to  W.  B.  Reed,  Accounting  Secretary, 

National  Coal  Association,  Washington,  D.  C.,  signed  by  Commissioner 
Daniel  C.  Roper,  and  dated  June  12,  1919.) 

INC.  476  TAX 


3439  Claims  for  reftmd  or  abatement;  Procedure  to  be  followed  by  col- 

2472  lectors  with  respect  to  claims  for  refund  or  abatement — Extension 

3045  of  Treasury  Decision  2688 — Amendment  to  Article  1036,  Regula- 

tions 45. — (1)  Claims  for  refund  or  for  abatement,  pertaining  to  tax 

returns  which  have  not  at  the  time  been  posted  to  an  assessment  list,  will  be 
numbered  to  agree  with,  attached  to,  and  made  a part  of,  the  original  return 
so  that  the  total  tax  as  posted  on  the  assessment  list  will  be  the  admitted  tax 
liability  of  the  taxpayer.  If  a taxpayer  submits  an  amended  return  as  a claim 
either  for  refund  or  for  abatement  before  the  original  return  has  been  listed, 
such  amended  return  will  be  numbered  to  agree  with  and  attached  to  the 
original  return  in  the  same  manner.  Similarly,  errors  or  omissions  in  returns 
discovered  by  the  collector  prior  to  the  posting  operate  as  an  amendment  to 
the  amount  of  tax  liability  shown  by  the  return. 

3440  In  other  words,  all  amendments  or  changes  either  increasing  or  de- 
creasing the  amount  of  tax  liability  and  whether  originated  by  the 

taxpayer  or  by  the  collector  will  be  reflected  on  the  face  of  the  return  itself 
and  the  posting  to  the  assessment  list  will  be  of  the  correct  amount.  In  this 
connection  attention  is  called  to  the  provisions  of  Mim.  2124. 

3441  (2)  Amended  returns  showing  a reduced  tax  liability  will  not  be 
acted  upon  by  collectors  if  the  original  return  has  been  previously 

entered  on  the  assessment  list.  All  claims  pertaining  to  returns  which  have 
been  listed  for  assessment  must  be  submitted  on  Form  46,  if  the  tax  has  been 
paid,  or  on  Form  47,  if  the  tax  has  not  been  paid. 

3442  (3)  The  following  classes  of  claims  may  be  included  on  Form  751 
(if  for  refund),  or  blanket  Form  47  (if  for  abatement).  Separate 

sheets  properly  designated  of  Forms  751  or  blanket  Forms  47  must  be  pre- 
pared for  returns  on  file  in  the  Commissioner’s  office  and  those  on  file  in  the 
collector’s  office: 

(a)  All  claims  for  refund  or  abatement  pertaining  to  Form 
, 1040-A  income  returns  for  the  calendar  year  1918,  or  subsequent 

years. 

(b)  Errors  in  computation.  (These  include  only  mistakes  in 
arithmetic.) 

(c)  Errors  in  specific  exemptions  on  income  returns.  (These 
include  such  items  as  failure  to  deduct  exemptions  for  dependents; 
the  $2,000  exemption  for  corporations,  etc.) 

(d)  Payments  in  excess  of  the  total  amount  of  tax  due  as  shown 
by  the  return.  (These  include  such  cases  as  a remittance  of  $1,500 
covering  payment  of  a tax  liability  of  $1,300,  etc.) 

(e)  Amount  previously  paid  on  submission  of  a tentative  income 
return  in  excess  of  the  total  tax  liability  shown  by  the  final  return. 

(f)  Duplicate  payments  or  assessments. 

(g)  All  claims  for  refund  on  account  of  nonrevenue  remittances 
forwarded  to  the  collector  in  error  and  deposited  by  him.  (These 
include  such  items  as  state  or  municipal  taxes  sent  to  the  collector 
and  deposited  by  him  as  ‘‘unidentified,”  etc.) 

3443  (4)  All  claims  for  refund  or  abatement  other  than  those  enumerated 
above  will  be  forwarded  to  the  Commissioner  for  settlement.  However, 

any  claim  may  be  so  forwarded  whenever  the  collector  does  not  feel  absolutely 
certain  of  the  law,  regulations  or  precedent  involved,  or  if  his  disbursing  bond 
is  insufficient  to  enable  him  to  procure  an  advance  on  accountable  warrant  of 
the  requisite  amount  of  funds  from  which  to  make  payment. 


INC. 


477 


TAX 


3444  (5)  Before  forwarding  claims  to  the  Commissioner  for  settlement 
certification  must  be  made  on  the  claim  of  the  account  number,  the 

amount  of  tax  originally  due,  the  dates  and  amounts  of  all  payments  or  other 
transactions  affecting  such  amount,  and  the  balance  due  as  shown  by  the 
account  on  the  list.  All  claims  of  this  nature  now  on  file  in  the  collector’s 
office  and  hereafter  as  received  should  be  certified  and  forwarded  immediately. 

3445  (6)  Claims  submitted  by  taxpayers  direct  to  the  Commissioner  will 
in  future  be  referred  to  the  collector  for  this  certificate  as  to  the  status 

of  the  account  on  the  assessment  list.  Until  so  certified  by  the  collector  such 
claims  will  not  be  settled.  When  certifying  claims  for  refund  the  collector 
will  make  a notation  in  the  “Remarks”  column  of  the  date  and  amount  of  the 
refund  claim  but  no  record  will  be  made  on  the  tax  journals  unless  a credit 
balance  exists  in  the  taxpayer’s  account.  In  this  case,  the  amount  of  the  claim 
as  certified  will  be  posted  to  the  list  and  recorded  on  the  journal  in  the  same 
manner  as  though  payment  were  made  by  the  collector. 

3446  (7)  In  all  cases  where  abatement  claims  are  certified  by  the  collector, 
notation  will  be  made  on  the  assessment  list  of  the  date  on  which  the 

abatement  claim  was  filed  and  the  amount  thereof,  and  on  the  daily  journals. 
Form  769.  (See  paragraph  49,  Manual  of  Revenue  Accounting.) 

3447  (8)  Blanket  claims  for  abatement  of  uncollectible  items  Form  53 
may  be  filed  by  the  collector  as  heretofore.  The  same  record  will  be 

made  on  the  tax  journal  and  on  the  assessment  list  as  in  cases  where  the  tax- 
payers submit  such  claims  (the  only  difference  being  that  in  the  first  instance 
the  claim  originates  with  the  taxpayer  instead  of  with  the  collector). 

3448  (9)  The  last  two  sentences  of  Article  1036,  Regulations  45  (final  edi- 
3048  tion),  are  to  be  replaced  by  the  following; 

“In  certain  cases  of  overpayment  by  taxpayers  the  collector  may 
repay  the  excess  after  allowance  by  the  Commissioner  of  a claim  for  refund, 
made  by  the  collector  on  Form  751.  The  cases  in  which  refund  is  made 
through  collectors  are  covered  by  specific  provisions  not  herein  incorporated. 
The  Commissioner  has  no  authority  to  refund  on  equitable  grounds  penalties 
legally  collected.” 

3449  (10)  All  existing  regulations  in  conflict  with  the  above  are  hereby 
revoked.  (T.  D.  2871,  signed  by  Commissioner,  Daniel  C.  Roper, 

and  dated  June  21,  1919.) 


INC. 


478 


TAX 


6-27-1 9. 


(T.  D.  2873.) 

3450  Bases  of  Computation  of  Net  Income:  Modification  of  Article  23, 
2834  Regulations  45. — Article  23,  Regulations  45,  is  modified  to  read  as 

follows : 

3451  Art.  23.  Bases  of  Computation. — (1)  Approved  standard  methods 
of  accounting  will  ordinarily  be  regarded  as  clearly  reflecting  income. 

A method  of  accounting  will  not,  however,  be  regarded  as  clearly  reflecting 
income  unless  all  items  of  gross  income  and  all  deductions  are  treated  with 
reasonable  consistency.  See  Section  200  of  the  statute  for  definitions  of 
“paid,”  “paid  or  accrued,”  and  “paid  or  incurred.”  All  items  of  gross  income 
shall  be  included  in  the  gross  income  for  the  taxable  year  in  which  they  are 
received  by  the  taxpayer,  and  deductions  taken  accordingly,  unless  in  order 
clearly  to  reflect  income  such  amounts  are  to  be  properly  accounted  for  as  of  a 
different  period.  For  instance,  in  any  case  in  which  it  is  necessary  to  use  an 
inventory,  no  accounting  in  regard  to  purchases  and  sales  will  correctly  reflect 
income  except  an  accrual  method.  See  Section  213  (a)  [Tf768]  of  the  statute. 
A taxpayer  is  deemed  to  have  received  items  of  gross  income  which  have  been 
credited  to  or  set  apart  for  him  without  restriction.  See  Article  53  [^2862c]. 
On  the  other  hand,  appreciation  in  value  of  property  is  not  even  an  accrual  of 
income  to  a taxpayer  prior  to  the  realization  of  such  appreciation  through 
conversion  of  the  property. 

3452  (2)  For  the  taxable  year  1918  the  true  income,  computed  under  the 
Revenue  Act  of  1918  and — where  the  taxpayer  keeps  books  of  ac- 
count— in  accordance  with  the  method  of  accounting  regularly  employed  in 
keeping  such  books,  shall  in  all  cases  be  entered  in  the  return,  even  though 
this  results  in  apparent  omissions  or  duplications  of  particular  items  of  income 
or  expense.  In  the  ordinary  case  such  omissions  and  duplications  are  more 
apparent  than  real  and  are  likely  to  counterbalance  one  another,  so  that  the 
change  in  the  basis  of  reporting  calls  for  no  material  adjustment.  Where, 
however,  the  method  previously  employed  by  the  taxpayer  in  determining  his 
income  subject  to  the  tax,  is  materially  different  from  the  method  regularly 
used  by  the  taxpayer  in  keeping  his  accounts,  or  where  for  any  reason  the 
basis  of  reporting  income  subject  to  tax  is  changed  the  taxpayer  should  attach 
to  his  return  a separate  statement  setting  forth  for  the  taxable  year  and  for  the 
preceding  year  the  classes  of  items  differently  treated  under  the  two  systems, 
specifying  in  particular  all  amounts  duplicated  or  entirely  omitted  as  the 
result  of  such  change.  Where  for  example  a taxpayer  who,  prior  to  1918,  has 
reported  on  the  so-called  receipts  basis,  is  compelled  under  the  above  rule  to 
report  on  the  so-called  accrual  basis,  he  should  include  in  the  separate  state- 
ment the  following  information: 

Firsts  (a)  expenses  paid  before  the  end  of  the  taxable  year  1917  but  not 
accrued  at  that  date;  (b)  income  accrued  at  the  end  of  the  taxable  year  1917 
but  not  received  at  that  date;  (c)  expenses  accrued  at  the  end  of  the  taxable 
year  1917  but  not  paid  at  that  date;  (d)  income  received  before  the  end  of  the 
taxable  year  1917  but  not  accrued  at  that  date;  and 

Second, ^ similar  items  as  of  the  end  of  the  taxable  year  1916. 

3453  If  in  the  opinion  of  the  Commissioner  such  information  indicates  that 
the  returns  for  any  previous  years  did  not  reflect  the  true  income, 

amended  returns  for  such  years  will  be  required. 

3454  (3)  A taxpayer  who  changes  the  method  of  accounting  employed  in 
keeping  his  books  for  the  taxable  year  1919  or  thereafter,  shall  before 

computing  his  income  upon  such  new  basis  for  purposes  of  taxation  secure 
the  consent  of  the  Commissioner.  Application  for  permission  to  change  the 
basis  of  the  return  shall  be  made  at  least  30  days  in  advance  of  the  date  of  filing 


INC. 


479  TAX 


return  and  shall  be  accompanied  by  a statement  specifying  the  classes  of  items 
differently  treated  under  the  two  systems  and  specifying  all  amounts  which 
would  be  duplicated  or  entirely  omitted  as  a result  of  the  proposed  change. 
3455  (4)  Bank  discounts. — Banks  which  in'the  past  have  treated  discount 

as  income  before  it  was  actually  earned  and  during  the  taxable  year 
1918  have  placed  the  discount  account  upon  an  accrual  basis,  will  be  required 
to  submit  the  information  called  for  in  paragraph  2 above  and  submit  an 
amended  return  for  the  taxable  year  1917,  and  will  be  permitted  to  submit 
(or  the  Commissioner  may  require)  amended  returns  for  all  prior  years  during 
which  the  taxpayer  was  subject  to  tax.  Additional  taxes  for  prior  years 
found  to  be  due  upon  such  reexamination  will  be  paid  upon  the  basis  of  the 
amended  returns  in  the  ordinary  way.  Where  it  appears  that  prior  taxes 
have  been  paid  in  excess  of  the  amount  properly  due,  such  excess  will  to  the 
extent  possible  be  credited  against  future  income  and  profits  taxes  under  the 
provisions  of  Section  252  [^[2488]  of  the  Revenue  Act  of  1918.  (T.  D.  2873, 

signed  by  Commissioner  Daniel  C.  Roper,  and  dated  June  24,  1919.) 

{Decision.) 

(Act  of  October  3,  1913.) 

Income  from  Stocks  and  Bonds  located  in  the  United  States,  Taxable  to 

Nonresident  Aliens. 


Supreme  Court  of  the  United  States. 


Emily  R.  DeGanay 
vs. 

Ephraim  Lederer,  Collector 
Internal  Revenue. 


of 


Certificate  from  the  United  States 
Circuit  Court  of  Appeals  for  the 
Third  Circuit. 


[June  9,  1919.] 

Mr.  Justice  Day  delivered  the  opinion  of  the  Court. 

3456  The  Act  of  October  3,  1913,  c.  16.  sec.  2a,  subdivision  1,  38  Stat. 

506  166,  provides: 

“That  there  shall  be  levied,  assessed,  collected  and  paid  annually 
upon  the  entire  net  income  arising  or  accruing  from  all  sources  in  the  preceding 
calendar  year  to  every  citizen  of  the  United  States,  whether  residing  at  home 
or  abroad,  and  to  every  person  residing  in  the  United  States,  though  not  a 
citizen  thereof,  a tax  of  1 per  centum  per  annum  upon  such  income,  except 
as  hereinafter  provided;  and  a like  tax  shall  be  assessed,  levied,  collected,  and 
paid  annually  upon  the  entire  net  income  from  all  property  owned  and  of 
every  business,  trade,  or  profession  carried  on  in  the  United  States  by  persons 
residing  elsewhere.” 

3457  Under  this  statutory  provision  a question  arose  as  to  the  taxability 
of  income  from  certain  securities  of  Emily  R.  DeGanay,  a citizen  and 

resident  of  France.  The  District  Court  of  the  United  States  for  the  Eastern 
District  of  Pennsylvania  held  the  income  from  the  securities  taxable.  239 
Fed.  568  [^[2195,  Income  Tax  Service — 1917].  The  case  is  here  upon  certi- 
ficate from  the  Circuit  Court  of  Appeals,  from  which  it  appears:  That  Emily 
R.  DeGanay  is  a citizen  of  France,  and  resides  in  that  country.  That  her 
father  was  an  American  citizen  domiciled  in  Pennsylvania,  and  died  in  1885, 
having  devised  one-fourth  of  his  residuary  estate,  consisting  of  real  property, 
to  the  Pennsylvania  Company  for  Insurance  on  Lives  and  Granting  Annuities, 
in  trust  to  pay  the  net  income  thereof  to  her.  She  also  inherited  from  her 
father  a large  amount  of  personal  property  in  her  own  right  free  from  any  trust. 
This  personal  property  is  invested  in  stocks  and  bonds  of  corporations  organ- 


6-27-19. 


ized  under  laws  of  the  United  States  and  in  bonds  and  mortgages  secured  upon 
property  in  Pennsylvania.  Since  1885  the  Pennsylvania  Company  has  been 
acting  as  her  agent  under  power  of  attorney,  and  has  invested  and  reinvested 
her  property,  and  has  collected  and  remitted  to  her  the  net  income  therefrom. 
The  certificates  of  stocks,  bonds  and  mortgages  had  been  and  were  in  1913 
in  the  Company’s  possession  in  its  offices  in  Philadelphia.  The  Company 
made  a return  of  the  income  collected  for  the  plaintiff  for  the  year  1913  both 
from  her  real  estate,  which  is  not  in  controversy  here,  and  her  net  income  from 
corporate  stocks  and  bonds  and  the  bonds  and  mortgages  held  by  her  in  her 
own  right.  The  tax  was  paid  under  protest  and  recovery  was  sought  by  the 
proper  action. 

3458  The  question  certified  is  limited  to  the  net  income  collected  by  virtue 
of  the  power  of  attorney  from  the  personal  property  owned  by  the 

plaintiff  in  her  own  right. 

3459  The  power  of  attorney,  which  is  attached  to  the  certificate,  authorizes 
the  agent: 

“To  sell,  assign,  transfer  any  stocks,  bonds,  loans,  or  other  securities  now 
standing  or  that  may  hereafter  stand  in  my  name  on  the  books  of  any  and  all 
corporations,  national,  state,  municipal  or  private,  to  enter  satisfaction  upon 
the  record  of  any  indenture  or  mortgage  now  or  hereafter  in  my  name,  or  to 
sell  and  assign  the  same  and  to  transfer  policies  of  insurance,  and  the  proceeds, 
also  any  other  moneys  to  invest  and  reinvest  in  such  securities  as  they  may 
in  their  discretion  deem  safe  and  judicious  to  hold  for  my  account;  to  collect 
and  receipt  for  all  interest  and  dividends,  loans,  stocks,  or  other  securities 
now  or  hereafter  belonging  to  me,  to  endorse  checks  payable  to  my  order  and 
to  make  or  enter  into  any  agreement  or  agreements  they  may  deem  necessary 
and  best  for  my  interest  in  the  management  of  my  business  and  affairs,  also 
to  represent  me  and  in  my  behalf,  to  vote  and  act  for  me  at  all  meetings  con- 
nected with  any  company  in  which  I may  own  stocks  or  bonds  or  be  inter- 
ested in  any  way  whatever,  with  power  also  as  attorney  or  attorneys  under  it 
for  that  purpose  to  make  and  substitute,  and  to  do  all  lawful  acts  requisite 
for  effecting  the  premises,  hereby  ratifying  and  confirming  all  that  the  said 
attorney  or  substitute  or  substitutes  shall  do  therein  by  virtue  of  these 
presents.” 

3460  The  question  certified  is:  “If  an  alien  non-resident  own  stocks,  bonds 
and  mortgages  secured  upon  property  in  the  United  States  or  payable 

by  persons  or  corporations  there  domiciled;  and  if  the  income  therefrom  is 
collected  for  and  remitted  to  such  non-resident  by  an  agent  domiciled  in  the 
United  States;  and  if  the  agent  has  physical  possession  of  the  certificates  of 
stock,  the  bonds  and  the  mortgages;  is  such  income  subject  to  an  income  tax 
under  the  Act  of  October  3d,  1913.^” 

3461  The  question  submitted  comes  to  this:  Is  the  income  from  the 
stock,  bonds  and  mortgages,  held  by  the  Pennsylvania  Company,  de- 
rived from  property  owned  in  the  United  States.^  A learned  argument  is 
made  to  the  effect  that  the  stock  certificates,  bonds,  and  mortgages  are  not 
property,  that  they  are  but  evidences  of  the  ownership  of  interests  which  arc 
property;  that  the  property,  in  a legal  sense,  represented  by  the  securities, 
would  exist  if  the  physical  evidences  thereof  were  destroyed.  But  we  are  of 
opinion  that  these  refinements  are  not  decisive  of  the  congressional  intent  in 
using  the  term  “property”  in  this  statute.  Unless  the  contrary  appears, 
statutory  words  arc  presumed  to  be  used  in  their  ordinary  and  usual  sense, 
and  with  the  meaning  commonly  attributable  to  them.'  To  the  general  under- 
standing and  with  the  common  meaning  usually  attached  to  such  descriptive 
terms,  bonds,  mortgages,  and  certificates  of  stock  are  regarded  as  property. 
By  state  and  federal  statutes  they  are  often  treated  as  property,  not  as  mere 


INC. 


481 


TAX 


evidences  of  the  interest  which  they  represent.  In  Blackstone  v.  Miller^  188 
U.  S.  189,  206,  this  court  held  that  a deposit  by  a citizen  of  Illinois  in  a trust 
company  in  the  city  of  New  York  was  subject  to  the  transfer  tax  of  the  State 
of  New  York  and  said:  “There  is  no  conflict  between  our  views  and  the 
point  decided  in  the  case  reported  under  the  name  of  State  Tax  on  Foreign 
Held  Bonds,  15  Wall.  300.  The  taxation  in  that  case  was  on  the  interest  on 
bonds  held  out  of  the  State.  Bonds  and  negotiable  instruments  are  more  than 
merely  evidences  of  debt.  The  debt  is  inseparable  from  the  paper  which 
declares  and  constitutes  it,  by  a tradition  which  comes  down  from  more 
archaic  conditions.  Bacon  v.  Hooker^  177  Mass.  335,  337.” 

3462  The  Court  of  Appeals  of  New  York  recognizing  the  same  principle, 
treated  such  instruments  as  property  in  People  ex  rel,  Jefferson  v. 

Smith,  88  N.  Y.  576,  585: 

“It  is  clear  from  the  statutes  referred  to  and  the  authorities  cited  and  from 
the  understanding  of  business  men  in  commercial  transactions,  as  well  as  of 
jurists  and  legislators,  that  mortgages,  bonds,  bills  and  notes  have  for  many 
purposes  come  to  be  regarded  as  property  and  not  as  the  mere  evidences  of 
debts,  and  that  they  may  thus  have  a situs  at  the  place  where  they  are  found 
like  other  visible,  tangible  chattels.” 

3463  We  have  no  doubt  that  the  securities,  herein  involved,  are  property. 
Are  they  property  within  the  United  States.?  It  is  insisted  that  the 

maxim  mobilia  sequuntur  personam  applies  in  this  instance,  and  that  the  situs 
of  the  property  was  at  the  domicile  of  the  owner  in  France.  But  this  court 
has  frequently  declared  that  the  maxim,  a fiction  at  most,  must  yield  to  the 
facts  and  circumstances  of  cases  which  require  it;  and  that  notes,  bonds  and 
mortgages  may  acquire  a situs  at  a place  other  than  the  domicile  of  the  owner, 
and  be  there  reached  by  the  taxing  authority.  It  is  only  necessary  to  refer 
to  some  of  the  decisions  of  this  court.  New  Orleans  v.  Stempel,  175  U.  S.  309; 
Bristol  V.  Washington  County,  177  U.  S.  133;  Blackstone  v.  Miller,  supra; 
State  Board  of  Assessors  v.  Comptoir  National  d’ Escompte,  191  U.  S.  388; 
Carstairs  v.  Cochran,  193  U.  S.  10;  Scottish  Union  & National  Ins.  Co.  v.. 
Bowland,  196  U.  S.  611;  Wheeler  v.  New  York,  233  U,  S.  434,  439;  Iowa  v. 
Slimmer,  248  U.  S.  115,  120.  Shares  of  stock  in  national  banks,  this  court  has 
held,  for  the ‘purpose  of  taxation  may  be  separated  from  the  domicile  of  the 
owner,  and  taxed  at  the  place  where  held.  Tappan  v.  Merchants^  National 
Bank,  19  Wall.  490. 

3464  In  the  case  under  consideration  the  stocks  and  bonds  were  those  of 
corporations  organized  under  the  laws  of  the  United  States,  and  the 

bonds  and  mortgages  were  secured  upon  property  in  Pennsylvania.  The 
certificates  of  stock,  the  bonds  and  mortgages  were  in  the  Pennsylvania  Com- 
pany’s offices  in  Philadelphia.  Not  only  is  this  so,  but  the  stocks,  bonds  and 
mortgages  were  held  under  a power  of  attorney  which  gave  authority  to  the 
agent  to  sell,  assign,  or  transfer  any  of  them,  and  to  invest  and  reinvest  the 
proceeds  of  such  sales  as  it  might  deem  best  in  the  management  of  the  business 
and  affairs  of  the  principal.  It  is  difficult  to  conceive  how  property  could  be 
more  completely  localized  in  the  United  States.  There  can  be  no  question 
of  the  power  of  Congress  to  tax  the  income  from  such  securities.  Thus 
situated  and  held,  and  with  the  authority  given  to  the  local  agent  over  them, 
we  think  the  income  derived  is  clearly  from  property  within  the  United  States 
within  the  meaning  of  Congress  as  expressed  in  the  statute  under  considera- 
tion. It  follows  that  the  question  certified  by  the  Circuit  Court  of  Appeals 
must  be  answered  in  the  affirmative. 

So  ordered. 

Mr.  Justice  McReynolds  took  no  part  in  this  case. 


INC. 


482  TAX 


7-10-19. 


(T.  D.  2874.) 

3465  Simulation  of  income  tax  receipts — Decision  of  court.- — The  appended 
2465  opinion  and  charge  of  Judge  Westenhaver  in  the  District  Court  of  the 

United  States,  for  the  Northern  District  of  Ohio,  Eastern  Division, 
in  the  case  of  United  States  v.  Pittaro,  is  published  for  the  information  of 
internal  revenue  officers  and  others*concerned.  [Captions  only.] 

3466  1.  Receipts  to  taxpayers — Duty  to  issue. 

The  fact  that  Section  251  of  the  act  of  February  24,  1919,  requires 
that  full  written  or  printed  receipts  be  issued  to  taxpayers  only  on  request 
therefor  does  not  limit  the  collector’s  mandatory  duty  to  issue  them  when 
requested  and  does  not  fail  to  make  them  documents  required  to  be  issued 
whenever  requested,  and  the  receipts  are  plainly  documents  required  to  be 
issued  by  such  section. 

3467  2.  Same — Simulation  or  fraudulent  execution. 

Such  receipts  are  documents  required  by  provisions  of  the  internal 
revenue  laws  and  by  regulations  made  in  pursuance  thereof,  within  the  mean- 
ing of  Section  3451,  R.  S.,  making  it  an  offense  to  simulate  or  falsely  or  fraudu- 
lently execute  or  sign  any  document  required  by  the  internal  revenue  laws, 
or  any  regulation  made  in  pursuance  thereof,  or  to  procure  the  same  to  be 
falsely  or  fraudulently  executed,  or  to  advise,  aid  in,  or  connive  at  such  execu- 
tion thereof. 

3468  3.  Same — Blanks. 

The  offense  may  be  committed  either  where  the  receipt  itself  is  a 
genuine  receipt  of  the  kind  kept  for  that  purpose  in  the  office  of  the  internal 
revenue  collector  but  signed  by  the  defendant  without  authority,  or  where, 
even  if  not  a blank  of  the  kind  required  to  be  kept,  the  blank  itself  is  simulated 
or  falsely  or  fraudulently  executed  and  issued  by  a person  who  has  no  power 
or  authority  to  do  so. 

3469  4.  Same — Income  tax  receipts. 

Where  defendant  was  charged  with  violating  Section  34-51,  R.  S.. 
in  that  he  falsely,  fraudulently,  etc.,  simulated  and  executed  and  advised,  aided 
in,  and  connived  at  the  execution  of  certain  income  tax  receipts  required  by 
Section  251  of  the  act  of  February  24,  1919,  to  be  given  when  requested,  what 
defendant  told  the  persons  who  paid  the  money  is  not  material,  nor  is  the 
question  whether  or  not  such  persons  were  subject  to  the  payment  of  an  in- 
come tax,  or  to  assessment  and  levy  of  such  tax. 

(T.  D.  2874,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  June 
23,  1919.) 


3470  Separate  ownership  certificates  required  for  coupons  of  differing 

659  maturity  dates. — Interest  coupons  represent  income  to  taxpayer  when 

660  due  and  payable  and  are  required  to  be  reported  in  return  for  taxable 
2862d  year  during  which  coupons  matured.  See  Article  54,  Regulations  45. 
2998  Separate  ownership  certificate  will  be  required  for  each  interest  coupon 

of  different  maturity  date  even  though  of  same  issue.  (Telegram  to 
the  Southern  Pacific  Company,  New  York,  N.Y.,  signed  by  Commissioner 
Daniel  C.  Roper,  and  dated  June  24,  1919.) 


INC. 


483  TAX 


347 1  Withholding  at  the  source  on  interest  on  bonds  having  no  tax-free 
2996  covenant.-  Your  telegram  May  29.  Bonds  without  tax-free  covenant 
not  permitted  to  be  considered  tax-free  bonds  at  option  of  issuing 
corporations.  ^Corporation  only  allowed  to  withhold  tax  at  rate  of  eight 
and  ten  per  cent,  from  nonresident  alien  individuals  and  nonresident  alien 
corporations  respectively.  ^Corporation  prohibited  from  paying  tax  on  inter- 
est derived  from  such  bonds  when  owned  by  citizens  or  residents  of  United 
States.  (Telegram  to  the  Farmers’  Loan  and  Trust  Company,  New  York, 
N.  Y.,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  June  2,  1919.) 


(T.  D.  2876) 

3472  Income  from  stocks  and  bonds  located  in  the  United  States,  taxable 
3456  to  nonresident  aliens. — The  appended  opinion  [For  opinion  in  full,  see 

1f3456]  of  the  United  States  Supreme  Court  in  the  case  of  Emily  R. 

DeGanay  v.  Lederer,  Collector,  is  published  for  the  information  of  internal 
revenue  officers  and  others  concerned.  (T.  D.  2876,  signed  by  Commissioner  , 

Daniel  C.  Roper,  and  dated  June  25,  1919.)  ' 


3473  Inventories  of  securities  by  a bank  maintaining  a department  for  the 
3113  merchandising  thereof. — Reference  is  made  to  your  letter  of  May  26, 

1919,  wherein  you  ask  whether  a bank  that  maintains  a branch  for  the 
purpose  of  buying  and  selling  securities  has  the  full  status  of  a recognized 
dealer  in  securities.  ^In  reply,  you  are  advised  that  a bank  or  other  institution 
having  a regularly  established  department  for  the  merchandising  of  securities, 
even  though  that  department  is  subordinate  in  importance  to  other  depart- 
ments, is  entitled^  to  the  same  benefit  of  using  the  basis  provided  for  in  Article 
1585  [1f3 113]  of  inventorying  securities  acquired  and  held  for  resale,  as  one 
who  is  solely  a dealer  in  securities.  1[In  so  far  as  the  bank  or  other  institution 
carry  on,  with  an  established  place  of  business,  a department  for  the  mer- 
chandising of  securities,  it  is  in  respect  of  such  department  treated  in  the  same 
way  as  any  other  security  merchant.  It  should  be  noted,  however,  that  thfe 
method  of  inventorying  provided  for  in  Article  1585  has  no  application  and 
can  not  be  extended  to  taxpayers  simply  buying  and  selling  securities  for  in- 
vestment or  speculation.  (Letter  to  The  Corporation  Trust  Company,  signed 
by  Commissioner  Daniel  C.  Roper,  and  dated  June  28,  1919.) 


3474  The  use  of  Form  1001  by  foreign  governments. — Answering  your 
3000  telegram  July  5.  Ownership  certificate  Form  1001  should  be  used  in 
connection  with  interest  payments  upon  domestic  bonds  owned  by 
foreign  governments.  Enter  amount  on  line  six.  (Telegram  to  the  Guaranty 
Trust  Company,  New  York,  N.  Y.,  signed  by  J.  H.  Callan,  Assistant  to  the 
Commissioner,  and  dated  July  7,  1919.) 


(T.  D.  2883) 

3476  Extension  of  Time  for  Filing  Returns  of  Partnerships  and  Personal 
3386  Service  Corporations  Having  a Fiscal  Year  Ended  Prior  to  May  31, 
1919. — ^An  extension  of  time  to  August  15,  1919,  for  filing  returns  is 
hereby  granted  to  partnerships  and  personal  service  corporations 
having  a fiscal  year  ended  January  31,  February  28,  March  31,  or  April  30, 
1919.  (T.  D.  2883,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated 

July  9,  1919.) 


INC. 


484  TAX 


7-16-19. 


3476  Sale  of  personal  property  on  installment  plan.— Receipt js  acknowl- 

2849  ^ edged  of  your  letter  of  1919,  in  which  further  reference  is 

3486  made  to  your  letter  of  March  6,  1919,  and  office  reply  dated  April  7, 

1919,  requesting  information  as  to  the  treatment  of  amounts  owing 
on  installment  accounts  in  connection  with  making  Income  tax  returns  under 
the  Revenue  Act  of  1918,  in  cases  where  only  the  profits  are  reported  as 
actually  realized  as  at  the  date  of  collection.  It  is  assumed  the  taxpayer  in 
question  has  heretofore  made  returns  upon  the  basis  of  treating  all  installment 
sales  as  the  equivalent  of  cash. 

3477  In  reply  you  are  advised — (1)  In  accordance  with  provisions  of 
Article  42  [^12849]  of  Regulations  No.  45,  the  first  step  to  be  taken  by 

the  taxpayer  is  to  prepare  and  hie  as  part  of  his  return  an  amended  balance 
sheet  as  at  the  date  of  the  beginning  of  the  taxable  year,  in  which  there  shall 
be  excluded  from  the  surplus  the  unrealized  gross  profits  uj^on  the  outstanding 
installment  sales  contracts  at  that  date.  Such  amended  balance  sheet  would 
be  in  substantially  the  following  form: 

Balance  Sheet  as  at  opening  of  fiscal  year. 

Assets.  Liabilities. 

Plant  and  Elquipment $ Capital  stock  (or  individ- 

Pess  Depreciation $ ual’s  or  partner’s  capital)  $ 

Mortgage  indebtedness..  . $ 


Current  assets:  Current  Liabilities: 

Merchandise  as  per  inv.  .$ Bills  payable $ 

Tnstal.  sales  contracts. . Accounts  payable $ 

Notes  receivable $ Wages  or  other  accrued 

Accounts  receivable. ...  $ items $ 

Cash $ 


Deferred  Debit  Items: 
Insurance  prem.  paid  in 

in  advance $ 

Other  items: 


Deferred  Credit  Items: 
Unrealized  gross  profits  upon 
installment  sales  contracts$ 
Surplus $ 


Total  Assets $ 


Total  Liabilities $ 


3478  (2)  As  from  the  beginning  of  the  taxable  year  the  following  accounts 
should  be  set  up: 

3479  (a)  Goods  purchased  which  will  be  charged  with  the  amount  of  in- 
ventory of  the  goods  on  hand  at  the  beginning  of  the  taxable  year  and 

with  the  expenditures  for  goods  purchased  during  the  year; 

3480  (b)  Goods  sold  {cost  value).,  which  will  be  credited  with  the  cost  value 
of  all  goods  sold  during  the  year; 

3481  (c)  Installment  Sales  Gontracts  which  will  be  charged  with  the 
amount  of  the  outstanding  installment  sales  contracts  at  the  begin- 
ning of  the  year  and  with  the  amount  of  installment  sales  contracts  made 
during  the  year.  4'his  account  wdll  be  credited  with  all  cash  collected  during 
the  year  upon  installment  sales  contracts  and  with  the  unpaid  installments 
of  defaulted  or  cancelled  contracts. 

3482  (d)  Unrealized  Gross  Profits  on  installment  sales  contracts^  which  will 
be  credited  with  the  amount  of  unrealized  gross  profits  upon  the  out- 
standing installment  sales  contracts  at  the  beginning  of  the  year,  and  with  the 
amount  of  such  unrealized  gross  profit  upon  Installment  sales  contracts  made 
during  the  year.  1 his  amount  will  be  computed  upon  the  basis  of  the  total 
installment  sales  contracts  reduced  by  the  cost  or  in\  entory  value  of  the  goods 


INC. 


485 


TAX 


covered  by  the  contracts,  the  remaining  balance  being  the  amount  of  the  un- 
realized gross  profits. 

3483  (e)  Realized  Profits  on  installment  sales  contracts  which  will  be 
credited  from  month  to  month,  or  at  least  at  the  end  of  the  year,  with 

the  profits  realized  by  collection  upon  installment  sales  contracts.  Such 
profits  should  be  computed  by  taking  the  same  percentage  of  the  total  cash 
collections  upon  installment  sales  contracts  during  the  period  as  the  total 
unrealized  profits  on  installment  sales  contracts  bears  to  the  total  installment 
sales  during  the  same  year.  Corresponding  debits  should  be  made  to  un- 
realized gross  profits  on  installment  sales  contracts.  Any  necessary  correc- 
tions to  produce  a more  accurate  result  can  be  made  as  at  the  end  of  the  fiscal 
year. 

3484  It  is  believed  that  sufficient  has  been  said  above  to  indicate  the  use 
that  is  to  be  made  of  these  special  accounts  and  it  is  not  necessary  to 

discuss  any  of  the  other  accounts  which  would  normally  be  maintained. 

34  85  It  will  be  noted  that  the  foregoing  plan  which  will  be  permitted  upoft 
an  explicit  statement  of  facts  made  to  the  Commissioner  of  Internal 
Revenue  by  a taxpayer  engaged  in  merchandising  upon  the  installment  plan 
is  not  a change  from  an  accrual  basis  to  a cash  received  and  paid  basis.  In 
the  opinion  of  this  olfice  the  income  of  a merchandising  concern  cannot  be 
correctly  reflected  upon  the  latter  basis,  as  the  use  of  inventories  is  absolutely 
essential.  The  plan  herein  outlined  is,  therefore,  merely  a modification  or 
adaptation  of  the  ordinary  accrual  method  of  accounting  as  in  the  opinion  of 
this  office  will  enable  the  accounts  of  the  taxpayer  to  clearly  reflect  his  net 
income.  Where  in  the  past,  another  method  has  been  used  that  has  failed  to 
reflect  the  taxpayer’s  net  income  an  amended  return  or  returns  for  such  year 
may  be  made.  (Letter  to  The  Corporation  Trust  Company,  signed  by  Com- 
missioner Daniel  C.  Roper,  and  dated  July  9,  1919.) 

34  86  Sale  of  personal  property  on  installment  plan.— This  Department  is  in 
2849  receipt  of  your  letter  of  July  8,  1919,  requesting  amplification  of  the 
3476  instructions  contained  in  Article  42  [^2849]  of  Regulations  No.  45 
relative  to  the  applic.''tion  of  the  rule  prescribed  in  said  Article  that, 
in  the  sale  or  contract  for  sale  of  personal  property  on  the  installment  plan, 
whether  or  not  title  remains  in  the  vendor  until  the  property  is  fully  paid  for, 
the  income  to  be  returned  by  the  vendor  will  be  that  proportion  of  each  install- 
ment payment  which  the  gross  profit  to  be  realized  when  the  property  is  paid 
for  bears  to  the  gross  contract  price. 

3487  arc  advised  that  the  income  from  installment  sales  to  be  returned 
each  taxable  year  shall  consist  of:  (1)  Such  part  of  1 he  installments 

received  during  the  year  (excluding  those  Installments  received  on  account 
of  property  repossessed  during  the  year)  as  represents  realized  profit.  Install- 
ments received  during  the  year  are  to  be  included  whether  the  sales  were  ef- 
fected in  an  earlier  or  in  the  current  taxable  year.  The  profit  on  such  install- 
ments shall  be  computed  by  taking  the  sam.e  percentage  of  the  installment 
receipts  as  the  gross  profit  to  be  realized  on  the  total  installment  sales  made 
during  the  taxable  year  bears  to  the  gross  contract  price  (4  all  such  sales. 
Any  necessary  corrections  to  produce  a more  acairate  result  can  be  made 
as  at  the  end  of  the  taxable  year. 

3488  (2)  The  profit,  if  any,  on  contracts  which  during  the  year  have  been 
cancelled,  the  goods  being  repossessed  by  the  vendor.  In  such 

cases  the  entire  profit  realized  on  the  cancelled  contract,  less  so  much  thereof 
as  has  been  returned  in  previous  5'ears,  shall  be  returned  as  profit  of  the  tax- 
able year  in  which  the  goods  are  repossessed.  In  estimating  such  profit  the 
value  of  the  repossessed  article  (taken  at  its  cost  to  vendor,  less  proper  al- 
lowance for  damage  and  use)  shall  be  taken  into  account,  as  well  as  all  install- 
ments received  on  account  of  the  contract.  Where  an  installment  house 


INC. 


486 


TAX 


T-28-19. 


makes  sales  which  are  not  on  the  installment  plan,  the  profit  on  such  com- 
pleted sales  will  be  determined  in  the  regular  manner  prescribed  in  Sections 
202  [1fl854]  and  203  [1[1861]. 

3489  Illustration:  In  1917  goods  which  cost  $10,000  are  sold  on  install- 
ment plan  for  $20,000.  Collections  on  account:  1917,  $10,000; 
1918,  $9,800.  One  contract,  originally  for  $500,  is  defaulted  in  1918  and  the 
goods  which  cost  the  vendor  $250  are  repossessed,  being  then  worth  $50.  In- 
stallments on  this  defaulted  contract  had  been  paid  as  follows:  1917,  $100; 
in  1918,  $200.  The  profits  to  be  returned  in  1918  are: 

Under  (1)  50%  of  $9,600  ($9,800  — $200) $4,800 

Under  (2)  total  installments  received $300 

Less — Profit  returned  in  1917 $50 

Shrinkage  in  goods  repossessed  ($250 

— $50) 200 

$250 

50 


Total  profit  returnable  in  1918 $4,850 

3490  For  simplicity,  the  above  illustration  omits  sales  in  1918.  If  sales 
in  1918  contain  a different  percentage  of  profit  than  those  in  1917, 

some  adjustment  may  be  necessary  as  indicated  in  the  text  of  the  Regulations. 

3491  If  the  vendor  chooses  as  a matter  of  consistent  practice  to  treat  the 
obligations  of  purchasers  as  the  equivalent  of  cash,  such  a course  is 

permissible.  Where  the  adoption  of  the  method  outlined  above  involves  a 
change  in  the  method  of  computing  net  income,  the  taxpayer’s  balance  sheet 
should  be  adjusted  conformably  as  of  the  date  when  the  change  is  effected, 
and  he  should  conform  to  the  requirements  of  Article  23  as  amended  in 
T reasury  Decision  2873  [^3450].  (Letter  to  The  Corporation  Trust  Company, 
signed  by  Commissioner  Daniel  C.  Roper,  and  dated  July  10,  1919.) 


3492  Duty  of  employer  to  determine  status  of  alien  employee. — Reference 
2976  is  made  to  your  letter  dated  June  18,  1919,  in  regard  to  Article  315, 
3152  R.egulations  45  which  is  quoted  here:  ‘‘(b)  The  employer  may  also 

obtain  evidence  to  overcome  the  prima  facie  presumption  of  the  non- 
residence by  securing  from  the  alien  Form  1078  (revised)  or  an  equivalent 
certificate  of  the  alien  establishing  residence.  Having  secured  such  evidence 
from  the  alien,  the  employer  may  rely  thereon  unless  the  statement  of  the 
alien  was  false  and  the  employer  has  reasonable  cause  to  believe  it  false,  and 
may  continue  to  rely  thereon  until  the  alien  ceases  to  be  a resident  under  the 
provisions  of  Article  314.”  It  is  noted  that  you  have  been  advised  by  the 
Collector  of  Internal  Revenue  at  Baltimore  that  it  will  be  necessary  for  the 
employer  to  obtain  Form  1078  for  each  year  that  a nonresident  'alien  was 
employed. 

3493  In  reply  you  are  advised  that  when  Form  1078  is  filed'with  the  em- 
ployer, the  alien  may  be  treated  as  a resident  of  the  United  States  in 

so  far  as  withholding  of  income  tax  at  source  is  concerned  and  it  is  not  neces- 
sary for  the  employer  to  secure  from  the  alien  employees  new  certificates. 
Form  1078,  for  each  taxable  year.  The  ruling  contained  in  the  article  quoted 
herein  will  govern,  namely,  that  when  Form  1078  is  filed,  the  employer  may 
continue  to  rely  thereon  until  the  alien  ceases  to  be  a resident  under  the  pro- 
visions of  Article  314. 

3494  You  are  further  advised  that  employers  with  whom  Forms  1078  are 
3397  filed,  should  make  a record  of  the  certificates  and  forward  them  to  the 

Commissioner  of  Internal  Revenue,  Sorting  Division,  Washington, 
D,  C.,  not  later  than  the  twentieth  day  of  the  month  succeeding  that  during 
which  the  certificates  were  received.  (Letter  to  W.  B.  Reed,  Accounting 
Secretary ,fNational  Coal  Association,  Washington,  D.  C.,  signed  by  Commis** 
sioner  Daniel  C.  Roper,  and  dated  July  9,  1919.) 

INC.  487  TAX 


(T.  D.  2892) 


3495  Amending  Article  307,  final  edition  of  Regulations  45,  dealing  with 
2972a  non-resident  alien  individual  entitled  to  personal  exemption  and 
credit  for  dependents. — The  final  edition  of  regulations  45  is  amended 
by  changing  article  307  to  read  as  follows: 

Art.  307.  When  nonresident  alien  individual  entitled  to  personal 
exemption.—  (a)  The  following  is  an  incomplete  list  of  countries 
which  either  impose  no  income  tax  or  in  imposing  an  income  tax  allow 
both  a personal  exemption  and  a credit  for  dependents  which  satisfy 
the  similar  credit  requirement  of  the  statute:  Argentina;  Bosnia;  Brazil; 
Canada;  Carinthia;  China;  Chile;  Cuba;  Ecuador;  Dalmatia;  Denmark; 
France;  Herzegovina;  Istria;  Mexico;  Montenegro;  Morocco;  Nicaragua; 
Persia;  Portugal;  Roumania;  Russia;  Santo  Domingo;  Serbia;  Union  of 
South  Africa,  (b)  The  following  is  an  incomplete  list  of  countries  which 
in  imposing  an  income  tax  allow  a personal  exemption  which  satisfies  the 
similar  credit  requirement  of  the  statute,  but  do  not  allow  a credit  for 
dependents:  Bachka;  Banat  of  Tenesvar;  Croatia;  El  Salvadore;  Holland; 
Italy;  Slavonia.  (c)  The  following  is  an  incomplete  list  of  countries 
which  in  imposing  an  income  tax  do  not  allow  to  citizens  of  the  United 
States  not  residing  in  such  country  either  a personal  exemption  or  a 
credit  for  dependents  and,  therefore,  fail  entirely  to  satisfy  the  similar 
credit  requirement  of  the  statute:  Australia;  Costa  Rica;  Great  Britain 
and  Ireland;  Japan;  New  Zealand;  Norway;  Spain.  The  former  names 
of  certain  of  these  territories  are  here  used  for  convenience,  in  spite  of  an 
actual  or  possible  change  in  name  or  sovereignty.  A nonresident  alien 
individual  who  is  a citizen  or  subject  of  any  country  in  the  first  list  is 
entitled  for  the  purpose  of  the  normal  tax  to  such  credit  for  a personal 
exemption  and  for  dependents  as  his  family  status  may  warrant.  If  he 
is  a citizen  or  subject  of  any  country  in  the  second  list  he  is  entitled  to  a 
credit  for  a personal  exemption,  but  to  none  for  dependents.  If  he  is  a 
citizen  or  subject  of  any  country  in  the  third  list  he  is  not  entitled  to 
credit  for  either  a personal  exemption  or  for  dependents.  If  he  is  a 
citizen  or  subject  of  a countiy  which  is  in  none  of  the  lists,  then  to  secure 
credit  for  either  a personal  exemption  or  for  dependents  he  must  prove  to 
the  satisfaction  of  the  Commissioner  that  his  country  does  not  impose 
an  income  tax  or  that  in  imposing  an  income  tax  it  grants  the  similar 
credit  required  by  the  statute.  (T.  D.  2892,  signed  by  Commissioner 
Daniel  C.  Roper,  and  dated  July  17,  1919.) 


3496  Coupons  of  foreign-owned  domestic  bonds  purchased  by  a domestic 
687  corporation. — In  case  bank  purchases  abroad  coupons  from  bonds 

issued  by  domestic  corporations  purchaser  held  prima  facie  to  be 
recipient  of  income.  Ownership  certificates  should  therefore  be  secured  from 
original  owners  of  bonds  in  order  that  tax  may  be  withheld  as  provided  in 
sections  two  twenty  one  and  two  thirty  seven  revenue  act  1918.  (Telegram 
M.  F.  Frey,  Guaranty  Trust  Company,  New  York,  N.  Y.,  signed  by  Com- 
missioner Daniel  C.  Roper,  and  dated  July  22,  1919.) 


INC. 


488  TAX 


7-80-19 


{Decision.) 

(Act  of  Oct.  3,  1913.) 

257  Fed.  133. 

Stock  losses  as  losses  incurred  in  trade. 

BRYCE  et  al.  v.  KEITH,  Collector  of  Internal  Revenue. 

(District  Court,  E.  D.  New  York.  March  26,  1919.) 

3497  In  Equity.  Suit  by  Peter  Cooper  Bryce  and  another,  as  executors 
1066  of  the  will  of  Edith  C.  Bryce,  deceased,  against  Henry  P.  Keith,  Col- 
lector of  Internal  Revenue  for  the  First  District  of  New  York.  On 

plaintiff’s  motion  for  judgment  on  demurrer  to  complaint  interposed  by 
defendant.  Demurrer  overruled,  with  leave  to  answer. 

3498  GARVIN,  District  Judge.  Plaintiff’s  move  for  judgment  upon  the 
demurrer  to  the  complaint  interposed  by  the  defendant.  The  com- 
plaint sets  forth  the  following  facts:  That  plaintiffs  are  the  surviving 
executors  of  Edith  C.  Bryce,  deceased,  who  died  April  29,  1916.  That  on 
various  dates  between  October  6,  1908,  and  February  4,  1910,  inclusive, 
she  had  traded  certain  glue  and  gelatine,  glue  and  gelatine  stock,  and  mach- 
inery worth  $225,000  for  2,250  shares,  of  the  par  value  of  $100  each,  of  the 
capital  stock  of  Peter  Cooper’s  Glue  Factory,  a corporation,  and  had  sold  to 
said  corporation  other  similar  materials  worth  and  at  an  agreed  value  of  $471,- 
594.72.  That  she  had  eventually  accepted  in  payment  of  the  agreed  purchase 
price  therefor,  and  of  other  indebtedness  of  the  corporation  to  her  for  rent, 
interest,  and  insurance  premiums,  amounting  to  $28,405.28,  5,000  other 
shares  of  said  stock  making  7,250  shares  thereof  altogether,  which  7,250  shares 
were  all  so  acquired  by  her  on  and  prior  to  February  4,  1910,  at  a total  cost  to 
her  of  $725,000  as  aforesaid.  That  on  or  about  June  10,  1914,  all  of  the  assets 
of  said  Peter  Cooper’s  Glue  Factory  were  sold  for  a sum  insufficient  to  pay  its 
debts,  and  said  stock  thereupon  became  entirely  worthless,  and  the  said  sum 
of  $725,000  was  thereupon  and  during  the  year  1914  actually  charged  off  as  a 
loss  on  the  books  of  said  Edith  C.  Bryce.  That  prior  to  March  1,  1915,  and  on 
or  about  February  27,  1915,  under  and  pursuant  to  the  provisions  of  the 
statute  known  as  the  “Federal  Income  Tax  Law,”  to  wit,  section  2 of  the  Act 
of  Congress,  approved  October  3,  1913,  c.  16,  38  Stat.  114,  entitled  “An  act  to 
reduce  tariff  duties  and  to  provide  revenue  for  the  government  and  for  other 
purposes,”  she  duly  made  to  and  filed  with  the  defendant  as  collector  of  in- 
ternal revenue  of  the  United  States  of  America  for  the  First  district  of  New 
York  a return  of  her  gross  income  during  the  year  1914  and  of  certain  items 
claimed  by  her  to  be  properly  deductible  therefrom  in  order  to  determine  her 
net  inccme  for  that  year  subject  to  the  tax  imposed  by  said  statute.  The  said 
return  stated  her  gross  income  to  be,  as  in  fact  it  was,  $428,071.67,  and 
claimed  as  an  item  properly  deductible,  the  said  sum  of  $725,000,  as  a loss 
actually  sustained  by  her  during  1914,  incurred  in  trade  and  not  compensated 
for  by  insurance  or  otherwise.  That  thereafter  the  Commissioner  of  Internal 
Revenue  assessed  a tax  against  her  in  the  sum  of  $12,336.44,  which  amount 
was  fixed  without  allowing  any  deduction  whatever  for  the'said  sum  of  $725,- 
000.  That  the  plaintiffs  paid  this  tax  involuntarily,  under  protest,  under 
duress,  under  threat  of  distraint  against  their  property,  and  after  the  defen- 
ant,  as  collector  as  aforesaid,  had  demanded  the  same. 

3499  From  the  complaint  it  cannot  be  determined  what  proportion  of  the 
loss  sustained  by  the  decedent  occurred  between  March  1,  1913,  and 

June  10,  1914  (that  being  a matter  of  proof),  and  as  the  only  question  raised 
by  the  demurrer  is  whether  the  plaintiffs  are  entitled  to  any  relief  whatever,  it 
is  proper  to  consider  at  once  whether  any  part  of  such  a loss  as  the  decedent 
sustained  may  be  deducted. 


INC. 


489  TAX 


3500  The  return  was  made  for  the  year  1914  under  the  act  of  Congress 
approved  October  3,  1913,  paragraph  “b’’  of  section  2 of  which  pro- 
vides: 

“That  in  computing  net  income  for  the  purpose  of  the  normal  tax  there 
shall  be  allowed  as  deductions:  * * * 

“Fourth,  losses  actually  sustained  during  the  year,  incurred  in  trade  or 
arising  from  fire,  storms,  or  shipwreck,  and  not  compensated  for  by  insurance 
or  otherwise.” 

3501  The  defendant  claims  that  no  part  of  the  stock  loss  was  a loss  “in- 
curred in  trade,”  within  the  meaning  of  the  act. 

3502  The  transactions  by  which  the  decedent  became  the  owner  of  the 
stock  were  carried  on  over  a considerable  period,  were  complicated  in 

character,  involved  a very  large  sum  of  money,  and  must  have  required 
much  of  her  time  and  attention,  and  I am  of  the  opinion  that  they  were  of  the 
character  contemplated  by  Congress  as  “incurred  in  trade.” 

3503  The  wording  of  Treasury  Decisions,  T.  D.  1989  [^[1067],  dated  June 
2,  1914,  bears  out  this  view: 

“Losses  actually  sustained  during  the  year  incurred  in  trade  are  limited 
by  the  language  of  the  act  itself.  In  trade  is  synonymous  with  business; 
business  has  been  defined  as  that  which  occupies  and  engages  the  time,  at- 
tention and  labor  of  any  one  for  the  purposes  of  livelihood,  profit,  or  im- 
provement; that  which  is  his  personal  concern  or  interest;  employment,  regu- 
lar occupation,  but  it  is  not  necessary  that  it  should  be  his  sole  occupation 
or  employment.  The  doing  of  a single  act  incidental  or  of  necessity  not 
pertaining  to  the  particular  business  of  the  person  doing  the  same  will  not 
be  considered  engaging  in  or  carrying  on  the  business.  It  is  therefore  held 
that  no  losses  are  deductible  in  a return  of  income  save  and  only  those  losses 
permitted  and  provided  for  by  the  statute,  viz.,  those  actually  sustained 
during  the  year,  which  are  incurred  in  trade.” 

3504  In  overruling  the  demurrer,  the  question  of  the  amount  of,  or  method 
of  arriving  at,  the  proper  deduction,  is  not  decided. 

3505  Demurrer  overruled,  with  leave  to  answer  in  20  days  from  the  serv- 
ice of  the  order  to  be  entered  herein.  (257  Fed.  133.) 

3506  In  determining  value  of  stock  as  of  March  1,  1913,  the  goodwill  of  the 
2846  corporation  is  to  be  taken  into  consideration. — Receipt  is  acknowl- 
edged of  your  letter  of  July  2,  1919,  in  which  you  refer  to  the  con- 
sideration to  be  given  to  the  value  of  goodwill  of  a corporation  where  it  is 
desired  to  establish  the  fair  market  value  of  its  outstanding  capital  stock  on 
March  1,  1913. 

In  reply,  you  are  advised  that  the  value  of  the  tangible  and  intangible  assets 
of  a corporation,  inclusive  of  the  value  of  goodwill,  as  of  March  1,  1913,  is 
to  be  taken  into  consideration,  together  with  such  other  facts  as  may  be  ne- 
cessary, where  it  is  desired  to  establish  the  market  value  of  its  outstanding 
capital  stock  on  March  1,  1913,  for  income  tax  purposes.  (Letter  to  The 
Corporation  Trust  Company,  signed  by  Commissioner  Daniel  C.*Roper,  and 
dated  July  22,  1919.) 


INC. 


490  TAX 


8-4-19. 


3507  Withholding  and  tax  liability  in  connection  with  credit  and  debit 
572  interest  items  involved  in  transactions  between  domestic  and  foreign 
2312  banks. — Reference  is  made  to  your  letter  dated  June  30,  1919  re- 

3342  lative  to  withholding  of  the  tax  at  the  source  from  interest  on  bank 

balances  of  foreign  banks  on  deposit  in  domestic  banks,  under  the 
provisions  of  the  Revenue  Act  of  1918.  In  many  cases  the  accounts  of 
foreign  banks  are  at  times  overdrawn  and  instead  of  crediting  interest  to 
their  accounts  the  domestic  bank  is  obliged  to  debit  interest  for  the  money 
temporarily  advanced  to  the  foreign  bank.  In  some  cases  foreign  banks  have 
two  accounts  with  domestic  banks,  one  a deposit  account  and  the  other  a 
borrowing  account.  You  ask  whether  in  such  cases  the  domestic  bank  should 
deduct  the  tax  from  the  entire  amount  of  interest  credited  to  the  foreign 
bank  or  whether  the  domestic  bank  is  required  to  deduct  the  tax  from  only 
the  net  amount  of  interest  credited  to  the  foreign  bank  after  subtracting  the 
amount  of  interest  debited  or  only  from  the  excess  of  the  amount  of  interest 
credited  to  the  deposit  account  of  the  foreign  bank  over  the  amount  of  in- 
terest charged  upon  the  borrowing  account.  In  this  connection  you  are 
advised  that  under  the  provisions  of  Sections  221  and  237  of  the  Act,  domestic 
banks  are  required  to  deduct  and  withhold  the  tax  from  the  entire  amount  of 
interest  credited  to  foreign  banks  upon  their  deposits  in  the  domestic  banks 
regardless  of  the  amount  of  interest  charged  the  foreign  banks  on  money 
advanced  to  them  through  loans  or  borrowing  accounts  or  on  account  of 
overdrafts  or  otherwise.  However  if  the  foreign  banks  render  returns  of 
their  total  income  from  all  sources  within  the  United  States  they  may  deduct 
in  such  returns  the  interest  charged  upon  the  money  advanced  to  them  by  the 
domestic  banks  to  the  extent  provided  in  Sections  214  (a,2)  and  234  (a, 2)  of 
the  Act.  In  such  cases  the  foreign  bank  should  include  in  its  gross  income 
the  entire  amount  of  the  income  from  which  the  tax  was  withheld  and  paid 
at  the  source  as  well  as  income  from  all  other  sources  within  the  United 
States  without  deduction  for  the  tax  so  paid,  but  any  tax  actually  so  withheld  i» 
to  be  credited  against  the  total  tax  as  computed  in  its  return.  In  the  event 
the  amount  of  tax  so  paid  at  the  source  by  the  withholding  agent  is  in  excess 
of  the  total  tax  liability  of  the  foreign  bank,  a claim  for  refund  may  be  properly 
filed  for  the  amount  overpaid.  (Letter  to  The  Corporation  Trust  Company^ 
signed  by  Commisioner  Daniel  C.  Roper,  and  dated  July  26,  1919.) 


(T.  D.  2903.) 

3508  In  re  laws  relating  to  the  giving  out,  by  employees  of  the  Bureau  of 
403  Internal  Revenue,  of  information  contained  in  returns  filed  by  tax- 
3063  payers  or  in  reference  to  office  procedure  with  respect  to  the  auditing 

of  returns,  handling  of  claims  and  similar  lines  of  work. — Your 
attention  is  directed  to  the  following  legislation  relating  to  the  divulging  of 
information  contained  in  the  returns  of  taxpayers.  Ik 'HT 

3509  Section  257  of  the  Revenue  Act  of  1918  provides:  [1[403].  Section 

403  3167  R.  S.,  as  amended  by  Section  1317  of  the  said  Revenue  Act  of 

441  1918,  provides:  [•[441].  Section  3152,  R.  S.,  as  amended  by  Act  of 

443  March  1,  1879,  authorizing  the  employment  of  internal  revenue 

agents  also  provides:  ‘‘And  all  provisions  of  section  thirty-one  hun- 
dred and  sixty-seven,  * * hc  Revised  Statutes  shall  apply  to 

internal-revenue  agents  as  fully  as  internal-revenue  officers.”  Section  3173 
(R.  S.,  as  amended  by  said  Section  1317)  of  the  Revenue  Act  of  1918  provides 
that:  “It  shall  be  the  duty  of  any  person,  partnership,  firm  or  association 
or  corporation,  made  liable  to  any  duty,  special  tax,  or  other  tax  imposed  by 
law,  when  not  otherwise  provided  for,  (1)  in  case  of  a special  tax,  on  or  before 

INC.  491 


TAX 


the  thirty-first  day  of  July  in  each  year,  and  (2)  in  other  cases  before  the  day 
on  which  the  taxes  accrue  to  make  a list  or  return  * * *:  provided^ 

That  if  any  person  liable  to  pay  any  duty  or  tax,  or  owning,  possessing,  or 
having  the  care  or  management  of  property,  goods,  wares,  and  merchandise, 
articles  or  objects  liable  to  pay  any  duty,  tax  or  license,  shall  fail  to  make  and 
exhibit  a list  or  return  required  by  law,  but  shall  consent  to  disclose  the 
particulars  of  any  and  all  the  property,  goods,  wares,  and  merchandise, 
articles,  and  objects  liable  to  pay  any  duty  or  tax,  or  any  business  or  occupa- 
tion liable  to  pay  any  tax  as  aforesaid,  then,  and  in  that  case,  it  shall  be  the 
duty  of  the  collector  or  deputy  collector  to  make  such  list  or  return.  * * *” 

Section  3176,  R.  S.,  as  amended  by  said  Section  1317,  Revenue  Act  of  1918, 
further  provides:  [1f443]. 

3510  Reading  these  provisions  of  law  together,  it  is  evident  that  any  col- 
lector, deputy  collector,  agent,  clerk,  or  other  officer  or  employee  of  the 

Bureau  of  Internal  Revenue,  including  internal-revenue  agents,  who  divulges 
or  makes  known  in  any  manner  whatsoever  not  provided  by  law  the  amount 
or  source  of  income,  profits,  losses,  expenditures,  or  any  particulars  thereof 
set  forth  or  disclosed  in  any  income  return  made  by  any  taxpayer,  or  by  a 
collector  or  deputy  collector,  or  by  the  Commissioner  of  Internal  Revenue,  or 
who  permits  any  income  return  or  copy  thereof,  or  any  book  containing  any 
abstract  or  particulars  thereof,  to  be  seen  or  examined  by  any  person,  except 
as  provided  by  law,  or  who  prints  or  publishes  in  any  manner  whatever,  not 
provided  by  law,  any  income  return  or  any  part  thereof,  or  source  of  income, 
profits,  losses,  or  expenditures  appearing  in  any  income  return,  is  guilty  of  a 
misdemeanor  and  subject  to  a fine  not  exceeding  $1,000  or  to  imprisonment 
not  exceeding  one  year,  or  both,  at  the  discretion  of  the  court,  and  if  he  be  an 
officer  or  employee  of  the  United  States,  to  be  dismissed  from  office  or  dis- 
charged from  employment. 

3511  The  only  provisions  of  law  authorizing  the  making  known  of  any 
income  return  under  the  Revenue  Act  of  1918  are  those  contained  in 

Section  257  of  said  Act,  above  quoted. 

3512  Similar  provisions  to  those  contained  in  Section  257,  Revenue  Act  of 
1918,  and  Sections  3173  and  3176,  as  amended  by  said  Revenue  Act 

of  1918,  were  also  contained  in  the  Act  of  October  3,  1914,  and  the  Act  df 
September  8,  1916.  _ _ ^ 

3513  You  should  endeavor  in  every  way  possible  to  impress  employees 
under  your  supervision  with  the  seriousness  of  the  offenses  which  are 

intended  to  be  prevented  by  this  legislation.  Any  violations  of  these  pro- 
visions of  the  law  which  become  known  to  any  officer  or  employee  of  the 
Bureau  must  be  immediately  reported  for  investigation.  (T.  D.  2903,  signed 
by  Commissioner  Daniel  C.  Roper,  and  dated  July  30,  1919.) 


INC 


492 


TAX 


8-14-19. 


(T.  D.  2899.)  ■' 

3514  Income  Tax — Decision  of  Court.  [Life  Insurance — Dividends.]— 

The  appended  decision  of  the  United  States  Circuit  Court  of  Appeals 
for  the  Third  Circuit  in  the  case  of  Lederer,  collector,  v.  Penn  Mutual  Life 
Insurance  Co.,  is  published  for  the  Information  of  internal-revenue ‘officersx 
and  other  concerned.  [Captions  only.] 

3515  1.  Dividends  Excluded  from  Gross  Income. — Under  the  provisions  of 

paragraph  G,  subdivision  (b)  of  section  2 of  the  act  of  October  3, 

1913,  that  “life  insurance  companies  shall  not  Include  as  income  in  any  year 
such  portion  of  any  actual  premium  received  from  any  individual  policy- 
holder as  shall  have  been  paid  back  or  credited  to  such  individual  policyholder 
within  such  year,”  a life  insurance  company  is  not  entitled  to  exclude  from 
its  total  income  during  the  taxable  year,  for  the  purpose  of  ascertaining  its 
gross  income,  any  dividends  paid  or  credited  to  policyholders  from  whom  it 
did  not  receive  any  premium  during  that  year;  and  as  to  such  policyholders 
as  it  did  receive  premiums  from  that  year  it  is  entitled  to  exclude  only  such 
part  of  the  dividends  paid  to  those  policyholders  as  did  not  exceed  the  amount’ 
received  from  them,  respectively,  by  way  of  premiums  during  that  year. 

3516  2.  Dividends  Consisting  of  Redundancies  in  Previous  Premium 

Payments. — None  of  the  cash  dividends  paid  by  a life  insurance  com- 
pany to  Its  policyholders  which  represent  redundancies  in  previous  premium 
payments  are  deductible  from  gross  income  in  annual  tax  returns  as  “sums 
other  than  dividends  paid  within  the  year  on  policy  * * * contracts.”* 

(T.  D.  2899,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  July  24, 
1919.)  

(T.  D.  2906.) 

3517  Income  Tax. — Amending  Article  307,  final  edition  of  Regulations 
2972a  45,  dealing  with  nonresident  alien  individual  entitled  to  personal 
3274  exemption  and  credit  for  dependents. — The  final  edition  of  Regula- 
3495  tions  45  is  amended  by  changing  Article  307  to  read  as  follows: 

Art.  307.  When  nonresident  alien  individual  entitled  to  personal  ex- 
emption— (a)  The  following  Is  an  incomplete  list  of  countries  which  either  Im- 
pose no  income  tax  or  In  imposing  an  income  tax  allow  both  a personal  ex- 
emption and  a credit  for  dependents  which  satisfy  the  similar  credit  require- 
ment of  the  statute:  Argentina;  Belgium;  Bolivia;  Bosnia;  Brazil;  Canada; 
Carinthia;  China;  Chile;  Cuba;  Dalmatia;  Denmark;  Equador;  Egypt;  France; 
Herzegovina;  Istria;  Mexico;  Montenegro;  Morocco;  Newfoundland;  Nicarag- 
ua; Norway;  Panama;  Persia;  Peru;  Portugal;  Roumania;  Russia  (including 
Poles  owing  allegiance  to  Russia) ; Santo  Domingo;  Serbia;  Siam;  Spain;  Union 
of  South  Africa;  Venezuela,  (b)  The  following  is  an  Incomplete  list  of  countries 
which  In  imposing  an  income  tax  allow  a personal  exemption  which  satisfies  the 
similar  credit  requirement  of  the  statute,  but  do  not  allow  a credit  for  depend- 
ents: Bachka;  Banat  of  Temesvar;  Croatia;  El  Salvadore;  India;  Italy; 
Slavonia,  (c)  The  following  Is  an  incomplete  list  of  countries  which  in  Im- 
posing an  income  tax  do  not  allow  to  citizens  of  the  United  States  not  resid- 
ing in  such  country  either  a personal  exemption  or  a credit  for  dependents  and, 
therefore,  fail  entirely  to  satisfy  the  similar  credit  requirement  of  the  statute: 
Australia;  Costa  Rica;  Great  Britain  and  Ireland;  Japan;  The  Netherlands; 
New  Zealand.  The  former  names  of  certain  of  these  territories  are  here  used 
for  convenience,  in  spite  of  an  actual  or  possible  change  in  name  or  sov- 
ereignty. A nonresinent  alien  Individual  who  is  a citizen  or  subject  of  any 
country  in  the  first  list  is  entitled  for  the  purpose  of  the  normal  tax  to  such 
credit  for  a personal  exemptioh  and  for  dependents  as  his  family  status  may 
warrant.  If  he  is  a citizen  or  subject  of  any  country  in  the  second  list  he  is 
entitled  to  a credit  for  a personal  exemption,  but  to  none  for  dependents. 

INC.  493 


TAX 


If  he  is  a citizen  or  subject  of  any  country  in  the  third  list  he  Is  not  entitled  to 
credit  for  either  a personal  exemption  or  for  dependents.  If  he  is  a citizen  or 
subject  of  a country  which  is  in  none  of  the  lists,  then  to  secure  credit  for 
either  a personal  exemption  or  for  dependents  he  must  prove  to  the  satis- 
faction of  the  Commissioner  that  his  country  does  not  impose  an  income  tax 
or  that  in  imposing  an  income  tax  it  grants  the  similar  credit  required  by  the 
statute.  (T.  D.  2906,  signed  by  Commissioner  Daniel  C.  Roper,  and 
dated  Augusts,  1919.) 


(T.  D.  2907.) 

3518  Instructions  relative  to  acceptance  of  Treasury  certificates  of 

435  indebtedness  for  income  and  profits  taxes,  supplementing  Articles 
3128  1731  and  1732,  Regulations  45. — Collectors  of  Internal  Revenue 

3371  are  directed  to  receive  at  par  United  States  Treasury  certificates 
of  indebtedness  of  Series  T4,  dated  June  3,  1919,  maturing  Sepember  15, 
1919,  and  Series  T6,  dated  July  1,  1919,  maturing  September  15,  1919, 
in  payment  of  income  and  profits  taxes  payable  on  September  15,  1919,  and 
to  receive  at  par  United  States  Treasury  certificates  of  indebtedness  of 
Series  T5,  dated  June  3,  1919,  maturing  December  15,  1919,  and  Series 
T7,  dated  July  1,  1919,  maturing  December  15,  1919,  in  payment  of  income 
and  profits  taxes  payable  on  December  15,  1919.  Collectors  are  authorized 
to  receive  such  certificates  in  payment  of  such  taxes,  respectively,  prior  to 
the  dates  when  the  certificates  respectively  mature.  The  certificates  of 
said  series  have  one  interest  coupon  attached,  payable  at  the  maturity  of 
the  certificates,  respectively,  but  such  coupons  must  in  all  cases  be  detached 
by  the  taxpayer  and  collected  in  ordinary  course  when  due.  The  amount, 
at  par,  of  the  Treasury  certificates  of  indebtedness  presented  by  any  tax- 
payer in  payment  of  income  and  profits  taxes  must  not  exceed  the  amount  of 
the  taxes  to  be  paid  by  him,  and  collectors  shall  in  no  case  pay  interest  on 
the  certificates  nor  accept  them  for  an  amount  other  or  greater  than  their 
face  value. 

3519  Deposits  of  Treasury  certificates  of  indebtedness  received  in  pay- 
ment of  income  and  profits  taxes  must  be  made  by  collectors  with 

the  Federal  Reserve  Banks  of  the  districts  in  which  the  respective  collectors’ 
offices  are  located,  unless  otherwise  specifically  instructed  by  the  Secretary 
of  the  Treasury.  Specific  instructions  may  be  given  in  certain  instances  for 
the  deposit  of  the  certificates  with  Federal  Reserve  Banks  of  other  districts 
and  with  branch  Federal  Reserve  Banks,  and  the  term  “Federal  Reserve 
Bank,”  where  it  appears  herein,  includes  such  branches.  Treasury  certifi- 
cates accepted  by  the  collector  prior  to  the  dates  when  the  certificates  re- 
spectively mature,  should  be  forwarded  by  the  collector  to  the  Federal 
Reserve  Bank  to  be  held  for  account  of  the  collector  until  the  date  of  ma- 
turity, and  for  deposit  on  such  date.  Certificates  of  indebtedness  should  in 
all  cases  be  stamped  as  follows  by  the  Collector,  and  when  so  stamped  for- 
warded to  the  Federal  Reserve  Bank  by  registered  mail  uninsured: 

“ , 191. . . . 

“This  certificate  has  been  accepted  in  payment  of  income  and  profits 
taxes  and  will  not  be  redeemed  by  the  United  States  except  for  credit  of  the 
undersigned. 

Collector  of  Internal  Revenue 

for  the district  of ” 

3520  Collectors  of  internal  revenue  are  not  authorized,  unless  otherwise 
notified  by  the  Secretary  of  the  Treasury,  to  receive  in  payment  of 

income  or  profits  taxes  interim  receipts  issued  by  Federal  Reserve  Banks 
in  lieu  of  definite  certificates  of  the  series  herein  described. 

494  * TAX 


INC. 


S-14-19 


3621  Collectors  should  make  in  tabular  form  a schedule  in  duplicate  of 
the  certificates  of  indebtedness  to  be  forwarded  to  the  Federal 
Reserve  Bank,  showing  the  serial  number  of  each  certificate,  the  date  of 
issue  and  maturity,  and  face  value.  Certificates  of  indebtedness  accepted 
prior  to  the  date  of  maturity  must  be  scheduled  separately.  At  the  bottom 
of  each  schedule  there  should  be  written  or  stamped  “Income  and  Profits 

Taxes  $ ,”  which  amount  must  agree  with  the  total  shown  on 

the  schedule.  One  copy  of  this  schedule  must  accompany  certificates  sent 
to  the  Federal  Reserve  Bank,  and  the  other  be  retained  by  the  collector. 
Such  income  and  profits  tax  deposits  must  in  all  cases  be  shown  on  the  face 
of  the  certificate  bf  deposit  (National  Bank  Form  15)  separate  and  distinct 
from  the  item  of  miscellaneous  internal  revenue  collections  (formerly  called 
Ordinary),  but  it  is  not  necessary  to  give  the  separation  into  corporation 
income,  individual  income  and  profits  taxes. 

3522  Until  certificates  of  deposit  are  received  from  the  Federal  Reserve 
Banks,  the  amounts  represented  by  the  certificates  of  indebtedness 

forwarded  must  be  carried  by  collectors  as  cash  on  hand,  and  not  credited 
as  collections,  as  the  dates  of  certificates  of  deposit  determine  the  dates  of 
collections. 

3523  For  the  purpose  of  saving  taxpayers  the  expense  of  transmitting 
such  certificates  as  are  held  in  Federal  Reserve  cities  to  the  office  of 

the  collector  in  whose  district  the  taxes  are  payable,  taxpayers  desiring  to 
pay  income  and  profits  taxes  by  Treasury  certificates  of  indebtedness 
acceptable  in  payment  of  such  taxes,  should  communicate  with  the  collector 
of  the  district  in  which  the  taxes  are  payable  and  request  from  him  authority 
to  deposit  such  certificates  with  the  Federal  Reserve  Bank  in  the  city  in 
which  the  certificates  are  held.  Collectors  are  authorized  to  permit  deposits 
of  Treasury  certificates  of  indebtedness  in  any  Federal  Reserve  Bank  with 
the  distinct  understanding  that  the  Federal  Reserve  Bank  is  to  issue  a cer- 
tificate of  deposit  in  the  collector’s  name  covering  the  amount  of  the  cer- 
tificates of  indebtedness  at  par  and  to  state  on  the  face  of  the  certificate  of 
deposit  that  the  amount  represented  thereby  is  in  payment  of  income  and 
profits  taxes.  The  Federal  Reserve  Bank  should  forward  the  original  cer- 
tificate of  deposit  to  the  Treasurer  of  the  United  States,  with  its  daily 
transcript,  and  transmit  to  the  collector  the  duplicate  and  triplicate,  accom- 
panied by  a statement  giving  the  name  of  the  taxpayer  for  whom  the  pay- 
ment is  made  in  order  that  the  collector  may  make  the  necessary  record  and 
forward  the  duplicate  to  the  office  of  the  Commissioner  of  Internal  Revenue. 

3524  This  Treasury  Decision  amends  and  supplements  the  provisions  of 

Articles  1731  [^[3128]  and  1732  [^3129]  of  Regulations  45.  (T.  D. 

2907.  Signed  by  Commissioner  Daniel  C.  Roper,  and  dated  August 
7,  1919.) 


3525  Alien  employees — Resident  and  Non-resident — Withholding  upon 
2976  change  of  status. — Reference  Is  made  to  your  letter  dated  June  30, 

3406  1919,  which  Is  quoted  here  In  part:  “Referring  to  our  telephone 

3436  conversation  of  this  morning,  we  understand  that  In  the  case  of  the 

3492  employment  of  alien  labor  that  where  such  labor  has  been  em- 

ployed for  three  months  or  more  continuously  his  status  is  estab- 
lished as  a resident  alien,  and  there  is  no  liability  upon  the  employer  for 
further  withholding  from  such  an  employee.  In  fact,  he  may  refund  the 
amounts  withheld  prior  to  that  time.  Assuming  that  such  an  employee  has 
been  in  the  service  of  an  employer  continuously  for  a sufficient  time  to 
establish  his  status  as  a resident  alien  until  for  example  November  15th. 
The  employer  has  paid  over  to  him  all  of  the  money  which  Is  due  him  up  to 
that  time.  The  employee  announces  his  intention  to  return  to  the  foreign 
country  from  which  he  came,  but  continues  to  work  for  the  employer  until 

495  TAX 


INC. 


the  first  of  January.  The  employer  now  has  information  as  to  the  intentions 
of  such  an  employee.  We  understand  that  there  is  no  liability  upon  him 
for  withholding  prior  to  the  time  in  which  these  intentions  became  known; 
namely,  November  15th,  and  that  he  should  withhold  only  upon  the  basis 
of  the  earnings  of  the  employee  from  the  time  from  which  the  employer 
knew  of  the  intention  of  the  employee  to  quit  the  country.” 

3526  In  reply  you  are  advised  that  under  the  provisions  of  Article  315, 
Regulations  45,  if  wages  are  paid  without  withholding  the  tax,  the 

employer  should  be  provided  with  written  proof  of  facts  which  overcome 
the  presumption  that  such  alien  is  a nonresident.  If  an  alien  has  been 
living  in  the  United  States  for  as  much  as  one  year  immediately  prior  to  the 
time  he  entered  the  employment  of  the  withholding  agent,  or  if  he  has  been 
regularly  employed  by  a resident  individual  or  corporation  in  the  same 
county  for  as  much  as  three  months  immediately  prior  to  any  payment  by 
the  employer,  he  may  be  treated  as  a resident  in  the  absence  of  facts  known 
to  the  employer  showing  that  he  is  in  fact  a transient. 

3527  In  case  tax  has  been  withheld  by  the  employer  from  wages  paid  dur- 
ing three  months  period  while  the  status  was  that  of  a nonresident 

alien,  the  amount  of  tax  may  be  refunded  in  accordance  with  the  data 
contained  on  Form  1115.  This  form  is  provided  for  the  purpose  of  receiving 
the  benefit  of  personal  exemption  and  credit  for  dependents  in  connection 
with  income  tax  withheld  at  the  source  from  salaries,  wages  and  similar 
income.  In  case  tax  has  been  withheld  from  an  alien  employee  and  his 
status  as  a resident  has  been  established  by  the  execution  of  Form  1078, 
any  income  tax  withheld  may  be  refunded  upon  receipt  of  that  certificate. 
The  fact,  however,  that  an  alien  has  been  employed  by  a corporation  for 
three  months  is  not  in  itself  sufficient  grounds  upon  which  to  refund  income 
tax  withheld  at  the  source.  It  was  not  the  intention  that  Article  315  of 
Regulations  No.  45  referred  to  herein,  should  be  construed  as  permitting  an 
employer  to  withhold  from  nonresident  alien  employees  for  a period  of  only 
three  months  and  refund  the  amount  of  tax  withheld  at  the  end  of  that 
period  merely  because  aliens  had  been  employed  by  him  for  that  period  of 
time. 

3528  If  the  status  of  a resident  employee  changes  to  that  of  a nonresident 
alien,  the  employer  should  withhold  income  tax  at  the  rate  of  eight 

per  cent  from  all  wages  paid  to  the  nonresident  employee  on  and  after 
the  date  on  which  the  employer  had  knowledge  of  the  change.  Although  the 
employee,  in  such  case,  will  be  taxable  as  a nonresident  alien  for  the  entire 
taxable  year  during  which  his  status  is  changed  from  that  of  a resident  to 
that  of  a nonresident  alien,  the  employer  will  not  be  held  liable  for  the 
deduction  of  income  tax  with  respect  to  wages  paid  preceding  the  knowledge 
of  the  employer  as  to  the  change  in  status.  (Letter  to  W.  B.  Reed,  Ac- 
counting Secretary,  National  Coal  Association,  Washington,  D.  C.,  signed 
by  Commissioner  Daniel  C.  Roper,  and  dated  August  6,  1919.) 


3529  Compromise  of  penalties  arising  under  income  tax  laws. — Depart- 
ment of  Justice,  June  3,  1919.  Sir:  I have  had  under  careful  con- 
sideration for  some  time  a request  from  your  predecessor  for  an  opinion  as 
to  the  power  of  the  Commissioner  of  Internal  Revenue,  with  the  advice  and 
consent  of  the  Secretary  of  the' Treasury,  to  compromise  claims  for  certain 
penalties  arising  under  the  income-tax  laws.  The  specific  claims  mentioned 
are: 

(1)  Claims  for  amounts  50  per  cent  in  addition  to  amounts  of  income  and 
excess-profit  taxes  assessed  under  authority  of  section  3176  of  Revised 
Statutes,  as  am.ended  by  section  16  of  the  act  of  September  8,  1916,  and  of 
section  212  of  the  act  of  October  3,  1917,  in  cases  of  failure  to  make  and  file 
returns  or  lists  within  the  time  prescribed  by  law  or  by  the  collector; 

INC.  496  TAX 


^14-19. 

(2)  Claims  fof  amounts  100  per  cent  in  addition  to  amounts  of  income 
and  excess-profit  taxes  assessed  under  authority  of  said  sections  in  cases  of 
false  or  fraudulent  returns  or  lists  wilfully  made;  and 

(3)  Claims  for  sums  oi  5 per  cent  on  amounts  of  income  and  excess-profit 
taxes  not  paid  when  due  and  interest  at  the  rate  of  1 per  cent  per  month  on 
said  taxes,  the  collection  of  which  is  authorized  by  sections  9 {a)  and  14  {a) 
of  the  act  of  September  8,  1916,  and  section  212  of  the  act  of  October  3,  1917. 

3530  The  exact  question  submitted  is  whether,  under  the  authority  of 
section  3229  of  Revised  Statutes,  the  Commissioner  of  Internal 

Revenue  is  authorized  to  compromise  these  penalties  in  cases  in  which  there 
is  no  doubt  as  to  the  legal  liability  of  the  taxpayer  or  as  to  the  collectibility 
of  the  claim,  but  in  which,  in  the  opinion  of  the  Secretary  of  the  Treasury 
and  that  of  the  commissioner,  considerations  of  justice,  equity,  and  public 
policy  warrant  a reduction  of  the  amounts  to  be  collected  on  the  ground  that 
the  statutory  amounts  are  in  the  nature  of  penalties  for  delinquencies,  and 
that,  though  such  amounts  are  technically  due  and  are  collectible,  the  collec- 
tion of  them  inflicts  punishment  which  is  unduly  severe  in  view  of  the  culp- 
ability. 

3531  Section  3229  of  the  Revised  Statutes  is  as  follows; 

“The  Commissioner  of  Internal  Revenue,  with  the  advice  and 
consent  of  the  Secretary  of  the  Treasury,  may  compromise  any  civil^  or 
criminal  case  arising  under  the  internal-revenue  laws  instead  of  commencing 
suit  thereon;  and,  with  the  advice  and  consent  of  the  said  Secretary  and 
the  recommendation  of  the  Attorney  General,  he  may  compromise  any  such 
case  after  a suit  thereon  has  been  commenced.  Whenever  a compromise  is 
made  in  any  case  there  shall  be  placed  on  file  in  the  office  of  the  commissioner 
the  opinion  of  the  Solicitor  of  Internal  Revenue,  or  of  the  officer  acting  as 
such,  with  his  reasons  therefor,  with  a statement  of  the  amount  of  tax 
assessed,  the  amount  of  additional  tax  or  penalty  imposed  by  law  in  con- 
sequence of  the  neglect  or  delinquency  of  the  person  against  whom  the  taxis 
assessed,  and  the  amount  actually  paid  in  accordance  with  the  terms  of  the 
compromise.” 

3532  It  will  be  observed  that  the  power  to  compromise  is  given  in  very 
broad  and  general  terms.  Congress  has  not  seen  fit  to  specify  the 

considerations  which  shall  control  the  commissioner  in  determining  whether 
a case  ought  or  ought  not  to  be  compromised  instead  of  commencing  suit, 
nor  to  place  any  limitation  upon  this  exercise  of  power,  except  that  his  action 
shall  be  with  the  advice  and  consent  of  the  Secretary  of  the  Treasury. 
After  suit  is  commenced  the  power  is  to  be  exercised  only  with  the  advice  and 
consent  of  the  Secretary  of  the  Treasury  and  the  recommendation  of  the 
Attorney  General. 

3533  The  act  of  Congress  which,  somewhat  condensed  and  shortened,  was 
carried  into  the  Revised  Statutes  as  section  3229  was  section  102 

of  the  act  of  June  20,  1868  (15  Stat.  125,  166) . That  act  conferred  the  power 
to  compromise  in  all  cases  arising  under  the  internal-revenue  laws  where, 
instead  of  commencing  or  proceeding  with  a suit,  “it  may  appear  to  the 
Commissioner  of  Internal  Revenue  to  be  for  the  interest  of  the  United  States 
to  compromise  the  same.”  The  language  just  quoted  was  omitted  from 
section  3229.  It  will  be  seen,  therefore,  that  the  original  act  authorized  a 
compromise  whenever,  in  the  opinion  of  the  Commissioner  of  Internal 
Revenue  it  was  “for  the  interest  of  the  United  States.”  These  words  were  by 
way  of  limitation  upon  his  power.  Their  omission  from  section  3229,  there- 
fore, can  not  be  said  to  render  the  power  more  restricted  than  it  was  under 
the  original  act.  Certainly,  then,  section  3229  can  not  be  given  a narrower 
meaning  than  to  say  that  the  power  is  conferred  to  make  any  compromise 
which  in  the  opinion  of  the  commissioner,  acting  with  the  advice  and  consent 
of  the  Secretary  of  the  Treasury,  and,  in  the  event  suit  has  been  commenced,, 
upon  the  recommendation  of  the  Attorney  (jeneral,  will  be  for  the  interest 

INC.  497  TAX 


of  the  United  States.  The  fact  that  the  act  applies  to  both  civil  and  criminal 
cases,,  and  the  further  fact  that  when  a compromise  is  made  there  shall  be 
placed  on  file  the  opinion  of  the  Solicitor  of  Internal  Revenue  stating  the 
reasons  for  the  compromise,  the  amount  of  tax  assessed,  the  amount  of 
additional  tax  or  penalty  imposed,  and  the  amount  actually, paid,  make  it 
plain  that  whatever  power  to  compromise  is  given  extends  to  penalties,  such 
as  those  mentioned  in  the  request  for  this  opinion. 

3534  Opinions  of  my  predecessors  touching  the  nature  and  extent  of.  the 
power  of  the  commissioner  to  make  compromises  are  more  or  less 

conflicting  and  it  will  not,  I think,  serve  any  useful  purpose  to  review  and 
attempt  to  reconcile  them.  I have  given  them,  as  well  as  all  decisions  of  the 
courts  bearing  in  any  way  on  the  question,  careful  consideration  and  will 
content  myself  with  stating  my  conclusions. 

3535  Your  request  does  not  relate  to  compromises  of  taxes,  but  only  to 
penalties  and  interest  imposed  on  account  of  delinquencies  of  the 

taxpayer.  I shall  accordingly  confine  my  opinion  to  penalties  and  interest. 

3536  It  seems  clear  that  Congress  has  left  it  to  the  judgment  and  dis 
cretion  of  the  commissioner  to  determine  when  it  is  to  the  interest  of 

the  United  States  to  compromise  such  claims  instead  of  commencing  or 
prosecuting  suits  therefor,  and  that  the  only  limitation  placed  upon  the 
exercise  of  this  judgment  and  discretion  is  that  his  action  shall  be  with  the 
advice  and  consent  of  the  cabinet  officers  mentioned  in  the  statute.  And 
I am  of  the  opinion  that,  subject  to  this  limitation,  he  has  the  power  to 
compromise  the  penalties  and  interest  mentioned  in  the  request  for  this 
opinion  whenever,  in  his  judgment,  such  compromises  are  for  the  interest 
of  the  United  States.  Congress  has  not  said  that  such  compromises  may  be 
made  only  when  in  the  judgment  of  the  commissioner  more  money  can 
thereby  be  realized  than  can  be  realized  by  commencing  and  prosecuting  a 
suit.  It  can  not  be  said,  therefore,  as  a matter  of  law,  that  the  power  to 
compromise  is  limited  to  cases  in  which  either  the  liability  for  the  penalty  or 
the  collectibility  of  the  claim  is  doubtful.  In  these  matters  I think  the 
judgment  of  the  commissioner  as  to  what  is  for  the  interest  of  the  United 
States  is  made  conclusive.  What  considerations  shall  control  are  fixed  by 
no  rule  of  law,  but  depend  upon  his  own  discretion  and  sound  judgment 
exercised  in  good  faith.  It  may  be  that  with  respect  to  the  amount  of  tax 
to  be  collected,  or  the  amount  of  penalty  resulting  from  wilful  fraud,  the 
commissioner  may  never  find  a case  in  which  he  will  feel  justified  in  accepting 
less  than  can  be  legally  collected,  whereas  in  cases  of  penalties  resulting 
from  accident,  negligence,  or  technical  omission,  he  may  honestly  believe 
that  the  interests  of  the  United  States  will  be  best  served  by  accepting 
less  than  the  full  penalty.  In  such  cases,  I am  of  opinion  that  he  has  the 
right  to  compromise  upon  any  ground  which,  in  his  judgment,  renders  the 
compromise  for  the  interest  of  the  United  States.  Respectfully, 

To  the  Secretary  of  the  Treasury.  A.  Mitchell  Palmer. 

3537  Inventory  losses— time  for  filing  claim  in  abatement. — Acknowledg- 
144  ment  is  made  of  the  receipt  of  your  telegram  of  July  25,  1919, 
2963e  asking  to  be  advised  if  an  abatement  claim  covering  loss  in  inventory 
3337  value  can  be  filed  by  a taxpayer  after  his  return  is  filed  but  before 
3368  the  total  amount  of  tax  is  collected.  In  reply,  you  are  advised 

that  as  the  section  of  the  law  covering  the  matter  referred  to  by 
you  reads  that  at  the  time  of  filing  a return  for  the  taxable  year  1918,  a 
taxpayer  may  file  a claim  for  abatement,  it  is  held  by  this  Bureau  that  the 
law  does  not  mandatorily  provide  that  the  claim  shall  be  filed  at  the  time  of 
rendering  the  return.  Therefore,  such  an  abatement  claim  will  be  considered 
by  this  Bureau  if  filed  before,  or  within  ten  days  after,  the  mailing  of  the 
Collector’s  notice  and  demand  on  Form  17.  (Letter  to  Guaranty  Trust 
Company  of  New  York,  signed  by  Commissioner  Daniel  C.  Roper,  and 
dated  August  6,  1919.) 


INC. 


498  TAX 


3538yPolicy  of  the  Bureau  of  Internal  Revenue  with  Regard  to  Requests 
for  Rulings  and  Advice  Upon  Abstract  Propositions.— The  Bureau 
of  Internal  Revenue,  in  a statement  issued  yesterday  [August  25,  1919] 
definitely  outlines  its  policy  with  regard  to  requests  which  are  received' daily 
for  rulings  and  advice  upon  abstract  propositions  involving  questions  of 
income  ta^  and  profit  liability.  For  example,  taxpayers  considering  the  reor- 
ganization of  corporations  frequently  ask  whether  the  contemplated  plans 
will  result  in  the  realization  of  taxable  income.  These  requests  for  advance 
information  have  become  so  numerous,  that  the  Bureau  deems  it  advisable 
to  state  why  it  is  found  necessary  to  decline  to  make  advance  rulingsjin 
particular  cases.  The  policy  of  the  Bureau,  it  is  announced,  will  be  not  to 
answer  such  inquiries  except  under  the  following  circumstances: 

The  transaction  must  be  completed  and  not  merely  proposed  or  planned. 
The  complete  facts  relating  to  the  transaction,  together  with  abstracts 
from  contracts  or  other  documents  necessary  to  present  the  complete  facts 
must  be  given. 

The  names  of  all  the^real'parties  interested  (not  “dummies”  usedjin  the 
transaction)  must  be  stated  regardless  of  who  presents  the  question,  whether 
attorney,  accountant,  tax  service  or  other  representative. 

3539  The  conclusions  upon  which  the  rulings  are  based  are  as  follows: 
“An  examination  of  the  revenue  laws  setting^forth  the  duties  of  the 

Commissioner  of  Internal  Revenue  does  not  disclose  any^function  assigned 
to  him  by  statute  which  authorizes  him  to  make  a decision  in  any  particular 
case  which  does  not  arise  in  actual  course  of  administering  the  law.  He  is 
authorized,  with  the  approval  of  the  Secretary  of  the  Treasury,  to^make 
regulations,  but  this  would  not  authorize  him  even,  with  the  approval  of  the 
Secretary,  to  decide  any  particular  case  in  advance  of  its  actual  presentation 
of  the  facts  for  a decision. 

3540  :.“In^the  interval  between  an  informal  advanceTdecision'  and  the 

time  when  the  case  is  finally  presented  for  actual  decision,  develop- 
ments may  occur  which  affect  the  decision.  When  a question  is  actually 
presented  in  the  regular  course  of  administration  for  the  decision  of  the 
Commissioner,  the  decision  must  then  be  in  accordance  with  such  light, 
whether  from  experience  or  from  judicial  decision,  as  he  may  then  have. 
Any  taxpayer  who  had  relied  on  an  advance  decision  would  necessarily  be 
prejudiced  whenever  the  final  decision  did  not  agree  with  the  advance  de- 
cision. The  fact  that  taxpayers  asking  for  advance  decisions  are  usually  un- 
willing tojaccept^an  oral  opinion  shows  that  taxpayers  are  intending  to 
rely  on  such  advance  decisions,  and  are  likely  to  be  misled  by  them  if  change 
later  becomes  necessary. 

3541  “It  is  also  a matter  of  practical  experience  that  when  facts  are  pre- 
sented for  advance  decision  it  is  practically  impossible  to  present 

the  same  facts  as  will  afterwards  come  up  in  the  regular  course  for  actual 
decision.  Reorganization  plans,  for  instance,  when  they  actually  work 
out,  may  be  changed  in  some  particular  which  the  taxpayer  regards  as  un- 
important, but  which  In  fact  may  be  decisive  of  the  case. 

3542  “The  large  number  of  taxpayers  which  must  be  dealt  with  under 
the  present  law  and  the  great  variety  of  intricate  questions  involved 

requires  employes  not  only  of  native  ability  but  of  special  training.  Even 
such  a force  is  taxed  to  the  utmost  in  dealing  with  the  actual  cases  as  they 
arise,  and  every  attempt  to  render  an  advance  decision  takes  just  so  much 
time  away  from  the  taxpayers  who  have  a definite  right  under  the  law  to  a 
consideration  of  their  cases  which  are  ready  for  final  disposal. 

3543  “Experience  in  the  past  shows  that  when  such  questions  were  con- 
sidered a single  advance  decision  was  not  sufficient  In  most  cases. 

3544  “It  Is  realized  that  the  uncertainty  which  exists  In  the  minds  of 
business  men  as  to  the  construction  of  various  parts  of  the  law  is 

499 


INC. 


TAX 


unfortunate  and  tends  to  hamper  business  development,  but  since  such 
uncertainty  can  be  resolved  only  through  decisions  of  the  courts,  and  since 
an  advance  decision  by  the  Commissioner  is  not  a real  but  only  an  apparent 
resolution  of  the  uncertainty,  it  appears  that  in  giving  such  advance  decisions 
the  Commissioner  would  be  doing  the  taxpayer  an  injustice  rather  than’':  a 
favor. 

3545  “Where  a question  presented  is  not  covered  by  the  regulations  and  is 
so  general  that  the  regulations  should  contain  a provision  bearing 

on  it,  an  amendment  of  the  regulations  will  be  prepared  as  heretofore. 

3546  “The  conclusions  here  stated  are  the  same  conclusions  that  have  been 
reached  in  practically  every  instance  by  bodies  whose  duty  it  is  to  miake 

decisions  based  on  facts — that  it  is  unsafe  and  misleading  to  treat  hypothetical 
questions  or  to  give  advance  information  even  on  real  questions.^’  (Statement 
by  the  Bureau  of  Internal  Revenue,  dated  August  26,  1919.) 


3547  Bond  Interest  Due  Prior  to  March  1,  1913— No  Withholding. — 

613  Coupons  which  became  due  June  1,  1910  presented  on  behalf  of 
2862d  non-resident  alien  individual  owner.  Should  the  Federal  Income 
3431  Tax  be  withheld  therefrom.?  Please  wire  reply.  (Answer.)  Bond 
interest  represents  Income  to  taxpayer  when  due  and  payable  in 
accordance  with  Article  Fifty-Four  [l[2862d]  Regulations  Forty-Five.  No 
tax  required  to  be  withheld  from  interest  upon  bonds  due  prior  to  March 
first  Nineteen  Thirteen  but  paid  subsequent  to  that  date.  (Telegram  from 
Chicago  & Northwestern  Railway  Company  and  the  answer  thereto,  signed 
by  Acting  Commissioner  Callan  and  dated  August  26,  1919.) 


(T.  D.  2916) 

3548  Providing  for  the  addition  of  two  new  articles,  Regulations  45,  in 
2209  regard  to  the  determination  of  the  fair  market  value  and  quantity  of 
2955  timber. — The  final  edition  of  Regulations  No.  45  is  amended  by  the 

insertion  of  two  new  articles  to  be  known  as  Article  234  and  Article 
235  as  follows: — Article  234.  Determination  of  Fair  Market  Value  of 
Timber. — Where  the  fair  market  value  of  the  property  at  a specified  date  in 
lieu  of  the  cost  thereof  is  the  basis  for  depletion  and  depreciation  deductions 
such  value  must  be  determined,  subject  to  approval  or  revision  by  the  Com- 
missioner, by  the  owner  of  the  property  in  the  light  of  the  most  reliable  and 
accurate  information  with  reference  to  the  condition  of  the  property  as  it 
existed  at  that  date,  regardless  of  all  subsequent  changes  such  as  changes  in 
surrounding  circumstances,  in  methods  of  exploitation,  in  degree  of  utilization, 
etc.  The  value  sought  should  be  that  established  assuming  a transfer  be- 
tween a willing  seller  and  a willing  buyer  as  of  that  particular  date.  No  rule 
or  method  of  determining  the  fair  market  value  of  timber  property  is  pre- 
scribed, but  the  Commissioner  will  give  due  weight  and  consideration  to  any 
and  all  facts  and  evidence  having  a bearing  on  the  market  value,  such  as  cost, 
actual  sales  and  transfers  of  similar  properties,  market  value  of  stock  or  shares, 
royalties  and  rentals,  value  fixed  by  the  owner  for  purposes  of  the  capital  stock 
tax,  valuation  for  local  or  State  taxation,  partnership  accountings,  records  of 
litigation  in  which  the  value  of  the  property  was  in  question,  the  amount  at 
which  the  property  may  have  been  inventoried  in  probate  court,  disinterested 
appraisals  by  approved  methods,  and  other  factors.  For  depletion  purposes 
the  cost  of  the  timber  or  its  fair  market  value  at  a specified  date  shall  not  in- 
clude any  part  of  the  cost  or  value  of  the  land. 

3549  Art.  235.  Determination  of  Quantity  of  Timber. — Each  taxpayer 

claiming  a deduction  for  depletion  is  required  to  estimate  with  re- 
spect to  each  separate  timber  account  the  total  units  (feet  board  measure, 

500  TAX 


INC. 


cords,  or  other  units)  of  timber  reasonably  known  or  on  good  evidence  be- 
lieved to  have  existed  on  the  ground  on  March  1,  1913,  or  on  the  date  of  ac- 
quisition of  the  property,  as  the  case  may  be.  The  taxpayer,  according  to  his 
best  knowledge  and  belief  and  in  the  light  of  the  most  accurate  and  reliable  in- 
formation, will  estimate  the  number  of  units  of  timber  actually  present  upon 
the  specified  date;  this  estimate  will  state  the  number  of  units  which  would 
have  been  found  present  by  a careful  estimate  made  on  the  specified  date  with 
the  object  of  determining  100*  per  cent  of  the  quantity  of  timber 
which  the  area  would  have  produced  on  that  date  if  all  of  the 
merchantable  timber  had  been  cut  and  utilized  in  accordance  with  the 
standards  of  utilization  prevailing  in  that  region  at  that  time.  If  subse- 
quently during  the  ownership  of  the  taxpayer  making  the  return  additional 
units  of  timber  are  found  to  be  available  for  utilization  as  the  result  of  the 
growth  of  the  timber,  of  closer  utilization  of  the  timber,  of  the  utilization  of 
species  of  trees  not  formerly  utilized,  of  underestimates  of  the  quantity  of 
timber  available  on  the  specified  date,  etc.,  which  were  not  taken  into  account 
in  estimating  the  number  of  units  for  purposes  of  depletion,  or  if  it  shall  be 
found  in  the  course  of  operation  that  timber  included  in  the  estimate  is  not 
merchantable  as  the  result  of  deterioration  through  rot  or  otherwise,  or  that 
the  original  estimate  was  too  great,  a new  estimate  of  the  recoverable  units  of 
timber  (but  not  of  the  cost  or  the  fair  market  value  at  a specified  date)  shall 
be  made  and  when  made  shall  thereafter  constitute  a basis  for  depletion.  In 
In  the  selection  of  the  unit  or  units  of  estimate  the  custom  applicable  to  the 
given  type  of  timber  in  the  given  region  should  be  considered.  (T.  D.  2916, 
signed  by  Commissioner  Daniel  C.  Roper,  and  dated  September  5,  1919.) 

3650  No  taxable  profit  accrues  to  the  donor  in  connection  with  the  making 
1102  of  a deductible  charitable  contribution  in  the  form  of  securities 
2962  which  have  increased  in  value  in  his  hands. — In  compliance  with 
your  request  of  July  31,  1919,  this  office  hereby  confirms  the  following 
telegram  addressed  to  you  under  date  of  July  19,  1919:  “Your  telegram 
July  17.  Where  donor  is  entitled  to  claim  deduction  for  value  of  gift  as  pro- 
vided in  Article  251  regulations  he  is  not  required  to  report  as  a profit  the 
excess  in  value  of  tlie  property  donated  over  its  cost  or  fair  market  value  on 
March  1,  1913.” 

The  above  was  in  reply  to  your  telegraphic  inquiry  of  July  17,  which  reads 
as  follows: 

“Article  251  says  where  charitable  gift  is  other  than  money  basis  for 
calculation  of  amount  to  be  deducted  shall  be  fair  market  value  of  tiling  given, 
Does  this  mean  donor  can  deduct  market  value  of  gift  of  securities  without 
being  treated  as  having  realized  as  taxable  income  the  difference  between 
such  market  value  and  cost  of  securities  to  him.^  Flease  wire  reply  our 
expense.”  (Letter  to  Ropes,  Gray,  Boyden  and  Perkins,  Boston,  INlass., 
signed  by  J.  II.  Callan,  Assistant  to  the  Commissioner,  by  N.  T.  Johnson, 
Chief  of  Section,  and  dated  Aug.  14,  1919.) 

355 1 Tax  liability  and  withholding  obligation  on  bond  interest  collected 
2862d  and  paid  in  year  subsequent  to  that  in  which  the  interest  became 
2996  due  and  payable. — Reference  is  made  to  your  letter  of  June  26,  1919, 
3431  in  wliich  you  request  a ruling  in  regard  to  the  rate  of  withholding 
which  attacl  cs  to  interest  coupons  maturing  in  one  year  and  presented 
for  paymr-nt  in  a subsequent  year  when  withholding  is  required  at  a different 
specified  rate,  state  that  owing  to  the  German  occupation  of  Belgium 

during  the  war  and  to  Ui.e  general  unsettled  conditions  in  different  parts  of 
luiropc,  it  has  been  impossible  fur  foreign  owners  of  American  securities 
to  deposit  coupons  for  collection  when  they  became  due  during  the  years 
1915,  1916,  1917  and  1918,  and  that  in  the  year  1919,  when  they  were  pre- 

INC.  501  TAX 


sented  for  payment,  a tax  at  the  rate  of  8%  was  withheld  on  them.  You 
raise  the  question  as  to  whether  withholding  in  such  cases  should  have  been 
St  the  rate  specified  for  the  year  in  which  the  coupons  were  presented  for 
payment,  or  whether  it  should  have  been  at  the  rates  specified  for  the  years 
in  which  the  coupons  matured. 

3552  In  reply  you  are  advised  that  Article  54  of  Regulations  45  [1f2862d] 
states  specifically  that  where  interest  coupons  have  matured,  but 

have  not  been  cashed,  such  interest  payment,  though  not  collected  when  due 
and  payable,  is  nevertheless  available  to  the  taxpayer  and  should  therefore 
be  included  in  his  gross  income  for  the  year  during  which  the  coupons  matured. 
Hence,  withholding  on  interest  coupons  which  matured  during  the  years 
1915,  1916,  1917  and  1918  should  have  been  at  the  rates  specified  for  the 
years  in  whicli  such  coupons  matured,  the  year  in  v/hich  the  coupons  were 
presented  for  payment  having  no  bearing  upon  the  determination  of  the 
rate  at  which  they  were  subject  to  withholding. 

3553  You  are  advised  further  that  the  owners  of  the  bonds  to  which  you 
refer  may  exercise  their  privilege  of  filing  with  the  Collector  on  Form 

46  a claim  for  refund  of  that  portion  of  the  tax  withheld  which  was  in  excess 
of  their  true  liability.  (Letter  to  Aforris  F.  Frey,  Guaranty  Trust  Company, 
New  ork,  N.  Y.,  signed  by  J.  H.  Callan,  Assistant  to  the  Commissioner, 
and  dated  September  4,  1919.) 


3554  Allowance  for  obsolescence  of  good-will,  trade  marks,  and  trade 

1089  brands  in  the  case  of  distillers,  dealers  in  liquors,  etc. — Receipt  is 

2105  acknowledged  of  your  letter  of  Match  12,  1919,  in  which  you  request 

2912  a ruling  to  the  effect  that  distillers  and  dealers  in  liquors  may  for 

the  year  1918  take  a reasonable  amount  for  obsolescence  of  good- 
will, trade-marks,  and  trade  brands,  the  value  of  which  has  been  impaired 
or  destroyed  by  prohibition  legislation.  In  reply  you  are  advised  that  a 
reasonable  allowance  for  obsolescence  of  such  assets  may  be  taken  by  dis- 
tillers and  dealers  in  liquors  against  earnings  between  November  21,  1918, 
the  date  upon  which  the  Agricultural  Appropriation  act,  providing  for  war- 
time prohibition  was  enacted,  and  July  1,  19i9,  the  date  upon  which  the  war- 
time prohibition  is  to  become  effective.  To  sustain  a claim  for  a deduction 
for  obsolescence  in  respect  of  good-will,  trade  marl-rs,  or  trade  brands,  the 
taxpayer  must  show  that  the  value  of  tlie  property  in  question  has  been 
destroyed  or  will  be  destroyed  not  later  than  June  30,  1919,  and  that  the 
taxpayer  is  not  continuing  in  any  similar  trade  or  business.  An  allowance 
will  be  made  only  in  respect  of  such  assets  as  are  assignable  as  distinguished 
from  those  attaching  to  the  individuals  owning  or  conducting  the  business 
or  to  the  premises  at  which  it  is  being  or  has  been  conducted.  No  allowance 
for  obsolescence  will  be  made  in  any  case  where,  in  connection  with  the 
operation  of  his  previous  business,  the  taxpayer  has  developed  a good-will, 
trade-mark,  or  trade  brand  that  will  be  valuable  in  continuing  a lawful 
business  after  June  30,  1919. 

3555  The  values  will  be  based  on  those  as  at  Alarch  1,  1913,  if  the  good- 
will, trade  marks,  or  trade  brands  were  acquired  or  established  prior 

to  that  date,  or  at  the  actual  cost  thereof,  if  acquired  subsequent  to  February 
28,  1913. 

3556  Information  helpful  in  establishing  the  values  would  be  of  the 
following  general  character: 

3657  A.  Where  the  good-will,  trade  marks,  or  trade  brands  were  acquired 
prior  to  A4arch  1,  1913:  ^ ^ ^ 

1.  The  nature  of  business  (whether  distillers,  wholesalers,  or 
retailers,  or  a combination  thereof.) 

2.  Date  of  foundation  of  business  and  whether  organized  as 

502  TAX 


INC. 


9-16-19. 


an  individual,  partnership,  or  corporation.  Also  date  and  particularff 
of  each  change  in  the  ownership  or  form  of  organization  of  the 
business,  such  as  the  admission  or  retirement  of  a partner  or  partners; 
the  incorporation  of  a company  and  of  each  reorganization  thereof. 

3.  In  respect  to  the  trade-marks  or  trade  brands  for  which  a 
deduction  is  claimed: 

(a)  The  date,  established  and  by  w'hom. 

(b)  The  date  of  acquisition  by  the  present  owners. 

(c)  The  price  paid  therefor  and  whether  paid  in  cash  or  stock; 
if  the  latter,  state  the  basis  of  the  valuation  on  which  the  pur- 
chase price  was  determined. 

(d)  Tor  each  year  from  1900  or  the  date  of  the  establishment 
of  the  trade-mark  or  trade  brand,  if  subsequent  to  that  year  to 
1919  inclusive: 

■ (I)  Annual  sales  (quantity  and  amount). 

(II)  The  gross  profit  on  sales  (i.  e.,  the  difference  be- 
tween the  selling  price  and  the  cost  price  of  the  merchan- 
dise  sold). 

(III)  The  total  expenses  and  losses  of  the  business 
which,  when  deducted  from  the  gross  profit  on  sales,  will 
produce — 

(IV)  The  net  income. 

Where  the  records  permit,  the  sales  and  gross  profit  on 
sales  should  be  submitted  for  each  class  of  merchandise 
sold  and,  if  possible,  for  each  trade-mark  or  trade  brand  in 
respect  of  VvTich  a deduction  is  claimed. 

(V)  The  amount  of  capital  invested  in  the  business  (i.  e.,- 
capital  or  capital  stock  and  paid  in  or  earned  surplus  and 
undivided  profits)  as  at  the  beginning  of  each  year. 

(VI)  The  amount  included  in  the  invested  capital  at 
the  beginning  of  the  period  in  respect  of  good-will,  trade- 
marks, or  trade  brands  and  the  date  and  amount  of  each 
subsequent  addition  to  the  good-will,  trade-marks,  or  trade 
brands. 

(e)  Full  details  of  each  offer  to  purchase  any  of  the  trade- 
marks or  trade  brands,  setting  forth  in  particular  the  date  of 
each  offer,  by  whom  and  on  whose  behalf  made:  the  amount  of 
each  offer,  and  whether  payable  in  cash  or  stock;  and  the  date 
or  dates  on  which  the  purchase  price  was  proposed  to  be  paid, 
and  the  amounts  to  be  paid  on  each  such  date. 

4.  Where  a deduction  is  claimed  in  respect  of  good-will,  as 
distinct  from  trade-marks  or  trade  brands,  the  following  information 
should  be  submitted: 

(a)  The  date  of  acquisition,  and  from  whom  acquired. 

(b)  The  amount  paid  therefor  and  whether  paid  in  cash 
of  in  stock.  If  the  latter,  state  the  basis  of  the  valuation  on 
which  the  purchase  price  was  arrived  at. 

(c)  For  each  year  from  1900  or  the  date  of  acquisition,  if 
subsequent  to  that  year,  to  1919,  inclusive. 

(I)  The  annual  sales  of  the  business  (quantity  and 
amount)  classified,  if  possible,  as  to  the  various  kinds  of 
merchandise  sold. 

(II)  Gross  profit  on  each  class  of  merchandise  sold, 
or  if  the  records  do^  not  disclose  the  information,  the 
gross  profit  of  the  business  as  a whole. 

(III)  Total  yearly  expenses  and  losses  of  the  business 

503  TAX 


INC. 


which,  when  deducted  from  the  gross  profit  on  sales,  will 
produce — 

(IV)  The  net  income  from  the  business. 

(V)  The  amount  of  capital  invested  in  the  business 
(i.  e.,  capital  or  capital  stock  and  paid  in  or  earned  surplus 
and  undivided  profits),  as  at  the  beginning  of  each  year. 

(VI)  The  amount  included  in  invested  capital  at  the 
beginning  of  the  period  in  respect  of  good-will  and  the  date 
and  amount  of  each  subsequent  addition  to  good-will,  trade- 
marks, or  trade  brands. 

(d)  Full  details  of  each  offer  to  purchase  the  good-will, 
setting  forth  in  particular  the  date  of  each  offer;  by  whom 
and  in  whose  behalf  made;  the  amount  of  each  offer  and 
whether  payable  in  cash  or  in  stock,  and  the  date  or  dates  on 
which  the  purchase  price  was  proposed  to  be  paid,  and  if  on 
more  than  one  date,  the  amount  payable  on  each  such  date. 

3558  B.  Where  good-will,  trade-marks,  or  trade  brands  were  acquired 
Subsequent  to  February  28,  1913: 

(1)  Dates  of  acquisition  of  good-will  or  of  each  trade-mark  or 
trade  brand. 

(2)  From  whom  acquired. 

(3)  Purchase  price  of  good-will  or  of  each  trade-mark  or  trade 
brand. 

(4)  Whether  purchased  for  cash  or  stock;  if  the  latter,  state 
the  basis  of  the  valuation  on  which  the  purchase  price  was  arrived 
at. 

3559  Similar  information  to  that  suggested  in  A — 3d  and  3e,  and  in  A — 4 
should  also  be  furnished  for  each  of  the  five  years  prior  to  the  date 

of  acquisition,  and  for  each  year  thereafter  up  to  and  including  the  year  1919. 

3560  C.  In  the  case  of  good-will,  trade  marks,  and  trade  brands  acquired 
prior  to  March  1,  1913,  a statement  should  be  submitted  showing 

the  development  of  prohibition  and  local  option  laws  within  the  territory 
of  the  taxpayer  during  the  five  years  preceding  March  1,  1913.  Such  state- 
ment should  show  each  prohibition  or  local  option  law  enacted  by  any  State 
or  other  governmental  unit  within  the  business  territory  of  the  taxpayer, 
and  should  also  state  the  unsuccessful  efforts  at  such  legislation  during  such 
period.  (Letter  to  iVIr.  Levi  Cooke,  Washington,  D.  C.,  signed  by  Com- 
missioner Daniel  C.  Roper,  and  dated  June  21,  1919.) 


3561  Allowance  for  obsolescence  of  good-will,  trade-marks,  and  trade 
3554  brands  in  the  case  of  distillers,  dealers  in  liquors,  etc. — This  depart- 
ment has  considered  the  request  contained  in  your  letter  of  June  23 

last  for  a modification  of  the  ruling  relative  to  obsolescence  of  good-will, 
trade-marks  and  trade  brands  of  distillers  and  dealers  in  liquors,  the  value 
of  which  has  been  impaired  or  destroyed  by  prohibition  legislation,  con- 
tained in  this  department’s  letter  to  you  of  June  21.  The  particular  modi- 
fication you  desire  is  an  extension  of  the  period  set  forth  in  the  ruling  above 
referred  to  against  the  earnings  of  which  the  obsolescence  may  be  taken  as 
a deduction. 

3562  In  reply  you  are  advised  (1)  that  distillers  and  dealers  in  liquors 
are  entitled  to  make  a deduction  (based  upon  actual  cost  or  fair  mar- 
ket value  as  of  Alarch  1,  1913)  from  gross  Income,  on  account  of  depreciation 
or  obsolescence  of  their  intangibles,  such  as  good  will,  trade  marks,  trade 
brands,  etc.,  such  deduction  being  limited  to  assignable  assets,  the  value  of 
which  has  been  destroyed  by  prohibition  legislation,  and  (2)  that  in  arriving 
at  the  taxable  income  for  the  first  taxable  year  ending  on  or  after  January  31, 


INC. 


504  TAX 


9-24-19. 


1918,  the  obsolescence  fully  accrued  on  that  date  is  to  be  allowed  as  a deduction 
in  computing  the  income  subject  to  taxation  under  the  Revenue  Act  of  1918, 
plus  a further  deduction  of  such  proportion  of  the  remaining  value  of  the  in- 
tangible assets  as  the  interval  between  January  31,  1918,  and  the  end  of  the 
taxable  year  bears  to  the  total  interval  between  January  31,  1918,  and 
January  16,  1920,  (unless  at  an  earlier  date  the  taxpayer  discontinues  his 
business,  in  which  case  such  earlier  date  shall  mark  the  close  of  the  period), 
and  (3)  that  for  any  taxable  year  following  the  taxable  year  just  referred  to 
a deduction  In  respect  of  the  value  of  such  intangible  assets  on  January  31, 
1918,  based  upon  a ratable  distribution  will  be  permissible. 

3663  It  Is  the  opinion  of  the  department  that  the  ratification  of  the  18th 
amendment  in  the  month  of  January,  1918,  by  the  States  of  Massa- 
chusetts, Maryland,  and  Kentucky,  was  the  first  definite  Indication  that  the 
prohibition  amendment  would  be  ratified  by  the  requisite  number  of  State 
Legislatures,  and  therefore  that  on  January  31,  1918,  a computable  portion 
of  the  cost  of  good  will,  trade  marks,  trade  brands,  or  the  value  thereof,  on 
March  1,  1913,  if  acquired  prior  thereto  (excluding  any  Intangibles  acquired 
since  that  date,  the  expenditures  of  which  were  deductible  and  had  been 
deducted  in  computing  Income  for  tax  purposes)  had  become  obsolescent. 
On  January  31,  1918,  the  intangllbe  assets  had  an  actual  value,  viz.:  the 
then  present  value  of  the  Income  to  be  derived  therefrom  between  that  date 
and  January  16,  1920,  or  at  an  earlier  date  should  the  taxpayer  discontinue 
his  business  prior  thereto.  This  value  as  stated  above  should  be  distributed 
ratably  over  the  period  from  January  31,  1918,  to  January  16,  1920  (unless 
at  an  earlier  date  the  taxpayer  discontinues  his  business,  In  which  case 
such  earlier  date  shall  mark  the  close  of  the  period).  The  excess  of  the  cost 
of  the  Intangibles  or  the  value  thereof,  on  March  1,  1913,  if  acquired- prior 
thereto  (subject  to  the  exclusions  mentioned  above),  over  the  value  thereof, 
as  of  January  31,  1918,  determined  as  outlined  above,  will  represent  the 
amount  of  obsolescence  that  was  fully  accrued  on  January  31,  1918.  (Letter 
to  Mr.  Levi  Cooke,  Washington,  D.  C.,  signed  by  Acting  Commissioner 
J.  H.  Callan,  and  dated  August  19,  1919.) 

3564  Continued  use  of  old  ownership  certificates. — Old  forms  of  ownership 
f3323  certificates  may  be  accepted  pending  Issuance  of  Treasury  Decision 
m ^ fnow  in  course  of  preparation  on  the  subject.  (Letter  to  The  Chase 
National  Bank,  New  York,  N.  Y.,  signed  by  P.  S.  Talbert,  Acting  Assistant 
to  the  Commissioner,  and  dated  September  11,  1919.) 


(T.  D.  2918.) 

3565  Further  instructions  relative  to  acceptance  of  Treasury  certificates 
3518  of  indebtedness  for  income  and  profits  taxes,  supplementing  Articles 
1721  and  1732,  Regulations  45. — ^T.  D.  2907  [^[3518]  approved  August 
7,  1919,  as  to  the  acceptance  of  Treasury  certificates  of  Indebtedness  in  payment 
of  Income  and  profits  taxes.  Is  hereby  amended  by  striking  out  the  first  sen- 
tence in  the  second  paragraph  reading  “Deposits  of  Treasury  certificates  of 
indebtedness  received  In  payment  of  Income  and  profits  taxes  must  be  made 
by  collectors  with  the  Federal  Reserve  Banks  of  the* districts  In  which  the 
respective  collectors’  offices  are  located,  unless  otiuerwise  specifically  Instructed 
by  the  Secretary  of  the  Treasury,”  and  Inserting  in  lieu  thereof,  the  following: 
“Deposits  of  Treasury  certificates  of  Indebtedness  received  In  payment  of 
income  and  profits  taxes  must  be  made  by  collectors,  unless  otherwise  speci- 
fically instructed  by  the  Secretary  of  the  Treasury,  with  the  Federal  Reserve 
Bank  of  the  district  in  which  the  collector’s  head  office  is  located,  or  in  case 
such  head  office  is  located  in  the  same  city  with  a branch  Federal  Reserve 
Bank,  with  such  branch  Federal  Reserve  Bank.”  (T.  D.  2918,  signed  by 
Commissioner  Daniel  C.  Roper,  and  dated  September  12,  1919.) 

505  TAX 


INC. 


(T.  D.  2920.) 


^ses  Providing  for  relief  of  domestic  corporations  which  have  assumed 
604  payment  of  income  tax  in  respect  to  tax-free  covenant  bonds  owned 
2997  by  non-resident  aliens  who  are  entitled  to  credits  for  personal 
exemption  and  dependents,  but  whose  incomes  from  sources  in  the 
United  States  do  not  exceed  such  credits.— The  final  edition  of  Regulations 
No.  45  is  amended  by  inserting  immediately  after  Article  363,  a paragraph 
which  will  be  known  as  Article  363a  as  follows: 

Article  363a.  Personal  exemption  of  non-resident  aliens.  In  case  a non- 
resident alien  is  entitled  to  personal  exemption  and  credits  for  dependents 
in  accordance  with  Paragraphs  (c),  (d),  (e),  of  Section  216  of  the  Revenue 
Act  of  1918,  and  his  gross  income  from  sources  in  the  United  States,  including 
bond  interest,  does  not  exceed  his  personal  exemption  and  credits  for  depen- 
dents, a certificate.  Form  100 IB,  should  be  executed  and  filed  with  the  with- 
holding agent,  if  any  part  of  the  gross  income  is  derived  from  interest  upon 
bonds  of  a domestic  corporation  which  contain  a tax-free  covenant  clause. 
The  certificate  may  be  filed  with  the  withholding  agent  at  the  end  of  the 
calendar  year  but  not  later  than  February  first  of  the  succeeding  year  and  all 
such  certificates  should  be  attached  to  the  annual  list  return.  Form  1013. 
The  amount  of  tax  due  from  the  withholding  agent  as  shown  by  Form  1013, 
may  be  reduced  by  2 per  cent  of  the  aggregate  amount  of  interest  payments 
made  to  the  nonresident  alien  upon  tax-free  covenant  bonds  during  the 
calendar  year,  and  the  amount  of  tax  represented  by  the  certificates,  payment 
of  which  was  assumed  on  monthly  list  return.  Form  1012,  will  not  be  included 
in  the  assessment  against  the  withholding  agent.  The  certificate  may  be 
filed  only  by  a citizen  or  subject  of  the  countries  enumerated  in  Paragraph  (a) 
or  (b)  of  Article  307,  as  amended  [1[3517].  In  case  tax  in  excess  of  a non- 
resident alien’s  tax  liability  has  been  withheld  from  interest  upon  bonds  which 
do  not  contain  a tax-free  covenant  clause,  the  nonresident  alien  should 
file  or  cause  to  be  filed  with  the  collector  of  internal  revenue  a return  of  his 
gross  income  from  all  sources  within  the  United  States,  accompanied  by  a 
claim  for  refund  on  Form  46.  (T.  D.  2920,  signed  by  Commissioner  Daniel 

C.  Roper,  and  dated  September  15,  1919.) 


3567  Amount  of  tax  paid  by  debtor  on  account  of  tax-free-covenant  bond 
2841  interest  additional  income  to  creditor  on  whose  account  the  tax 

3322  v/as  paid. — Pvcceipt  is  acknowledged  of  your  letter  of  June  20,  1919, 

asking  for  advice  in  regard  to  the  office  ruling  which  authorizes 
increase  of  the.income  by  the  2%  normal  tax  paid  by  the  debtor  corporation 
on  bonds  containing  a tax-free-covenant  clause.  reply  you  are  informed 

that  this  office  holds  that  the  obligor,  in  pursuance  of  a contract  voluntarily 
entered  into,  guaranteed  to  pay  a direct  liability  of  the  taxpayer  which 
consisted  in  paying  a certain  amount  of  normal  tax  for  him  to  the  Govern- 
ment. The  reduction  of  the  payment  of  his  tax  liability  under  such  a contract 
constitutes  income  to  him  by  reducing  his  expenditures  in  that  amount. 
The  fact  that  the  amount  of  the  liability  was  paid  direct  to  the  Government 
instead  of  to  the  taxpayer  and  by  him  to  the  Cjovernment,  does  not  preclude 
such  an  amount  from  constituting  income  to  the  taxpayer.  (Letter  to  Hugh 
W.  Martin,  Secretary,  Northwestern  Trust  Company,  St.  Paul,  Minnesota, 
signed  by  J.  H.  Callan,  Assistant  to  the  Commissioner,  by  Geo.  V.  Newton, 
Head  of  Division,  and  dated  September  13,  1919.) 


INC. 


506  TAX 


9-26-19. 


(T.  D.  2922.) 

3568  Amending  Article  307,  final  edition  of  Regulations  45,  dealing  with 
2972a  non-resident  alien  individual  entitled  to  personal  exemption  and 
35 1 7 credit  for  dependents. — The  final  edition  of  Regulations  45  is  amended 

) by  changing  Article  307  to  read  as  follows: 

Art.  307.  When  nonresident  alien  individual  entitled  to  personal  exemp- 
tion: (a)  The  following  is  an  incomplete  list  of  countries  which  either  impose 
no  income  tax  or  in  imposing  an  income  tax  allow  both  a personal  exemption 
and  a credit  for  dependents  [which  satisfy  the  similar  credit  requirement 
of  the  statute;  Argentina;  Belgium;  Pohemia;  Bolivia;  Bosnia;  Brazil; 
Bukowina;  Canada;  Carinthia;  Carniola;  China;  Chile;  Cuba;  Dalmatia; 

^ Denmark;  Ecuador;  Egypt;  France;  Galicia;  Goritz;  Gradisca;  Herze- 

govina; Istria;  Lower  Austria;  Mexico;  Montenegro;  Moravia;  Morocco; 
Newfoundland;  Nicaragua;  Norway;  Panama;  Paraguay;  Persia;  Peru; 
Portugal;  Roumania;  Russia  (including  Poles  owing  allegiance  to  Russia); 
Salzburg;  Santo  Domingo;  Serbia;  Siam;  Silesia;  Styria;  Spain;  Trieste; 
Tyrol;  Upper  Austria;  Union  of  South  Africa;  Venezuela,  (b)  The  following 
is  an  incomplete  list  of  countries  which  in  imposing  an  income  tax  allow  a 

I personal  exemption  which  satisfy  the  similar  credit  requirement  of  the  statute, 

but  do  not  allow  a credit  for  dependents:  Bachka;  Banat  of  Temesvar; 
Croatia;  Salvador;  India;  Italy;  Slavonia;  Slovakia;  Transylvania, 
(c)  The  following  is  an  incomplete  list  of  countries  which  in  imposing  an 
income  tax  do  not  allow  to  citizens  of  the  United  States  not  residing  in  such 
country  either  a personal  exemption  or  a credit  for  dependents  and,  there- 
fore, fail  entirely  to  satisfy  the  similar  credit  requirement  of  the  statute: 
Australia;  Costa  Rica;  Great  Britain  and  Ireland;  Japan;  The  Netherlands; 
New  Zealand;  Sweden.  The  former  names  of  certain  of  these  territories 
are  here  used  for  convenience,  in  spite  of  an  actual  or  possible  change  in  name 
or  sovereignty.  A nonresident  alien  individual  who  is  a citizen  or  subject 
of  any  country  in  the  first  list  is  entitled  for  the  purpose  of  the  normal  tax 
to  such  credit  for  a personal  exemption  and  for  dependents  as  his  family 
status  may  warrant.  If  he  is  a citizen  or  subject  of  any  country  in  the  second 
list  he  is  entitled  to  a credit  for  personal  exemption,  but  to  none  for  dependents. 
If  he  is  a citizen  or  subject  of  any  country  in  the  third  list  he  is  not  entitled 
to  credit  for  either  a personal  exemption  or  for  dependents.  If  he  is  a citizen 
' or  subject  of  a country  which  is  in  none  of  the  lists,  then  to  secure  credit  for 
either  a personal  exemption  or  for  dependents  he  must  prove  to  the  satis- 
faction of  the  Commissioner  that  his  country  does  not  impose  an  income  tax 
or  that  in  imposing  an  income  tax  it  grants  the  similar  credit  required  by  the 
statute.  (T.  D.  2922,  signed  by  Commissioner  Daniel  C.  Roper  and  dated 
September  18,  1919.) 

3569  Tax  liability  and  withholding  obligation  on  bond  interest  collected 

3431  and  paid  in  year  subsequent  to  that  in  which  the  interest  became 
3551  due  and  payable. — [Comment.  In  view  of  the  conflict  of  the  follow- 

ing ruling  with  that  shown  at  113551,  dated  four  days  earlier,  it  seemed 

to  us  advisable,  before  reproducing  Mr.  Talbert’s  telegram  to  A.  Iselin  & 
Co.,  to  call  both  rulings  to  the  attention  of  the  Bureau,  specifically,  with  the 
request  that  we  be  advised  which  of  the  two  does  in  fact  set  forth  the  attitude 
of  the  Government  relative  to  the  withholding  feature.  Having  done  so, 
we  are  now  advised,  orally,  that  the  ruling  given  to  A.  Iselin  & Co.,  that  is, 
the  following,  controls.  The  Corporation  Trust  Company,  September  23, 
1919.] — Bond  interest  represents  income  to  taxpayer  when  due  and  payable 
in  accordance  with  article  54,  Regulations  45  [1f2862d].  No  tax  required  to 
be  withheld  from  interest  upon  bonds  due  prior  to  March  1,  1913,  but  paid 
subsequent  to  that  date.  Interest  due  on  and  after  March  1,  1913,  subject 
to  withholding  at  rates  in  force  at  time  of  payment  but  in  case  excess  tax 
is  withheld  and  paid  to  (Tovcrnment  claim  for  refund  on  Form  46  will  be  con- 
sidered. (Telegram  to  A.  Iselin  & Co.,  New  York,  N.  Y.,  signed  by  P.  S., 
Talbert,  Acting  Assistant  to  the  Commissioner,  and  dated  September  8, 
1919.) 

INC.  507  TAX 


(1.  T.-Mim.  2221.) 

3570  Consolidated  returns:  Apportionment  and  payment  of  tax. — In 

1407  connection  with  the  assessment  and  payment  of  income  and  profits 
3234  taxes  of  affiliated  corporations,  the  opinion  apparently  prevails 
among  taxpayers  that  the  tax  must  be  assessed  against  and  paid  by 
each  corporation  within  an  affiliated  group.  Unless  a subsidiary  has  made  a 
payment,  the  Bureau  greatly  prefers  that  the  parent  or  principal  reporting 
corporation  take  up  and  pay  the  entire  tax,  making  any  desired  adjustment 
thereof  by  charging  the  affiliated  corporations  through  their  own  records. 

3571  The  amount  reported  by  the  subsidiary  in  answer  to  Question  9, 
Form  1122,  will  be  used  as  the  basis  for  assessment  and  payment.  If 

the  subsidiaries  have  reported  an  apportionment  in  this  manner,  but  the 
parent  corporation  has  paid  the  tax  installments  on  account  of  such  sub- 
sidiaries, an  amended  Form  1122  showing  “none”  in  answer  to  Question  9, 
should  be  filed.  If  the  last  condition  obtains,  but  the  taxpayer  insists  upon 
apportionment,  the  Collector  of  the  subsidiary’s  district  will  request  abate- 
ment of  such  portion  of  the  subsidiary’s  tax  as  may  have  been  previously 
paid  by  the  parent  corporation  in  another  district. 

3572  As  a basis  for  such  advice,  the  latter  Collector  will  secure  from  the 
parent  corporation  a schedule  showing  apportionment  of  the  total 

tax  and  installments  to  the  respective  affiiliated  corporations.  If  a sub- 
sidiary has  filed  a tentative  return  and  paid  an  installment  of  the  tax,  it 
should  be  assessed  the  amount  shown  on  Form  1122,  and  will  pay  future  in- 
stallments as  they  fall  due.  (I.  T.-Mim.  2221,  signed  by  Commissioner 
Daniel  C.  Roper,  and  dated  August  8,  1919.) 

(T.  D.  2923.) 

3573  Authorizing  debtor  corporations  and  withholding  agents  to  accept 
3323  old  forms  of  ownership  certificates  with  respect  to  interest  due  on 
3564  and  prior  to  November  1,  1919,  when  received  from  continental 

United  States  and  with  respect  to  interest  due  on  and  prior  to  De- 
cember 1,  1919,  when  received  from  abroad. — 1.  In  view  of  the  fact  that 
the  revised  forms  of  ownership  certificates  were  placed  at  the  disposal  of 
the  public  over  three  months  ago,  this  office  is  of  the  opinion  that  a reason- 
able period  of  time  has  elapsed  in  which  to  permit  the  public  to  have  become 
familiar  with  them.  In  order,  however,  to  prevent  inconvenience  to  indi- 
A'dduals  and  organizations  required  to  use  such  forms,  old  forms  of  ownership 
certificates  will  be  accepted  with  respect  to  interest  due  on  and  prior  to 
November  1,  1919,  when  received  from  continental  United  States,  and  w'i  th 
respect  to  interest  due  on  and  prior  to  December  1,  1919,  when  received 
from  abroad, 

3574  2.  Banks  and  collecting  agents,  debtor  corporations,  and  withhold" 
ing  agents  shall  refuse  to  accept  the  old  forms, _ in  connection  with 

interest  due,  after  the  respective  dates  named  herein,  and  Collectors  of  In- 
ternal Revenue  receiving  monthly  returns  accompanied  by  certificates  on 
the  old  forms,  when  it  shall  appear  that^such^  certificates  were  filed  with 
debtor  corporations  or  withholding  agents,  with  respect  to  interest  due  sub- 
sequent to  such  dates,  shall  require  the  debtor  corporation  or  withholding 
agent  concerned  to  secure  certificates  on  the  revised  forms. 

3575  3.  In  order  that  the  fulfillment  of  the  requirements  herein  provided 
may  cause  as  little  hardships  as  possible  to  individuals,  banks,  col- 
lecting agents,  debtor  corporations,  etc..  Collectors  should  satisfy  them- 
selves that  they  have  a sufficient  supply  of  the  revised^ forms  on  hand  to 
meet  anticipated  demands  and^where  the  supply  is  not  deemed  sufficient. 


INC 


508  TAX 


9-29-19. 


requisition  should  be  made  without  delay  for  such  additional  (quantity  as 
may  be  necessary.  Collectors  are  requested  to  disseminate  this  informa- 
tion throughout  their  districts  as  quickly  as  possible.  (T.  D.  2923,  signed 
by  Commissioner  Daniel  C.  Roper  and  dated  September  24,  1919.) 

3576  - Tax  liability  and  withholding  obligation  on  bond  interest  collected 
3551  and  paid  in  year  subsequent,  to  that  in  which  the  interest  became 

3569  due  and  payable. — Reference  is  made  to  office  letter  of  September 

5,  1919,  [Sept.  4:  ^3551]  in  which  you  were  given  a ruling  in  answer 
to  your  inquiry  of  June  26,  1919,  relative  to  the  rate  of  withholding  which 
attaches  to  interest  coupons  maturing  in  one  year  and  presented  for  pay- 
ment in  a subsequent  year  during  which  withholding  is  required  at  a differ- 
ent specified  rate.  TfYou  are  advised  that  after  further  consideration  of  the 
subject  matter  of  your  letter  of  June  26,  1919,  this  office  is  of  the  opinion 
that  the  second  and  third  paragraph  of  office  letter  of  September  5,  1919 
[Sept.  4:  1(3551],  should  have  read:  K‘Tn  reply  you  are  advised  that  Article 
54  of  Regulations  45  [lf2862d]  states  specifically  that  where  interest  coupons 
have  matured  but  have  not  been  cashed,  such  interest  payment  though  not 
collected  when  due  and  payable,  is  nevertheless  available  to  the  taxpayer 
and  should  therefore  be  included  in  his  gross  income  for  the  year  in  which 
the  coupons  matured.  IfArticle  371  [1(3003]  states  that  in  the  case  of  every 
payment  made  after  February  24,  1919,  the  withholding  agent  must  with- 
hold at  the  rates  prescribed  by  the  present  statute  from  the  whole  pay- 
ment, not  merely  from  that  part  which  applies  to  the  period  after  February 
24,  1919.  Hence,  in  the  case  of  the  foreign  owners  of  American  securities 
whose  interest  coupons  matured  during  the  years  1915,  1916,  1917  and  1918 
but  which  were  not  presented  for  payment  until  the  year  1919,  the  amount 
of  these  coupons  should  have  been  entered  as  income  on  their  returns  ren- 
dered for  the  years  in  which  the  coupons  matured  but  the  withholding  agent 
was  required  to  withhold  from  these  coupons  at  the  rate  in  force  at  the  time 
of  payment  and  in  case  excess  tax  was  withheld  and  paid  to  the  Govern- 
ment by  reason  of  this  requirement,  the  owners  of  the  bonds  to  which  you 
refer  may  exercise  their  privilege  of  filing  with  the  collector  on  Form  46  a 
claim  for  refund  of  that  portion  of  the  tax  withheld  which  was  in  excess  of 
their  true  liability.”  KTherefore,  you  will  disregard  office  letter  of  Septem- 
ber 5,  1919  [Sept.  4:  ^3551]  and  be  governed  by  the  ruling  given  herein. 
(Letter  to'Morris  F.  Frey,  Guaranty  Trust  Company,  New  York,  N.  Y., 
signed  by  P.  S.  Talbert,  Acting  Assistant  to  the  Commissioner,  by  C.  R. 
Trobridge,  Acting  Head  of  Division,  and  dated  September  23,  1919.) 


(T.  D.  2924.) 

3577  Modification  of  Articles  1566  and  1567  of  Regulation  45. — 1.  Article 

3106a  1566  of  Regulations  45,  first  authorized  April  17,  1919,  is  considered 

as  not  being  warranted  in  law,  and  is  hereby  modified  to  read: 
‘‘Art.  1566.  Exchange  of  property  and  stock. — Where  property  is 
transferred  to  a corporation  in  exchange  for  its  stock,  the  exchange  constitutes 
a closed  transaction  and  the  former  owner  of  the  property  realizes  a gain  or 
loss  if  the  stock  has  a market  value,  and  such  market  value  is  greater  or  less 
than  the  cost  or  the  fair  market  value  as  of  Alarch  1,  1913  (if  acquired  prior 
thereto),  of  the  property  given  in  exchange.  For  the  rule  applicable  where 
a corporation,  in  connection  with  a reorganization,  merger  or  consolidation, 
exchanges  property  for  stock,  see  Article  1567.” 

3578  2.  Article  1567  of  Regulations  45,  as  amended  by  Treasury  Decision 

3432  2870,  is  amended  to  read  as  follows: 

“Art.  1567.  Exchange  of  stock  for  other  stock  of  no  greater  par  value. 
— In  general,  where  two  (or  more)  corporations  unite  their  properties  by  either 

INC.  509  TAX 


(a)  the  dissolution  of  corporation  B and  the  sale  of  its  assets  to  corporation  A, 
or  (b)  the  sale  of  its  property  by  B to  A and  the  dissolution  of  B,  or  (c)  the 
sale  of  the  stock  of  B to  A and  the  dissolution  of  B,  or  (d)  the  merger  of 
B into  A,  or  (e)  the  consolidation  of  the  corporations,  no  taxable  income  is 
received  from  the  transaction  by  A or  B or  the  stockholders  of  either,  provided 
the  sole  consideration  received  by  B and  its  stockholders  in  (a),  (b),  (c),  and 
(d)  is  stock  or  securities  of  A,  and  by  A and  B and  their  stockholders  in  (e) 
is  stock  or  securities  of  the  consolidated  corporation,  in  any  case  of  no  greater 
aggregate  par  or  face  value  than  the  old  stock  and  securities  surrendered. 
The  term  ‘reorganization’,  as  used  in  Section  202  of  the  statute,  includes 
cases  of  corporate  readjustment  where  stockholders  exchange  their  stock 
for  the  stock  of  a holding  corporation,  provided  the  holding  corporation  and 
the  original  corporation,  in  which  it  holds  stock,  are  so  closely  related  that 
the  two  corporations  are  affiliated  as  defined  in  Section  240  (b)  of  the  statute 
and  article  633  [^3235],  and  are  thus  required  to  file  consolidated  returns. 
So-called  ‘no-pai-value  stock’  issued  under  a statute  or  statutes  which  require 
the  corporation  to  fix  in  a certificate  or  on  its  books  of  account  or  otherwise 
an  amount  of  capital  or  an  amount  of  stock  issued  which  may  not  be  impaired 
by  the  distribution  of  dividends,  will  for  the  purpose  of  this  section  be  deemed 
to  have  a par  value  representing  an  aliquot  part  of  such  amount,  proper 
account  being  taken  of  any  preferred  stock  issued  with  a preference  as  to 
principal.  In  the  case  (if  any)  in  which  no  such  amount  of  capital  or  issued 
stock  is  so  required,  ‘no-par-value  stock’  received  in  exchange  will  be  regarded 
for  purposes  of  this  section  as  having  in  fact  no  par  or  face  value,  and  ]con- 
sequently  as  having  ‘no  greater  aggregate  par  or  face  value’  than  the  stock 
or  securities  exchanged  therefor.”  (T.  D.  2924,  signed  by  Commissioner 
Daniel  C.  Roper,  and  dated  September  26,  1919.)  [Comment:  We  are  ad- 
vised orally  by  the  Bureau,  in  response  to  our  specific  inquiry,  that  the  above 
T.  D.  2924  is  effective  as  if  the  two  Articles  had  been  so  issued  originally  in 
Regulations  No.  45.  See  ^2592. — ^The  Corporation  Trust  Company.] 


(T.  D.  2925.) 

3579  Bonds  under  Sections  214  (a)  (12),  234  (a)  (14),  and  1320  of  the 
Revenue  Act  of  1918. — Sections  214  (a)  (12)  and  234  (a)  (14)  of  the 

Revenue  Act  of  1918  provide  in  part  as  follows  [^1119  and  ^2215]: 

“At  the  time  of  filing  return  for  the  taxable  year  1918  a taxpayer 
may  file  a claim  in  abatement  based  on  the  fact  that  he  has  sustained  a 
substantial  loss  (whether  or  not  actually  realized  by  sale  or  other  dis- 
position) resulting  from  any  material  reduction  (not  due  to  temporary 
fluctuation)  of  the  value  of  the  inventory  for  such  taxable  year,  or  from 
the  actual  payment  after  the  close  of  such  taxable  year  of  rebates  in  pur- 
suance of  contracts  entered  into  during  such  year  upon  sales  made 
during  such  year.  In  such  case  payment  of  the  amount  of  the  tax 
covered  by  such  claim  shall  not  be  required  until  the  claim  is  decided, 
but  the  taxpayer  shall  accompany  his  claim  with  a bond  in  double  the 
amount  of  the  tax  covered  by  the  claim,  with  sureties  satisfactory"  to  the 
Commissioner,  conditioned  for  the  payment  of  any  part  of  such  tax 
found  to  be  due,  with  interest.” 

3580  Section  1320  of  the  same  Act  provides,  in  part  [*  2220]: 

“That  wherever  by  the  laws  of  the  Uinted  States  or  regulations 
made  pursuant  tliereto,  any  person  is  required  to  furnish  any  recogniz- 
ance, stipulation,  bond,  guaranty,  or  undertaking,  hereinafter  called 
‘penal  bond’,  with  surety  or  sureties,  such  person  may,  in  lieu  of  such 
surety  or  sureties,  deposit  as  security  with  the  official  having  authority 
to  approve  such  penal  bond.  United  States  Liberty  bonds  or  other  bonds 
of  the  United  States  in  a sum  equal  at  their  par  value  to  the  amount  of 

510 


INC. 


TAX 


10  3-19. 


such  penal  bond  required  to  be  furnished,  together  with  an  agreement 
authorizing  such  official  to  collect  or  sell  such  bonds  so  deposited  in- 
case of  any  default  in  the  performance  of  any  of  the  conditions  or  stipu- 
lations of  such  penal  bond.  The  acceptance  of  such  United  States  bonds 
in  lieu  of  surety  or  sureties  required  by  law  shall  have  the  same  force  and; 
effect  as  individual  or  corporate  sureties,  or  certified  checks,  bank  drafts^,, 
post-office  money  orders,  or  cash,  for  the  penalty  or  amount  of  such  penal 
bond.  The  bonds  deposited  hereunder  and  such  other  United  States^ 
bonds  as  may  be  substituted  therefor  from  time  to  time  as  such  security^  , 
may  be  deposited  wdth  the  Treasurer,  * * * United  States, 

* * * which  shall  issue  receipt  therefor,  describing  such  bonds  sc  ' 
deposited.  As  soon  as  security  for  the  performance  of  such  penal  bond  is 
no  longer  necessary,  such  bonds  so  deposited,  shall  be  returned  to  the  " 
depositor.” 

3581  Article  268  of  Regulations  No.  45  [^2963g]  provides  in  part  as 
follows,  relative  to  claims  for  losses  in  inventory  and  from  rebates: 

“In  the  case  of  a claim  in  abatement  filed  with  a return  payment  of  the 
amount  of  the  tax  covered  thereby  shall  not  be  required  until  the  claim 
is  decided,  provided  the  taxpayer  files  therewith  a bond  on  Form  1124 
in  double  the  amount  of  the  tax  covered  by  the  claim,  conditioned  for  the 
payment  of  any  part  of  such  tax  found  to  be  due  with  interest  at  the  rate; 
of  12  per  cent  per  annum.  The  bond  shall  be  executed  by  a surety 
company  holding  a certificate  of  authority  from  the  Secretary  of  the.. 
Treasury  as  an  acceptable  surety  on  Federal  bonds  and  shall  be  subject 
to  the  approval  of  the  Com^missioner.” 

3582  The  bond  executed  on  Form  1124  [Supplementary  Page  50],  pur- 
suant to  Article  268  of  Regulations  No.  45,  together  with  the  abate- 
ment claim,  should  be  forwarded  by  the  collector  to  the  Commissioner  of 
Internal  Revenue.  When  it  is  received  by  the  Commissioner  it  will  be  de- 
tached from  the  abatement  claim  and  forwarded  the  Surety  Bond  Section 
of  the  Treasury  Department  for  certification  as  to  the  sufficiency  of  the 
sureties.  The  Surety  Bond  Section  will,  after  certification,  return  the  bond 
to  the  Commissioner  for  his  approval.  When  he  has  approved  the  bond  he 
will  cause  it  to  be  attached  to  the  abatement  claim. 

3583  In  case  the  claimant,  in  accordance  with  the  provisions  contained  iir. 
Section  1320  of  the  Revenue  Act  of  1918,  elects  to  offer,  in  lieu  of 

the  surety  or  sureties  provided  for  on  Form  1124,  United  States  Liberty- 
Bonds  or  other  bonds  of  the  United  States  as  security  he  should  execute  iru 
duplicate  a bond  and  agreement  on  Form  1124a,  prescribed  below.  The 
original  should  accompany  the  United  States  bonds  offered  as  security;  the 
duplicate  should  be  forwarded  by  the  collector  with  the  abatement  claim  tO' 
the  Commissioner.  If  such  bond  and  agreement  is  executed  by  a corpora- 
tion a duly  certified  copy  of  the  resolution  of  the  board  of  directors,  author- 
izing the  execution,  should  be  attached.  The  United  States  Liberty  Bonds^ 
or  other  bonds  of  the  United  States,  offered  as  security,  shall  at  their  par 
value  be  not  less  than  the  amount  of  the  penal  sum  of  the  bond  executed  on 
Form  1124a,  which  shall  be  in  double  the  amoun't  of  the  tax  covered  by  the 
abatement  claim.  The  bonds  so  offered  as  security  must  be  delivered  to  the 
Commissioner  of  Internal  Revenue  at  the  obligor’s  risk  and  expense.  I Cou- 
pon bonds  cannot  safely  be  forwarded  by  registered  mail  unless  insured  by 
the  obligor  against  risk  of  loss  in  transit.  Registered  bonds  so  offered  as 
security  must  be  registered  in  the  name  of  the  obligor  and  duly  assigned; 
to  the  Commissioner  of  Internal  Revenue  at  or  before  the  date  of  deposit 
with  the  Commissioner  and  need  not  be  insured  when  forwarded  by  regis- 
tered mail,  unless  the  obligor  so  elects.  In  connection  with  effecting  in- 
surance of  bonds  shipped  reference  is  made  to  Article  187  (a)  of  Regulations- 
No.  2,  Revised. 


INC. 


511 


TAX 


'3584  The  Commissioner  of  Internal  Revenue  will  issue  a receipt  in  dupli- 
• • United  States  Bonds  so  deposited  with  him  as  security  the 

original  of  the  receipt  to  be  given  to  the  obligor  and  the  duplicate  to  be 
retained  by  the  Commissioner  for  his  files.  Upon  receipt  by  the  Commis- 
sioner  of  the  United  States  Bonds  so  offered  as  security  and  upon  satisfying 
himself  as  to  their  ownership  and  as  to  the  sufficiency  of  the  agreement  for 
him  to  collect  or  sell,  and  in  case  of  registered  bonds  as  to  the  regularity  of 
the  assignments,  he  will  approve  the  bond  executed  on  Form  1124a  and 
aeposit  the  United  States  Bonds  offered  as  security  with  the  Treasurer  of  the 
United  States,  as  provided  in  paragraph  7 of  Department  Circular  No.  154 
(1919),  dated  June  30,  1919,  and  the  Treasurer  of  the  United  States  will,  as 
provided  in  said  circular,  give  receipt  therefor  in  duplicate  describing  the 
bonds  so  deposited,  the  original  to  be  delivered  to  the  Commissioner  of  In- 
ternal Revenue  and  the  duplicate  to  be  retained  by  the  Treasurer  for  his 
hies. 

3E85  Bonds  of  the  United  States  shall  be  returned  to  the  obligor  as  soon 
as  the  security  for  the  performance  of  such  penal  bond  is  no  longer 
necessary.  Registered  bonds  shall  be  reassigned  to  the  owner  when  the  lia- 
bility is  cancelled. 

3586  These  special  instructions  are  prescribed  for  the  guidance  of  collect- 
ors of  internal  revenue  pursuant  to  the  provisions  of  Treasury  De- 
partment  Circular  No.  154  as  to  the  acceptance  of  United  States  Bonds  in 
lieu  of  surety  or  sureties  on  penal  bonds.  (T.  D.  2925,  signed  by  Commis- 
sioner Daniel  C.  Roper,  and  dated  September  26,  1919.) 


3587  Organization  of  a Committee  of  Review  and  Appeals  to  take  over 

3124  the  work  of  the  Advisory  Tax  Board  which  goes  out  cf  existence 
^ on  October  1. — Taxpayers  in  many  parts  of  the  country  have  ex- 

pressed interest  in  the  plans  of  the  Bureau  for  continuing  the  important 
work  entrusted  to  the  Advisory  Tax  Board.  The  function  of  the  Board  has 

' been  to  review,  upon  appeal,  the  administrative  decisions  of  the  Income 
Tax  Unit  in  important  income  and  excess  profits  cases,  particularly  cases 
involving  exceptional  or  unusual  conditions  with  respect  to  questions  of 
invested  capital,  amortization,  depletion,  depreciation,  etc.  The  newly 
organized  Committee  on  Review  and  Appeal  will  take  over  this  highly  im- 
portant function,  and  taxpayers  are  assured  of  the  same  thoughtful  and  im- 
partial consideration  of  their  problems  that  has  been  a feature  of  the  w^ork  of 
the  retiring  Board. 

3588  P.  S.  Talbert,  head  of  the  Technical  Division  of  the  Income  Tax  Unit, 
has  been  selected  as  Chairman  of  the  Committee  because  of  his  ex- 

Geptional  experience  and  peculiar  qualifications  for  this  important  task. 
Mr.  Talbert  is  one  of  our  leading  experts  on  income  tax  matters.  He  worked 
continuously  with  the  Tax  Advisers  in  drafting  the  administrative  regulations 
for  the  enforcement  of  the  1917  law  and  has  also  played  an  important  part 
in  framing  the  regulations  under  the  Act  of  February  24,  1919.  Mr.  Talbert 
will  be  relieved  from  duty  as  Head  of  the  Technical  Division  in  order  that  he 
may  devote  his  entire  time  to  the  work  of  the  Committee. 

3589  The  individual  members  of  the  Committee  on  Review  and  Appeals 
will  be  selected  with  the  greatest  care  from  our  most  experienced  men 

in  order  that  their  combined  judgment  may  represent  the  best  experience 
and  highest  intelligence  of  the  Bureau’s  personnel.  I am  confident  that  this 
body  of  men  will  continue  in  a most  satisfactory  manner  the  work  inaugurated 
by  the  Advisory  Tax  Board  and  taxpayers  may  be  assured  of  courteous, 
intelligent  and  impartial  hearings.  (Announcement  by  Commissioner 
iDaniel  C.  Roper,  dated  September  27,  1919.) 


INC. 


512  TAX 


lO-lMO 


3590  Ownership  Certificates — DcQning  revised  forms  and  old  forms. 

3573  Referring  Treasury  Decision  2923,  please  define  Revised  Forms  and 
Old  Forms.  Do  you  consider  Forms  1000  and  1001  Revised  February, 
1919,  as  Revised  Forms  or  Old  Forms?  Please  telegraph  reply.  (Answer) 
Revised  Forms  of  ownership  certificates  are  those  issued  February,  1919, 
and  those  issued  subsequently.  . Old  Forms  are  certificates  in  use  prior  to 
February,  1919.  Forms  1000  Revised  February,  1919,  and  1001  Revised 
February,  1919,  considered  Revised  Forms.  (Telegram  from  The  Chase 
National  Bank,  New  York,  N.  Y.,  and  the  answer  thereto  signed  by  Com- 
missioner Daniel  C.  Roper,  and  dated  September  29,  1919.) 


3591  Interest  Coupons  Without  Ownership  Certificates — Affidavit 
3100a  required. — When  interest  coupons  are  unaccompanied  by  owner- 
ship certificates  affidavits  should  be  secured  by  first  bank  as  pro- 
vided in  Article  three  six  eight.  Regulations  forty-five.  Such  affidavit 
should  accompany  the  ownership  certificates  to  debtor  corporation  or 
withholding  agent  and  should  be  forwarded  to  collector  Internal  Revenue 
in  accordance  with  usual  procedure.  Separate  affidavit  required  with 
respect  to  each  interest  payment  upon  bonds  of  different  issue  and  with 
respect  to  each  different  due  date  of  same.  (Telegram  to  Boissevain  & Co., 
New  York,  N.  Y.,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated 
September  18,  1919.) 

(T.  D.  2927.) 

3592  Special  Excise  Tax  an  Corporations  [Act  of  August  5.  :^.9D9] — 
Decision  of  Court.— The  appended  decision  of  the  United  States 

District  Court  for  the  District  of  Connecticut  in  the  case  of  the  United 
States  V.  Aetna  Life  Insurance  Company  is  published  for  the  information  of 
internal  revenue  officers  and  others  concerned.  [Caption  only.] 

3593  Deductions  from  Gross  Income.— Taxes  paid  on  behalf  of 
Corporation. — Taxes  paid  to  a State  by  various  corporations  upon 

shares  of  their  stock  owned  by  another  corporation,  are  not  deductible 
from  gross  income  of  this  latter  corporation  as  taxes  ‘‘paid  by  it,’’  such 
taxes  being  not  paid  by  this  corporation,  but  being  paid  in  its  behalf  -by 
other  corporations.  (T.  D.  2927,  signed  by  Commissioner  Daniel  C.  Roper, 
and  dated  September  30,  1919.) 

(T.  D.  2929.) 

3594  Modification  of  Article  163,  Regulations  No.  45-Depreciation 
2912  of  intangible  property. — Articles  1G3,  Regulations  No.  45,  is 
3554  modified  to  read  as  follovv^s  by  eliminating  therefrom  the  last  sen- 
tence reading,  “There  can  be  no  such  allowance  in  respect  of  good 

will,  trade  names,  trademarks,  trade  brands,  secret  formulae  or  processes”: 

Art.  163.  Depreciation  of  intangible  property. —Intangibles, 
the  use  of  which  in  the  trade  or  business  is  definitely  limited  in  duration, 
may  be  the  subject  of  a depreciation  allowance.  Examples  are  patents 
and  copyrights,  licenses  and  franchises.  Intangibles,  the  use  of  which  in 
the  business  or  trade  is  not  so  limited,  will  not  usually  be  a proper  subject 
of  such  an  allowance.  If  however,  an  intangible  asset  acquire.d  through 
capital  outlay  is  known  from  experience  to  be  of  value  in  the  business  for 
only  a limited  period,  the  length  of  which  can  be  estimated  fi'om  experience 
with  reasonable  certainty,  such  intangible  asset  may  be  the  subject  of  a 
depreciation  allowance,  provided  the  facts  are  fully  shown  in  the  return 
or  prior  thereto  to  the  satisfaction  of  the  ('Commissioner.  (T.  D.  2929, 
signed  by  Commissioner  Daniel  C.  Roper,  and  dated  October  7,  1919.) 

INC.  513 


TAX 


(T.  D.  29^3.) 

3595  New  York  State  transfer  (inheritance)  tax  not  deductible  as 
1058  a “tax”. — The  appended  decision  of  the  United  States  District 
1256  Court  for  the  Southern  District  of  New  York  in  the  case  of  Elizabeth 
2900  S.  Prentiss  vs.  Mark  Eisner,  Collector  of  Internal  Revenue,  is  pub- 
lished for  the  information  of  internal-revenue  officers  and  others 

concerned.  The  decision  confirms  and  supports  the  ruling  contained  in 
Article  134  [^12900]  of  Regulations  No.  45.  (T.  D.  2933,  signed  by  Com- 
missioner Daniel  C.  Roper,  and  dated  October  9,  1919.) 

Decision  of  United  States  DisUict  Court. 

[Actof  Oct.  3,  1913.] 

Elizabeth  S.  Prentiss  vs.  Mark  Eisner,  Collector, 

1.  The  tax  imposed  by  the  laws  of  New  York  upon  the  transfer  of  pro- 
perty by  will  or  under  the  interstate  laws  is  not  deductible  in  ascertaining 
the  taxable  net  income  of  the  legatee  or  distributee  under  the  act  of  October 
3,  1913.  It  is  not  a “tax”,  within  the  meaning  of  the  provision  permitting 
the  deduction  of  “all  national  State,  county,  school,  and  municipal  taxes 
paid  within  the  year”.  (Sec.  II,  par.  B). 

2.  A tax  upon  the  right  to  receive  an  interest  in  the  estate  of  a decedent 
is  not  a charge  either  against  the  person  receiving  the  interest  or  the  pro- 
perty or  right  accruing  to  him.  The  legatee  or  distributee  merely  receives 
the  balance  due  after  payment  of  the  tax.  He  does  not  receive  the  entire 
interest,  and  then  pay  the  tax;  and  he  is  consequently  not  entitled  to  deduct 
the  amount  as  a tax  paid  by  him. 

3596  Augustus  N.  Hand,  District  Judge:  This  is  a demurrer  to  a com- 
plaint whereby  the  plaintiff  seeks  to  recover  income  taxes  for  the 

year  1913,  paid  under  protest.  The  objection  urged  is  that  the  Commis- 
sioner refused  to  allow  as  a deduction  transfer  taxes  which  were  paid  to  the 
State  of  New  York  on  December  12,  1913,  upon  an  inheritance  which 
vested  June  25,  1913. 

3597  Paragraph  B,  Section  II  of  the  Act  of  October  3,  1913,  [Revenue 

Act  of  1918,  Sec.  213  (a)  (3)-(c)  If  1055],  provides: 

“That  in  computing  net  income  for  the  purpose  of  the  normal 
tax  there  shall  be  allowed  as  deductions  Third,  all  national, 
state,  county,  school  and  municipal  taxes  paid  within  the  year, 
not  including  those  assessed  against  local  benefits ; ” 

3598  The  Commissioner  of  Internal  Revenue  has  ruled  that  [^1058, 

111256]: 

“A  collateral  inheritance  tax  levied  under  the  laws  of  the 
State  of  New  York  being,  as  it  is,  a charge  against  the  corpus 
of  the  estate,  does  not  constitute  such  an  item  as  can  be  al- 
lowed as  a deduction  in  computing  income  tax  liability  to  either 
the  estate  or  a beneficiary  thereof.” 

3599  The  plaintiff  contends  that  the  New  York  transfer  taxes  are  excise 
taxes  imposed  by  the  State  upon  the  right  to  receive  an  interest  in 

a decedent’s  estate,  and  as  such,  are  within  the  deductions  allowed  by 
statute.  The  Government,  on  the  other  hand,  says  that  these  taxes  are 
an  appropriation  by  the  State  of  a portion  of  the  decedent’s  estate  before 
the  remainder  vests  in  the  legatee.  This  latter  contention  is  in  accordance 
with  the  decision  in  United  States  v.  Perkins,  163  U.  S.  625,  where  the 
Court  said  at  page  630: 

“The  legacy  becomes  the  property  of  the  United  States  only 
after  it  has  suffered  a diminution  to  the  amount  of  the  tax  and 
it  is  only  upon  this  condition  that  the  legislature  consents  to 
a bequest  of  it.” 


INC. 


514  TAX 


10-20-19 

3600  This  decision  which  so  far  as  I know  has  not  been  questioned  can- 
not be  reconciled  with  any  theory  that  the  tax  is  refused  a right  of 

succession  already  vested  in  the  legatee. 

3601  At  the  outset  we  have  the  important  fact  that  property  inherited 
or  transmitted  by  will  is  not  treated  as  income  in  the  income  tax 

act, but,  on  the  contrary,  is  not  only  not  included,  but  specifically  exempted. 
In  other  words,  in  the  hands  of  a legatee,  devisee,  heir  or  distributee,  such 
property  is  capital  and  not  income.  Under  these  circumstances,  it  would 
seem  inconsistent  with  charges  against  this  capital,  which  accrued  prior  to, 
or  simultaneously  with,  the  devolution  of  it  could  be  deducted  from  in- 
come tax  returns.  Notwithstanding  this,  the  language  of  the  Act  would 
apparently  make  the  transfer  taxes  a necessary  deduction  if  they  are  charges 
against  the  person  receiving  the  propert}^,  or  against  either  the  property 
or  the  right  accruing  to  him. 

3602  The  cases  are  extremely  confused  and  their  reasoning  is  unsat- 
isfactory. It  is  admitted  by  them  all  that  the  tax  is  not  upon  the 

property  itself  which  is  transmitted.  To  avoid  the  unconstitutionality 
of  a direct  tax  upon  the  property  itself  which  was  not  apportioned  among 
the  States,  the  Court  of  Appeals  of  New  York  said  as  to  the  Federal  Tax 
of  1898,  in  Matter  of  Gihon,  169  N.  Y.  443: 

' the  full  amount  of  the  legacy  is  in  law  paid  to  the  legatee 
and  the  deduction  made  from  it  and  paid  to  the  state  or  fed- 
eral government  is  paid  on  account  of  the  legatee  from  the 
legacy  which  he  receives.” 

3603  It  is  argued  that  the  personal  liability  of  the  executor  or  adminis- 
trator under  the  New  York  law  for  the  payment  of  the  tax  makes 

the  view  taken  by  the  foregoing  case  erroneous,  but,  as  Judge  Cullen  there 
said,  the  obligation  of  the  executor  or  administrator  to  pay  the  tax  is  a 
mere  rule  of  administration  to  insure  its  payment,  and  not  proof  that  the 
tax  is  either  on  the  right  to  transmit  or  upon  the  property  itself. 

3604  I do  not  think  it  follows  because  the  right  to  transmit  or  the  right 
to  receive  the  property  of  a decedent  is  a privilege  granted  by  the 

State,  and  not  a common  right,  that  the  tax  is  imposed  upon  either  right. 
Judge  Gray’s  statement  in  Matter  of  Swift,  137  N.  Y.  77,  is  an  accurate 
description  of  what  occurs: 

“What  has  the  State  done,  in  effect,  b}^  the  enactment  of  this 
tax  law?  It  reaches  out  and  appropriates  for  its  use  a portion  of 
the  property  at  the  moment  of  its  owner’s  decease;  allowing 
only  the  balance  to  pass  in  the  way  directed  by  the  testator, 
or  permitted  by  its  intestate  law.” 

3605  To  say  that  the  legatee,  devisee,  heir  or  distributee  receives  the 
property  without  any  deduction  and  then  pays  the  tax  is  really  a 

most  artificial  way  of  viewing  the  transaction.  In  the  case  of  personal 
property  he  really  only  gets  the  balance  with  a credit  as  a matter  of  con- 
venient bookkeeping  to  the  amount  of  the  tax.  In  the  case  of  real  estate 
he  receives  properly  speaking  an  equity.  He  can  pay  the  tax  and  get  the 
the  land  unencumbered,  or  the  State  can  foreclose  the  lien  and  he  will 
receive  the  balance.  In  either  case  the  onlv  natural  way  to  treat  him  is 
as  a recipient  of  a net  amount.  The  condition  of  the  devolution  of  the 
property  is  the  receipt  of  the  transfer  tax  by  the  State. 

3606  In  United  States  v.  Perkins,  163  U.  S.  625,  the  testator  bequeathed 
his  property  to  the  United  States.  The  Supreme  Court  held  that  the 

New  York  transfer  tax  was  upon  the  testator’s  right  to  dispose  of  his  prop- 

INC.  515  TAX 


erty,  and  thus  sustained  the  tax  for,  if  it  had  been  treated  as  upon  any 
right  of  succession  of  the  United  States,  the  tax  could  not  have  been  law- 
fully imposed.  This  case  has  been  cited  with  approval  in  New  York  de- 
cisions both  under  the  old  and  new  transfer  tax  acts. 

3607  I have  carefully  examined  the  interesting  briefs  submitted  by  counsel 
and  am  convinced  that  the  tax  cannot  properly  be  regarded  as  an 

imposition  upon  either  the  property  or  the  right  to  receive  a gross  amount 
of  the  property  of  a decedent  represented  by  a legacy,  devise  or  distributive 
share,  but  that  the  property  and  the  right  to  receive  it  passed,  reduced  by 
the  amount  of  the  tax  measured  by  a percentage  of  the  value  of  the  gross 
share.  It  is  impossible  to  reconcile  the  conflicting  expressions  in  judicial 
opinions,  but  this  treatment  of  the  situation  will,  I think,  accord  with  the 
results  reached  by  the  various  cases.  I can  see  no  substantial  difference 
between  the  New  York  Transfer  Tax  Act  in  operation  in  1913,  and  the  earlier 
Act,  and  I do  not  regard  any  of  the  Acts  as  imposing  a tax  upon  the 
plaintiff’s  right  of  succession  which  is  deductible  in  her  income  tax  return. 

3608  The  demurrer  is  sustained.  (Opinion  appended  to  and  made  a part 
of  T.  D.  2933,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated 

October_9,"1919.) 


3609  Resident  and  nonresident  alien  seamen.  Execution  of 

13147  Form  1078. — Receipt  is  acknowledged  of  your  letter  of  September 
I 3433  6,  1919,  requesting  information  relative  to  the  liability  of  an  em- 

ployer of  alien  seamen,  with  respect  to  withholding  part  of  their 

wages  for  income  tax  purposes,  and  inquiring  whether  any  exception  is 
made  to  that  part  of  the  regulations  requiring  that  Form  1078,  Revised, 
must  be  executed  before  an  officer  qualified  to  administer  oaths.  In 
reply  you  are  advised  that  your  inquiries  are  answered  in  the  order  in 
which  they  are  numbered  in  your  letter  as  follows: 

3610  1.  Article  92  (a)  [If  3434],  v/hich  is  added  to  Regulations  45  by 

3434  Treasury  Decision  2869,  provides  that  ^‘Nonresident  alien  seamen 
are  taxable  only  on  income  from  sources  within  the  United  States,” 

and  further,  that  “Wages  earned  by  an  alien  seaman  regularly  engaged  in 
foreign  trade  are  not  to  be  regarded  as  from  sources  within  the  United 
States  even  though  the  ship  flies  the  American  Flag,  or  although  during  a 
part  of  that  time  the  ship  touched  at  U.  S.  ports  and  remained  there  a 
reasonable  time  for  the  transaction  of  its  business.”  It  follows  therefore 
that  in  such  cases  the  wages  paid  to  nonresident  alien  seamen  by  an  em- 
ployer are  not  regarded  as  income  from  sources  within  the  United  States 
and  the  employer  is  not  required  to  withhold.  It  should  be  remembered, 
however,  that  for  purposes  of  information  such  an  employer  is  required  by 
Section  256,  Article  1071  [If  3054]  thereunder,  to  render  a return  to  the 
Commissioner  on  Form  1099,  in  all  cases  where  the  employer  made  pay- 
ment of  $1000  or  over  of  wages  to  resident  alien  seamen  in  any  taxable  year. 

3611  2.  Article  312  (a)  [%  3435],  which  is  added  to  Regulations  45  by 

3435  Treasury  Decision  2869,  provides  in  tlie  case  of  alien  seamen  that 
“Residence  may  be  established  on  a vessel  regularly  engaged  in 

coastwise  trade.”  This  provision,  however,  merely  places  alien  seamen 
employed  on  a vessel  regularly  engaged  in  coastwise  trade  on  the  same 
footing  with  an  alien  employed  within  the  United  States  for  purposes  of 
proving  residence  within  the  United  States.  The  employer  should,  there- 
fore, be  governed  by  the  requirements  of  Article  315]j^2976]  of  Regula- 
tions 45  mth  respect  to  the  necessity  for  filing  Form  lOTo,  Revised, 


INC. 


516  TAX 


lO-lO-lO 

3612  3.  If  an  officer,  qualified  to  administer  oaths,  is  not  reasonably 

2976  accessible.  Form  1078,  Revised,  will  be  accepted  if  signed  in  the 
3154  presence  of  an  official  of  the  employer  company  under  whose  su- 
pervision the  employee’s  duties  are  performed,  and  one  other  credible 
witness.  (Letter  to  Shipowners’  Association  of  the  Pacific  Coast,  San 
Francisco,  Calif.,  signed  b}^  P.  S.*  Talbert,  Acting  Assistant  to  the  Com- 
missioner, by  C.  R.  Trobridge,  Acting  Head  of  Division,  and  dated  Sep- 
tember 20,  1919.) 


(Decision.) 

(Revenue  Act  of  1916.) 

258  Fed.  208. 

Income  Tax  Liability  of  a Trustee  in  Bankruptcy: 

In  re.  Heller,  Hirsh  & Co. 

(U.  S.  Circuit  Court  of  Appeals,  Second  Circuit.) 

3613  Appeal  from  the  District  Court  of  the  United  States  for  the  Southern 
1398  District  of  New  York.  In  the  matter  of  Heller,  Hirsh  & Co.,  a 
1429  corporation,  bankrupt.  A petition  by  the  United  States  attorney 
3205A  for  an  order  directing  the  trustee  of  the  bankrupt  to  pay  to  the 
3228  collector  of  internal  revenue  for  the  Second  district  of  New  York 

S2,400  as  taxes  on  income  under  Act  Sept.  8,  1916,  as  a preferred 
claim,  was  denied,  and  the  government  appeals.  Affirmed. 

Before  WARD,  ROGERS,  AND  MANTON,  Circuit  Judges. 

3614  PER  CURIAM.  The  United  States  attorney  filed  a petition  for  an 
order  directing  the  trustee  of  the  bankrupt  corporation  to  pay  to  the 

collector  of  internal  revenue  for  the  Second  district  of  New  York  the 
sum  of  $2,400  under  Act  Sept.  8,  1916,  c.  463,  39  Stat.  756,  as  taxes  upon 
income  for  the  year  1916,  as  a preferred  claim.  The  trustee  was  not 
carrying  on  the  business  of  the  bankrupt,  and  the  funds  said  to  constitute 
net  income  were  the  result  of  a compromise  made  by  him  with  a foreign 
corporation  of  a claim  for  nonpayment  of  salary  and  commissions  by  the 
foreign  corporation  to  the  bankrupt  corporation  as  its  agents  between 
the  years  1910  and  1914.  The  referee,  John  J.  Townsend,  Esq.,  recom- 
mended that  the  prayer  of  the  petition  be  denied,  and  his  report,  which 
is  set  out  below  [in  part],  was  confirmed  without  opinion  by  Judge  Hough. 
We  are  quite  clear  that  under  section  13(c)  of  the  act  of  1916  (Comp.  St. 
Sec.  6336m)  [1918  Act,  If  1429  herein.]  only  net  income  earned  by  a trustee 
while  operating  the  business  of  a bankrupt  corporation  is  taxable. 

3615  The  order  is  affirmed. 

3616  Note. — Referee  Townsend’s  opinion,  referred  to  in  the  opinion/ 
here  follows  [in  part]: 

********* 

3617  “Carefully  prepared  briefs  have  been  filed  with  the  Referee  by  the 
parties.  I find  in  the  briefs  no  decisions  which  I deem  decisive  of 

the  present  motion,  viz.,  no  decisions  where  the  government  asserts  a 
claim  for  an  income  tax  against  a trustee  in  bankruptcy  of  a corporation 
or  individual  adjudicated  a bankrupt  and  therefore  presumably  insolvent. 
I refer  below  to  certain  decisions  which  in  my  opinion  aid  in  deciding  the 
present  motion. 


INC, 


517  TAX 


3618  “In  my  opinion  the  present  motion  depends  for  its  determination 
upon  a judicial  interpretation  of  the  act  of  September  8,  1916,  a 

copy  of  which  act  accompanies  this  report.  Such  interpretation  should 
be  a fair  one.  It  is  not  the  dut}^  of  this  court  or  of  the  government  au- 
thorities to  resort  to  Procrustean  methods  of  interpretation  against  the 
taxpayer. 

3619  “I  find  nothing  in  the  act  of  September  8,  1916,  to  indicate  that 
Congress  intended  to  impose  an  income  tax  upon  a trustee  in  bank- 
ruptcy^ in  respect  to  the  assets  of  a bankrupt  corporation  which  he  has 
taken  over  to  be  marshaled  and  distributed  among  the  creditors  of  the 
corporation.  To  my  mind  the  text  of  the  act  of  September  8,  1916,  does 
not  indicate  any  such  purpose.  This  view  of  the  act  does  not  deprive  the 
government  of  its  just  due.  The  dividends  declared  and  distributed  to 
the  creditors  are  presumptively  income  in  the  hands  of  the  latter  subject 
to  an  income  tax  to  be  assessed  against  the  latter. 

********* 

3620  “Great  stress  is  laid  by  the  government  on  the  provisions  of  section 
13(c)  of  the  act  of  September  8,  1916.  The  presence  of  subdivision 

(c)  in  the  act  of  September  8,  1916,  and  its  absence  from  the  prior  act 
of  October  3,  1913,  has  to  my  mind  no  significance  in  the  present  case  in 
view  of  the  peculiar  language  of  subdivision  (c). 

3621  “The  language  used  in  subdivision  (c)  shows  that  the  subdivision 
was  not  intended  by  Congress  to  apply  in  the  case  of  receivers  or 

trustees  in  bankruptcy  or  assignees  who  merely  marshaled  and  distributed 
the  assets  of  an  insolvent  corporation  among  its  creditors.  In  terms 
subdivision  (c)  applies  only  in  cases  where  receivers  or  trustees  in  bank- 
ruptcy or  assignees  ‘are  operating  the  property  or  business  of  corporations’ 
and  thus  may  be  in  the  receipt  of  a ‘net  income’  as  defined  in  the  prior 
sections  of  the  act.  I regard  the  quoted  words  as  of  marked  significance. 

3622  “To  my  mind  the  subdivision  was  inserted  in  the  act  to  meet  the 
specified  case  of  the  profitable  operation  of  the  business  of  a corpora- 
tion b}^  the  officers  mentioned;  for  instance,  the  operation  of  the  business 
of  a railroad  corporation  by  receivers  or  the  operation  of  the  business 
of  a manufacturing  corporation  by  a trustee  in  bankruptcy,  etc. 

********* 

3623  “The  decisions  cited  in  the  brief  filed  by  the  government,  such 
as  Edwards  v.  Keith,  Collector,  231  Fed.  Ill,  145  C.  C.  A.  298, 

L.  R.  A.  1918A,  498  (C.  C.  A.,  2d  Circuit),  and  Towne  v.  Eisner,  Col- 
lector, 245  U.  S.  418,  38  Sup.  Ct.  158,  62  L.  Ed.  372,  L.  R.  A.  1918D,  254 
(January,  1918),  turning  as  they  do  on  what  is  and  what  is  not  taxable 
income,  no  question  arising  in  those  cases  as  to  the  status  of  the  taxes, 
are  not  pertinent  in  my  view  of  the  case  before  me. 

3624  “For  like  reason  I have  not  discussed  the  correctness  of  the  amount 
of  net  income  upon  which  the  government  claims  a tax.  This 

amount,  as  well  as  his  liability  for  any  tax,  is  challenged  b}^  the  trustee  in 
bankruptcy. 

3625  “I  am  of  the  opinion  that  the  trustee  in  bankruptcy  is  entitled  to 
an  order  den^dng  the  prayer  of  the  petition  filed  by  the  United 

States  attorney  for  the  Southern  district  of  New  York,  on  behalf  of  the 
collector  of  internal  revenue  for  the  Second  district  of  New  York.”  (258 
Fed.  208.) 


INC. 


518  TAX 


104O-10 

3626  Deductibility  of  losses  sustained  by  estates  or  trusts  and 

2901  the  bearing  of  such  losses  on  the  taxable  income  of  bene- 
2991  ficiaries. — Receipt  is  acknowledged  of  your  letter  of  Octol>er  3, 
2994  1919,  which  reads  as  follows:  ‘‘With  reference  to  the  letter  dated 

August  9,  1919 — IT:T:RR-FMH — signed  by  C.  P.  Trobridge, 
Acting  Head  of  Division,  is  it  possible  to  obtain  any  definite  reply  to  our 
letter  of  July  24,  1919,  inquiring  as  to  whether  or  not  when  a fiduciary 
sells  stock  or  bonds  of  a trust  estate  at  a loss,  the  beneficiary  is  entitled 
to  a credit,  deducting  such  loss  against  his  income,  only  paying  a tax  on 
the  net  amount  of  his  taxable  income  in  excess  of  the  loss?  Inasmuch  as 
your  letter  of  August  9 stated  that  the  matter  was  at  that  time  under 
consideration  and  we  have  received  no  other  reply,  we  thought  it  possible 
that  the  matter  might  have  been  overlooked.”  ^ In  reply  you  are  advised 
that  this  office  holds  that,  under  the  Revenue  Act  of  1918,  (a)  any  loss 
resulting  from  the  sale  of  stocks,  bonds  or  other  property,  owned  by  a 
trust,  which  would  be  an  allowable  deduction  from  the  gross  income  of  an 
individual,  is  an  allowable  deduction  from  the,  gross  income  of  a trust, 
whether  or  not  the  income  of  such  trust  is  “to  be  distributed  to  the  bene- 
ficiaries periodically,  whether  or  not  at  regular  intervals,”  and  whether  or 
not  there  is  any  requirement  in  the  instrument  creating  the  trust,  a decree 
of  court,  or  general  law,  that  the  principal  of  the  trust  estate  be  kept  intact  at 
the  expense  of  income  as  against  such  loss;  that  (b)  such  a deduction  is  not 
allow^able  as  against  the  current  or  future  gross  income  of  the  present 
beneficiaries  or  of  those  who  will  receive  the  property  at  the  termination 
of  the  trust;  and  that  (c)  a beneficiary  is  not  required  to  include  in  his 
personal  return  as  a part  of  “his  distributive  share,  whether  distributed 
or  not,  of  the  net  income  of  the  . . . trust  for  the  taxable  year,”  any 
part  of  the  amounts  allowed  to  the  trust  as  a whole  as  a deduction  for  loss 
resulting  from  the  sale  of  the  property.  (Letter  to  The  Equitable  Trust 
Company  of  New  York,  New  York,  N.  Y.,  signed  by  Commissioner  Daniel 
C.  Roper,  and  dated  October  13,  1919.) 

3627  Articles  1668  and  1567,  Regulations  45:  Interpretative  com- 
3577  ments. — On  September  26  the  Bureau  of  Internal  Revenue  promul- 
gated Treasury  Decision  2924  modifying  Articles  1566  and  1567 

of  Regulations  45.  Two  questions  involving  interpretation  of  the  new 
Treasury  Decision  are  raised.  An  early  expression  of  an  opinion  on  the 
first  question  and  confirmation  of  our  view  as  to  the  second  question,  will 
be  appreciated. 

Meaning  of  “Market  Value.” — Question  1.  Article  1566,  as 
amended,  provides  that  where  property  is  transferred  to  a corpora- 
tion in  exchange  for  its  stock  the  exchange  constitutes  a closed  transaction 
and  the  former  owner  of  the  property  realizes  a gain  or  loss,  if  the  stock 
has  a “market  value,  and  such  market  value”  is  greater  or  less  than 
the  cost  or  the  “fair  market  value”  as  of  March  1,  1913  (if  acquired  prior 
thereto),  of  the  property  given  in  exchange.  The  question  raised  is  whether 
the  words  “market  value,  and  such  market  value”  permit  a presumption 
that  the  decision  contemplates  an  actual  market  before  the  case  would 
be  brought  within  the  provision  as  to  profit  or  loss,  or  the  words  “market 
value,  and  such  m.arket  value”  are  intended  by  the  Treasury  Department  to 
mean  “fair  value.”  The  use  of  the  words  “fair  market  value  as  of  March  1, 
1913”  immediately  following  that  part  of  the  Decision  under  discussion 
w’ould  indicate  that  the  word  “fair”  was  deliberately  omitted  in  the  first 
instance  and  that  the  words  “market  value”  were  intended  to  convey  the 
thought  that  there  must  be  an  actual  market.  This  interpretation  is 

519  TAX 


INC. 


further  borne  out  by  the  fact  that  if  the  word  ‘^fair^’  be  inserted  before 
the  word  “market’’  in  the  first  instance,  the  sentence  might  property  have 
been  concluded  with  the  word  “loss.”  We  can  conceive  of  no  situation 
in  which  property  could  be  transferred  in  exchange  for  corporate  stock 
which,  under  the  ruhngs  of  the  Bureau,  would  be  considered  to  have  no 
“fair  value.”  (Answer.)  In  your  letter  of  October  7,  1919,  you  ask 
whether  the  words  “market  value”  as  used  in  Treasury  Decision  2924 
are  used  as  an  equivalent  of  “fair  market  value”  or  whether  it  is  intended 
that  an  exchange  of  property  for  stock  shall  not  be  regarded  as  a closed 
transaction  unless  there  was  an  actual  market  for  the  stock  so  acquired. 
1[In  reply  I beg  to  say  that  the  words  “market  value”  as  used  in  that  Treas- 
ury Decision  are  used  as  an  equivalent  of  “fair  market  value,”  and  that 
stock  is  to  be  regarded  as  ordinarily  having  a market  value,  even  though 
no  actual  market  for  it  can  be  established.  Market  value  in  this  sense 
may,  therefore,  be  regarded  as  the  price  which  might  reasonably  be  pre- 
sumed would  be  agreed  upon  between  a willing  bu^ver  and  a wilhng  seller. 

3628  Application  of  the  limitation  as  to  *‘no  greater  aggregate 

3578  par  or  face  value. — Question  2.  In  interpreting  Article  1567, 
as  amended,  the  opinion  has  been  expressed  that  the  phrase  “in 
any  case  of  no  greater  aggregate  par  or  face  value  than  the  old  stock  and 
securities  surrendered”  is  a limitation  governing  only  “(e)  the  consohda- 
tion  of  the  corporations,”  and  not  a limitation  with  respect  to  (a),  (b),  (c) 
and  (d).  The  statue  indicates  that  the  hmitation  intended  by  the  Regula- 
tions is  applicable  to  (a),  (b),  (c),  (d)  and  (e).  (Answer.)  You  also  ask 
whether  in  interpreting  Article  1567  of  Regulations  No.  45,  as  amended, 
the  phrase  “in  any  case  of  no  greater  aggregate  par  or  face  value  than 
the  old  stock  and  securities  surrendered”  is  a limitation  governing  only 
“(e)  the  consolidation  of  the  corporation,”  or  a limitation  applying  to 
each  of  the  subdivisions  (a),  (b),  (c),  (d)  and  (e).  ^ In  reply  you  are 

advised  that  this  phrase  limits  not  only  subdivision  (e),  but  also  the  pre- 
ceding subdivisions.  This  article  of  the  regulations  is  founded  on  Section 
202  (b)  of  the  Revenue  Act  of  1918,  which  would  afford  no  basis  for  at- 
taching this  qualification  to  subdivision  (e)  only.  (Letter,  embodying 
inquiries,  from  Baker  and  Baker,  Washington,  D.  C.,  and  the  letter  of 
reply  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  October  16, 
1919.) 


(T.  D.  2935.) 

3629  Failure  to  file  returns  where  tentative  returns  have  been 
3026  filed,  Article  443  of  Regulations  45  amended. — Section  1309 

of  the  Revenue  Act  of  1918  (approved  February  24,  1919)  provides 
in  part  as  follows  2591]:  “That  the  Commissioner,  with  the  approval 
of  the  Secretary,  is  hereby  authorized  to  make  all  needful  rules  and  regula- 
tions for  the  enforcement  of  the  provisions  of  this  Act.” 

3630  In  pursuance  of  the  foregoing  provision  of  law.  Article  443  of  Regu- 
lations 45  3026]  is  hereby  amended  to  read  as  follows: 

Art.  443.  Extension  of  time  by  collector. — It  is  important  that  the 
taxpayer  render  before  the  return  due  date  a return  as  complete  and 
final  as  it  is  possible  for  him  to  prepare.  However,  in  cases  of  sickness 
or  absence  collectors  are  authorized  to  grant  an  extension  of  not  exceeding 
thirty  days,  where  in  their  judgment  such  further  time  is  actually  required 
for  the  making  of  an  accurate  return.  See  Article  1002  [If  3032].  The 
apphcation  for  such  extension  must  be  made  prior  to  the  expiration  of  the 


INC. 


520  TAX 


period  for  which  the  extension  is  desired.  The  absence  or  sickness  of 
one  or  more  officers  of  a corporation  at  the  time  the  return  is  required  to  be 
filed  will  not  be  accepted  as  a reasonable  cause  for  failure  -to  file  -the  return 
within  the  prescribed  time,  unless  it  is  satisfactorily  -shown  that  there 
were  no  other  principal  officers  available  and  sufficiently  informed  as  to 
the  affairs  of  the  corporation  to  make  and  verify  the  return.  As  a con- 
dition of  granting  an  extension  of  time  for  filing  a return  the  collector  may 
require  the  submission  of  a tentative  return  and  estimate  of  the  tax  on 
form  1040-T  in  the  case  of  individuals,  or  on  form  103 1-T  in  the  case  of 
corporations,  and  the  payment  of  one-fourth  of  the  estimated  amount  of 
tax.  Where  a taxpayer  has  filed  a tentative  return  and  has  failed  to  file 
a complete  return  within  the  period  of  the  extension  requested  by  him  the 
complete  return  when  filed  is  subject  to  penalties  prescribed  for  delin- 
quency. Where  a tentative  return  has  been  filed  and  no  tine  has  been 
fixed  within  which  a complete  return  must  be  filed,  the  collector  may  at 
any  time  send  notice  to  the  taxpayer  to  file  a complete  return  within  a 
period  of  time  therein  specified  by  him,  and  a taxpayer  who  fails  to  comply 
with  such  request  will  incur  the  penalties  prescribed  by  statute  for  de- 
linquency in  filing  a return.  (T.  D.  2935,  signed  by  Commissioner  Daniel 
C.  Roper,  and  dated  October  16,  1919.) 


(T.  D.  2937.) 

3631  Assessments  for  Drainage.— Article  133  of  Regulations  45  is 
2899  hereby  amended  to  read  as  follows: 

Art.  133.  Taxes  for  local  benefits.— So-called  taxes,  more 
properly  assessments,  paid  for  local  benefits,  such  as  street,  sidewalk  and 
other  like  improvements,  imposed  because  of  and  measured  b}^  some 
benefit  inuring  directly  to  the  property  against  which  the  assessment  is 
levied,  do  not  constitute  an  allowable  deduction  from  gross  income.  A 
tax  is  considered  assessed  against  local  benefits  when  the  property  subject 
to  the  tax  is  limited  to  the  property  benefited.  Special  assessments  are 
not  deductible,  even  though  an  incidental  benefit  may  inure  to  the  public 
welfare.  The  taxes  deductible  are  those  levied  for  the  general  public  wel- 
fare by  the  proper  taxing  authorities  at  a like  rate  against  all  property  in 
the  territory  over  which  such  authorities  have  jurisdiction.  Assessments 
under  the  statutes  o{  California  relating  to  irrigation  and  of  Iowa  relating 
to  drainage,  and  under  certain  statutes  of  Tennessee  relating  to  levees,  are 
limited  to  property  benefited,  and  when  it  is  clear  that  the  assessments 
are  so  limited,  the  amounts  paid  thereunder  are  not  deductible  as  taxes. 
When  assessments  are  made  for  the  purpose  of  maintenance  or  repair  of 
local  benefius,  the  taivpayer  may  deduct  the  assessments  paid  as  an  expense 
incurred  in  business,  if  the  [payment  of  such  assessments  is  necessary  to 
the  conduct  of  his  business.  When  the  assessments  are  made  for  the 
purpose  of  constructing  local  benefits,  the  payments  by  the  taxpayer  are 
in  the  nature  of  capital  expenditures  and  are  not  deductible.  Where 
assessments  are  made  for  the  purpose  of  both  construction  and  main- 
tenance or  repairs,  the  burden  is  on  the  taxpayer  to  show  the  allocation 
of  the  amounts  assessed  to  the  different  purposes.  Tf  the  allocation  can  not 
be  made,  none  of  the  amounts  so  paid  is  deductible.  (T.  D.  2937,  signed 
by  Commissioner  Daniel  C.  Roper,  and  dated  October  16,  1919.) 


i 


INC. 


521  TAX 


3632  Deduction  for  depreciation  in  computing  net  income  of 
2910  estates  and  trusts  and  the  bearing  of  such  deduction  on  the 
2991  taxable  income  of  beneficiaries. — [In  connection  with  the  fol- 
2994  lowing,  ^3626  should  be  read.]  Reference  is  made  to  our  letter 
3626  of  May  8,  1919,  in  which  you  refe  to  office  letter  of  April  14,  1919, 
wherein  you  are  informed  that  an  individual  who  receives  her 
income  from  three  trust  estates  is  not  permitted  to  deduct  in  her  personal 
return  the  amount  of  depreciation  sustained  during  the  year  on  real  estate 
which  forms  a part  of  the  assets  of  these  trusts.  You  now  state  you  note 
that  Article  164  [If 2913]  of  Preliminary  Regulations  45,  which  had  reference 
to  this  question,  has  been  eliminated  from  the  last  edition  of  the  Regu- 
lations, and  you  ask  to  be  advised  whether  the  decision  contained  in  of- 
fice letter  of  April  14  has  been  modified.  % In  reply  you  are  advised  that 
an  individual  who  receives  income  from  a trust  estate  is  not  permitted 
to  claim  a deduction  in  his  personal  income  tax  return  for  any  depreciation 
sustained  during  the  year  on  real  estate  or  other  assets  of  the  estate.  Under 
the  Revenue  Act  of  1918,  however,  it  is  permissible  for  the  fiduciary,  in 
ascertaining  the  net  income  of  the  estate  or  trust  for  which  he  acts,  to 
deduct  a proper  amount  for  the  depreciation  sustained  during  the  taxable 
year,  whether  or  not  the  terms  of  the  will  or  agreement  creating  same  or  a 
decree  of  Court  provides  for  the  taking  care  of  depreciation  which  may 
be  sustained  on  the  property  held  in  trust.  (Letter  to  William  R.  Conklin, 
New  York,  N.  Y.,  signed  by  J.  H.  Cailan,  Assistant  to  the  Commissioner, 
by  P.  S.  Talbert,  Head  of  Division,  and  dated  October  6,  1919.) 


3633  Return  by  corporation  for  taxable  year  during  which  its 
3205a  affairs  are  placed  in  hands  of  receiver,  etc.,  for  purposes  of 
3228  dissolution. — Receipt  is  acknowledged  of  your  letter  dated  October 
16,  1919,  relative  to  the  meaning  of  Article  547  of  Regulations  45. 

In  reply  you  are  advised  that  your  question  as  to  whether,  under  Article 
547  of  the  Regulations,  any  profit  or  loss  resulting  from  the  sale  of  capital 
assets  by  the  trustees  or  receivers  during  the  process  of  liquidation  is  to 
be  merged  with  the  profit  or  loss  resulting  from  the- regular  business  of 
the  corporation  during  the  same  taxable  year  prior  to  the  taking  over 
of  the  affairs  of  the  corporation  by  the  trustees  or  by  the  receiver  is  answered 
in  the  affirmative.  ^ For  information  as  to  the  meaning  of  the  term 
“taxable  year”  as  used  in  the  Revenue  Act  of  1918  and  for  further  in- 
formation as  to  the  requirements  of  the  Statute  with  respect  to  the  filing 
of  returns  by  receivers,  trustees  in  dissolution,  trustees  in  . bankruptcy 
and  assignees,  your  attention  is  invited  to  Articles  25  [1|2839]  and  622 
[^3228]  of  Regulations  45.  (Letter  to  The  Corporation  Trust  Company, 
signed  by  Commissioner  Daniel  C.  Roper,  and  dated  October  24,  1919.) 


INC. 


522  TAX 


CflJE  CORPORATION  TRUST  COMPANY’S  INCOME.  TA:^:  .SERVICE,.) 


INSERT  THIS  PAGE  TO  FACE  PAGE  522. 


THE  INDEX  on  the  blue  sheets  at  the  back  of  the  book  indexes 
the  Law  and  all  regulations,  etc.,  relating  thereto,  to  and 
including  page  522  opposite.  Page  523  following, 
and  the  pages  following  that  page,  are 
unindexed,  temporarily. 

THE  RUNNING  TABLE  OF  CONTENTS,  on  Supplementary 
Page  129,  at  the  back  of  the  book,  should  be  consulted  for 
matter  temporarily  unindexed.  This  table  consists  of 
a list  of  all  Treasury  Decisions,  etc.,  printed  dn 
the  Service,  showing  the  general  subject 
covered  by  each  regulation,  ruling 
or  other  matter. 


ItEMOVE  THE  PINK  PAtiK  EACIN<J  PAGE  446. 


<a‘HE  CORPOIiATlOK  TRUST  COMPANY’S  INCOME  TAX  SERVICE  ) 


the  Law  and  all  regulations,  etc.,  relating  thereto,  to  and 

including  page  522.  Page  523,  opposite,  et  seq.,  1 

are  unindexed^  temporarily. 

THE  RUNNING  TABLE  OF  CONTENTS  on  Supplementary 
, Page  129,  at  the  back  of  the  book,  should  be  consulted  for 
matter  temporarily  unindexed.  This  table  consists  of 
a list  of  all  Treasury  Decisions,  etc.,  printed  in 
the  Service,  showing  in  a general  way,  the 
subject  covered  by  each  regulation, 
ruling  or  other  matter. 


11-10-19. 

(T.  D.  2943) 

3634  Limited  partnership  as  a corporation. — Art.  1506  of  Regula- 

3078  lions  45  is  hereby  amended  to  read  as  follows: 

Art.  1506.  Limited  partnership  as  corporation. — On  the 
other  hand,  limited  partnerships  of  the  type  of  partnerships  with  limited 
liability  or  partnership  associations,  authorized  b^"  the  statutes  of  Pennsyl- 
vania and  of  a few  other  States  are  only  nominally  partnerships.  Such 
so-called  limited  partnerships,  offering  opportunity  for  limiting  the  Liability 
of  all  the  members,  providing  for  the  transferabilit}^  of  partnership  shares, 
and  capable  of  holding  real  estate  and  bringing  suit  in  the  common  name, 
are  more  truly  corporations  than  partnerships  and  must  make  returns  of 
income  and  pay  the  tax  as  corporations.  The  income  received  by  the 
mem])ers  out  of  the  earnings  of  such  limited  partnerships  will  be  treated 
in  their  personal  returns  in  the  same  manner  as  distributions  on  the  stock 
of  corporations.  In  all  doubtful  cases  limited  partnerships  will  be  treated 
as  corporations  unless  they  sulnnit  satisfactory  proof  that  they  are  not  in 
effect  so  organized.  A Michigan  * partnership  association  is  a corporation. 
Such  a corporation  may  or  may  not  be  a personal  service  corporation. 
See  Sections  200  [^1308]  and  218  1305]  of  the  statute  and  Articles  1523- 

1532  [beginning  at  ^3083].  (T.  D.  2943,  signed  by  Commissioner  Daniel  C. 

Roper,  and  dated  November  6,  1919.) 

* [Virginia  partnership  associations,  also,  were  held  to  be  corporations 
by  the  article  as  originally  promulgated.] 


( Decision.) 

(Revenue  Act  of  1916.) 

(November  3,  1919.) 

Depletion  allowance  in  the  case  of  operating  lessees  of  mines. 

Mohawk  Mining  Company  vs.  Harry  H.  Weiss,  (k:>llector. 
(United  States  District  C.'ourt  for  the  Northern  District  of  Ohio, 
Eastern  Division.) 

MEMORANDUM 

3635  Westenhaver,  District  Judge:  Plaintiff  brings  this  action  to  recover 
* income  tax  paid  under  protest.  The  parties  have  by  stipulation  in 

writing  waived  a jury  and  submitted  their  case  for  decision  by  me  upon 
an  agreed  statement  of  facts. 

3636  Plaintiff  is  the  owner  of  a Minnesota  mining  lease  on  iron  ore  property 
acquired  prior  to  March  1,  1913,  conferring  a right  to  mine  and 

remove  all  of  the  ore  and  requiring  the  payment  of  25  cents  a ton  royalty 
on  such  ore  mined  and  moved.  The  question  of  law  presented  for  decision 
is  whether  or  not  the  plaintiff  is  entitled  to  deduct  a reasonable  allowance 
for  depletion  of  iron  or(‘  fiom  the  gross  amount  of  its  receipts  from  all 
sources  in  order  to  determine  the  net  income  subject  to  tax.  The  answer 
to  this  ({uestion  turns  on  the  true  meaning  of  Section  12  of  the  Revenue 
Act  of  Septemb(‘r  18,  1916.  Th(‘  Covernment’s  contention  is  that  the 
deduction  authorized  by  the  s('cond  subdivision  of  this  section  is  allowable 
only  to  an  operating  ownei’  of  an  ore  mine  and  not  to  an  operating  lessee 
under  a lease  of  the  character  stated. 


* Comment:  Tlu*  present  Act  makes  i)rovision  for  the  equitable 
apportionment  of  (kq)letion  and  d(‘preciation  between  lessees  and  lessors, 
•2171. 


INC.  523  TAX 


3637  I have  carefully  examined  all  of  the  cases  decided  under  the  corporation 
tax  act  of  1909  and  under  the  several  income  tax  acts  and  have  also 

carefully  studied  the  several  provisions  of  these  several  acts  so  far  as  they 
relate  to  this  question.  My  conclusion  is  that  the  operating  lessee  is  en- 
titled to  the  deduction  as  claimed.  My  engagements  are  such  that  it  would 
be  impossible  for  me,  without  neglecting  other  work,  to  prepare  and  file 
an  extended  opinion  setting  forth  my  reasons  for  this  conclusion  earlier 
than  the  latter  part  of  December.  There  are,  however,  no  disputed 
questions  of  fact,  and  the  question  of  law  is  so  clear-cut  and  simple,  that 
an  entended  written  opinion  would  add  nothing  to  the  information  of 
counsel.  It  is  sufficient  to  say  that  I concur  in  the  reasoning  of  plaintiff’s 
brief,  particularly  its  reply  brief,  and  disagree  wholly  with  the  reasoning 
o the  brief  of  defendant. 

3638  Judgment  will  be  rendered  for  plaintiff  in  accordance  with  the 
prayer  of  its  petition.  An  exception  will  be  noted  on  behalf  of 

defendant. 


Cleveland,  Ohio,  November  3,  1919. 


D.  C.  WESTENHAVER, 
Judge. 


(T.  D.  2944.) 

Southern  Pacific  ii.  B.  Co.  v.  Muenter  ( C.  C.  A.  Oct.  6,  1919). 

Deduction  under  Section  38,  Act  of  August  5,  1909,  of  discount 
on  bonds  sold. 

Where  a corporation  sold  bonds  at  a discount  during  1906,  1907, 
and  1908  no  deduction  from  gross  income  for  the  years  1909, 

1910,  and  1911  of  sums  set  aside  by  the  corporation  to  pay  such 
discount  at  the  maturity  of  the  bonds  is  permitted  under  the 
provisions  of  Section  38,  Act  of  August  5,  1909,  authorizing 
corporations  to  deduct  from  gross  income  “(second)  all  losses 
actually  sustained  within  the  year  * * *”  and  “ (third)  interest 
actually  paid  within  the  year  on  its  bonded  or  other  indebted- 
ness * * Baldwin  Locomotive  Works  v.  McCoach, 

221  Fed.  59  explained  [1[2078]. 

3639  The  appended  decision  of  the  United  States  Circuit  Court  of  Appeals 
2072  for  the  Ninth  Circuit  in  the  case  of  Southern  Pacific  Railroad 
3203a  Company  v.  Muenter,  is  published  not  as  a ruling  of  the  Treasury 

Department,  but  for  the  information  of  internal-revenue  officers 
and  others  concerned.  (T.  D.  2944,  signed  by  Commissioner  Daniel  C. 
Roper,  and  dated  November  8,  1919.) 

In  the  United  States  Circuit  Court  of  Appeals  for  the  Ninth  Circuit. 

No.  3286  and  3287,  Term,  1919. 

Southern  Pacific  Railroad  Company,  a corporation,  plaintiff  in  error,  v. 

August  E.  Muenter,  formerly  collector  of  internal  revenue,  et  ah, 

defendants  in  error. 

(In  error  to  the  United  States  District  Court  for  the  Northern  District  of 

California.) 

3640  Before  GILBERT,  ROSS,  and  HUNT,  Circuit  Judges. 

GILBERT,  Circuit  Judge:  The  court  below  sustained  a demurrer  to 

the  complaint  brought  b}^  the  plaintiff  in  error  to  recover  certain  items 
of  corporation  income  tax  paid  under  protest  upon  its  net  income  for  the 


INC.  524  TAX 


years  1909,  1910  and  1911.  The  complain-*  alleged  that  during  the  yean 
1906,  1907,  1908  the  plaintiff  in  error  borrowed  various  sums  3f  money, 
and  as  security  therefor  issued  and  sold  interest-bearing  bonds  of  the  par 
value  of  $1,000,  drawing  interest  at  4%  per  annum,  and  maturing  on 
the  first  day  of  January,  1955,  which  bonds  it  was  necessary  to  sell  at  a 
discount.  The  amount  involved  in  the  action  is  the  sum  of  $1,392.22, 
income  tax  upon  reserved  sums  of  mone.y  which  the  plaintiff  in  error  had 
set  aside  as  the  pro  rata  amount  of  the  discount  ‘or  the  years  in  question 
distributed  over  the  entire  period  until  the  maturity  of  the  bonds,  the 
plaintiff  in  error  contending  that  the  discount  is  to  be  regarded  as  a portion 
of  the  interest  which  it  pays  upon  the  loans.  The  question  presented  is 
whether  or  not  money  so  reserved  and  set  aside  by  book  entries  to 
meet  the  final  payment  ot  the  discount  could  be  deducted  from  net  income 
of  the  corporation  under  the  Income  Tax  Law  of  1909,  36  Stat.  102,  Sec.  38. 
That  act,  so  far  as  it  pertains  to  this  question,  provides  that  the  net  income 
upon  which  the  tax  is  to  be  assessed  is  ascertained  by  deducting  from  the 
gross  income,  (second)  all  losses  actually  sustained  within  the  year  and  not 
compensated  by  insurance  or  otherwise,  (third)  interest  actually  paid  within 
the  year  on  its  bonded  or  other  indebtedness.  The  plaintiff  in  error  refers 
to  Baldwin  Locomotive  Works  v.  McCoach,  215  Fed.  967,  and  the  same 
case  on  appeal,  221  Fed.  59,  as  sustaining  its  contention.  In  that  case  the 
bonds  were  31-year  bonds,  and  the  assessor  thought  it  proper  to  deduct 
1-31  of  the  total  discount  from  the  gross  income  of  each  taxable  year. 
The  controverted  question  in  the  case,  however,  was  whether  or  not  the 
corporation  could  deduct  for  the  year  1910  the  total  discount  upon  the 
bonds  which  they  had  sold  at  5%  discount.  The  court  held  that  a book 
charge  because  of  the  sale  of  an  issue  of  bonds  at  less  than  par  is  not  a 
part  of  the  “expenses  actually  paid  within  the  year  out  of  income’^  so  as 
to  be  deducted  from  gross  income.  There  was  no  discussion  of  the  question 
whether  1-31  part  of  the  total  discount  deducted  for  the  year  had  been 
deducted  lawfully,  as  that  deduction  was  not  involved  in  the  controversy. 
We  think  the  present  case  is  determined  adversely  to  the  plaintiff  in  error 
by  the  plain  language  of  the  statute.  The  money  set  apart  upon  the  books 
each  year  until  the  maturity  of  the  bonds  to  meet  the  loss  which  came 
from  selling  the  bonds  below  par  was  the  application  of  a prudent  and 
proper  system  of  business,  and  was  a wise  provision  for  the  future,  but 
it  \vas  not  the  payment  of  interest,  nor  did  it  represent  a loss  actually 
sustained  within  the  year.  The  money  was  not  in  fact  paid  out.  Not- 
withstanding the  books  of  the  plaintiff  in  error  the  money  is  still  in  its 
possession  and  subject  to  its  control.  A system  of  bookkeeping  will  not 
justify  the  Government  in  claiming  taxes,  nor  will  it  justify  the  taxpayer 
in  claiming  exemption  from  taxation.  The  facts  must  control.  Baldwin 
Locomotive  Works  v.  McCoach,  221  Fed.  59,  Mitchell  Bros.  v.  Doyle, 
225  Fed.  437. 

3611  The  judgment  is  affirmed. 


3642  Proceeds  of  insurance  policies  paid  to  partnerships  on  death 

945  of  the  insured  are  exempt. — Receipt  is  acknowledged  of  your 
2864  letter  dated  October  30,  1919,  relative  to  the  meaning  of  Article 
72  [^2864]  of  Regulations  45. 

3643  You  call  attention  to  the  fact  that  Article  72  of  the  preliminary 
edition  of  Regulations  45  provided  that  “upon  the  death  of  an 

INC.  525  TAX 


insured  the  proceeds  of  his  life  insurance  policies,  whether  paid  to  his 
estate  or  to  individual  beneficiaries  (but  not  if  paid  to  a corporation  or 
partnership),  are  excluded  from  the  gross  income  of  the  beneficiary”  and 
that  the  same  provision  is  contained  in  Article  72  of  the  final  edition  of 
the  regulations,  with  the  exception  of  the  clause  ‘‘(but  not  if  paid  to  a 
corporation  or  partnership)”  being  omitted  and  the  words  “directly  or 
in  trust”  substituted  therefor.  You  also  point  out  that  Article  541  [^3201] 
of  the  regulations  establishes  the  status  of  the  proceeds  of  life  insurance 
policies  paid  upon  the  death  of  the  insured  to  corporation  beneficiaries, 
but  that  nowhere  in  the  regulations  is  a definite  statement  to  the  effect 
that  such  proceeds  paid  to  a partnership  are  or  are  not  to  be  reported 
in  the  gross  income  of  the  partnership.  You  ask  whether,  under  the 
circumstances,  the  term  “individual  beneficiaries”  as  used  in  Article  72 
of  the  final  edition  of  Regulations  45  also  means  partnership  beneficiaries. 

3644  In  reply,  you  are  advised  that  paragraph  (1)  of  Section  213(b) 
of  the  Revenue  Act  of  1918  specifically  provides  that  the  term  “gross 
income”  does  not  include  the  proceeds  of  life  insurance  policies  paid  upon 
the  death  of  the  insured  to  individual  beneficiaries  or  to  the  estates  of 
the  insured.  Section  218  of  the  Act  provides  that  in  computing  the  net 
income  of  each  member  of  a partnership  “there  shall  be  included  his  dis- 
tributive share,  whether  distributed  or  not,  of  the  net  income  of  the  partner- 
ship for  the  taxable  year.  * * * The  net  income  of  the  partnership  shall 
be  computed  in  the  same  manner  and  on  the  same  basis  as  provided  in 
Section  212,  except  that  the  deduction  provided  in  paragraph  (11)  of 
subdivision  (a)  of  Section  214  shall  not  be  allowed.”  In  Section  212  it  is 
specified  “that  the  term  ‘net  income’  means  the  gross  income  as  defined 
in  Section  213,  less  the  deductions  allowed  by  Section  214.”  These  pro- 
visions of  the  Revenue  Act  of  1918  do  not  require  that  the  proceeds  of 
life  insurance  policies  paid  upon  the  death  of  the  insured  to  a partnership 
be  reported  in  the  gross  income  of  the  partnership.  In  other  words,  the 
phrase  “individual  beneficiaries”  as  used  in  that  Act  is  held  to  include 
partnership  beneficiaries.  (Letter  to  The  Corporation  Trust  Company, 
signed  by  Commissioner  Daniel  C.  Roper,  and  dated  November  18,  1919.) 


(T.  D.  2951.) 

3615  Verification  of  returns. — Article  406  of  Regulations  45  is  hereby 
3017  amended  [the  matter  in  italics  being  new]  to  read  as  follows: 

“Art.  406.  Verification  of  returns.  All  income  tax  returns  must 
be  verified  under  oath  or  affirmation,  before  a7i  officer  duly  authoi'ized  to 
administer  oaths  either  by  the  laws  of  the  United  States  or  by  the  laws  of  the 
state  or  tei'ritory  ivhere  such  ojfcer  resides.  Persons  in  the  naval  or  military 
service  of  the  United  States  may  verify  their  returns  before  any  official 
authorized  to  administer  oaths  for  the  purposes  of  those  services. 
Income  tax  returns  executed  abroad  may  be  attested  free  of  charge  before 
United  States  consular  officers.  Where  a foreign  notary  or  other  official 
having  no  seal  shall  act  as  attesting  officer,  the  authority  of  such  attesting 
officer  should  be  certified  to  by  some  judicial  official  or  other  proper  officer 
having  knowledge  of  the  appointment  and  official  character  of  the  attest- 
ing officer.”  (T.  D.  2951,  signed  by  Commissioner  Daniel  C.  Roper,  and 
dated  November  19,  .1919.) 


INC. 


526 


I AX 


12-3-19. 

(T.  D.  2952.) 

United  States  u.  Berwiuit%  {District  Court  of  T.,  Oct.  ^0,  1919) 

Income  tax  returns— Authority  to  administer  oaths.— A com- 
missioner of  deeds  is  authorized  by  Section  [Article]  406,  Regulations  45, 
Treasury  Department,  to  administer  an  oath  to  an  income  tax  return  and 
where  such  oath  is  false  an  indictment  for  perjury  will  lie  under  Section  125 
of  the  Criminal  Code  of  the  United  States. 

8646  The  appended  decision  of  the  United  States  District  Court  for  the 
3017  Southern  District  of  New  York  in  the  case  of  the  United  States  of 
3645  America  v.  Hyman  Benowitz,  is  pubhshed  not  as  a ruling  of  the 
Treasury  Department,-  but  for  the  information  of  internal-revenue 
officers  and  others  concerned.  (T.  D.  2952,  signed  by  Commissioner 
Daniel  C.  Roper,  and  dated  November  19,  1919.) 


IN  THE  UNITED  STATES  DISTRICT  COURT  FOR  THE 
SOUTHERN  DISTRICT  OF  NEW  YORK. 

(Decided  October  20,  1919.) 

The  United  States  of  America  v.  Hyman  Benowitz. 

(On  demurrer  to  an  indictment  for  perjury  under  Section  125  of  the 
Criminal  Code.  The  indictment  charged  that  the  defendant  had  com- 
mitted perjury  by  falsely  swearing  to  an  income  tax  return  before  a com- 
missioner of  deeds  of  the  City  of  New  York.) 

8647  HAND,  J.  D.:  It  must  be  conceded  that  since  U.  S.  v.  Curtis,  107 
U.  S.  671  and  U.  S.  v.  Hall,  131  U.  S.  50,  the  crime  charged  in  the 

first  count  must  stand  or  fall  solely  upon  whether  Section  406  of  the  Regu- 
lations under  the  Income  Tax  Law  authorized  commissioners  of  deeds  to 
take  oaths  to  income  tax  returns,  U.  S.  v.  Morehead,  243  U.  S.  608,  or 
whether  under  Mr.  Justice  Story's  dictum  in  U.  S.  v.  Bailey,  9 Pet.  238, 
253,  257,  the  oath  was  taken  before  such  an  official  ‘‘in  conformity  with 
the  practice  and  usage  of  the  treasury  department." 

8648  Section  [Article]  406  begins  by  the  bare  statement  that  all  returns 
must  be  verified  on  oath,  in  that  respect  merely  repeating  the 

statute.  Yet  it  very  clearl}^  intended — though  it  must  be  confessed  it  is 
very  blindly  worded — to  cover  the  whole  matter,  because  it  at  once  pro- 
ceeds to  particulars,  providing  that  soldiers  and  sailors  may  take  oaths 
before  anyone  generally  authorized  to  administer  oaths  to  soldiers  and 
sailors  and  that  persons  abroad  may  go  to  consular  officers.  It  is  of  course 
absurd  to  suppose  that  the  section  taken  as  a whole  meant  to  say  that  only 
such  officers  might  administer  oaths.  If  so,  no  one  not  only  need,  but 
no  one  even  could  verify  his  return  unless  it  were  soldiers  and  sailors  and 
persons  abroad.  This  would  repeal  the  statute  in  substance;  indeed 
such  a regulation  would  be  illegal. 

3649  Finally,  the  section  concludes  with  a provision  for  the  certification 
of  oaths  taken  by  “a  foreign  notary  or  other  official  having  no  seal." 
This  of  course  directly  implies  that  foreign  notaries  may  take  such  oaths, 
and  that  there  are  also  officials  so  authorized  who  have  no  'seals  other 
than  they.  It  is  perfectly  apparent  from  this  language  that  those  who 
drafted  the  section  must  have  supposed  that  the  first  sentence  authorized 
iome  officers  to  take  oaths,  for  the  last  sentence  from  which  the  question 
waa  taken  would  be  without  any  conceivable  meaning  if  they  did  not,  just 
as  tbs  second  and  third  sentences,  while  logically  possible,  would  be  absurd 


INC 


527  TAX 


and  indeed  invalid  in  law.  If  so,  the  only  question  is  as  to  what  officers  the 
scriveners  of  the  section  must  have  meant.  Much  the  most  rational, 
and,  so  far  as  I can  see,  the  only  possible,  interpretation  is  that  they  meant 
to  include  all  such^as^were  authorized  by  the  local  law  to  take  oaths  in 
their  several  districts.  If  I do  not  so  interpret  the  language,  I must  sup- 
pose^* that  the  regulation  which  was  meant  to  put  the  statute  into  effect 
illegally  defeated  it  by  applying  it  in  a whimsically  capricious  way.  I 
intei'pret  the  regulation,  therefore,  as  intended  to  allow  a commissioner 
of  deeds  among  other  officials  to  take  such  an  oath. 

3650  It  becomes  unnecessary,  therefore,  to  consider  the  effect  of  Justice 
Story’s  dictum  in  U.  S.  v.  Bailey,  supra. 

The  second  count  is  concededly  good  if  the  first  is. 

Demurrer  overruled.  [Opinion  appended  to  T.  D.  2952,  ^[3648. 


3651  The  filing  of  Form  1000  by  personal  service  corporations  in 
2999  collecting  interest  on  tax-free-covenant  bond  interest.— 

Reference  is  made  to  your  letter,  dated  October  8,  1919  which  is 
quoted  here:  While  the  Revenue  act  of  1918  treats  a personal  service 

corporation  similar  to  a partnership,  no  provision  seems  to  have  been  made 
to  allow  a personal  service  corporation  to  take  advantage  of  the  tax-free 
•clause  when  collecting  coupons  from  bonds.  We  inquire  if  a personal 
service  corporation  may  alter  Certificate  Form  1000  when  collecting  coupons 
from  tax-free  covenant  obligations.”  1|In  reply  you  are  advised  that  per- 
sonal service  corporations  are  to  be  treated,  so  far  as  practicable,  on  the 
same  basis  as  partnerships  for  the  purposes  of  withholding  under  Section 
221  (b)  of  the  Revenue  Act  of  1918.  Corporations  which  have  received 
notice  from  the  Income  Tax  Unit  that  their  returns  as  personal  service 
corporations  have  been  approved  may  thereafter,  and  not  before,  issue 
Form  1000  in  collecting  interest  from  bonds  or  other  obligations  of  a 
corporation  containing  a so-called  tax-free  covenant  clause  in  the  same 
manner  as  and  to  the  same  extent  that  partnerships  are  authorized  to  use 
that  form.  The  form  should  bear  the  stamped  or  written  notation 
“Approved  by  the  Treasury  Department  as  Personal  Service  Corpo- 
ration on  (blank  date)”.  (Letter  to  The  Corporation  Trust  Company, 
signed  by  Commissioner  Daniel  C.  Roper,  and  dated  November  20,  1919.) 


INC. 


528  TAX 


12-4-19. 


3653  Amended  returns  and  refunds  for  years  prior  to  1914. — 

2497  Receipt  is  acknowledged  of  your  letter  of  September  8,  1919,  with 
reference  to  the  question  of  refund  in  the  case  of  your  client,  the 

Company,  , Wisconsin,  whose  invested 

capital  has  been  reduced  in  order  to  provide  for  depreciation  which  had  not 
been  deducted  during  the  years  1909  to  1917,  inclusive.  You  state  that  a 
letter  addressed  to  the  compaliy  by  the  Revenue  Agent  in  charge,  on 
August  15,  contained  the  following  paragraph: 

‘^On  account  of  the  limitation  contained  in  the  Revenue  Act 
of  1918,  no  refund  is  allowable  for  any  year  prior  to  1914. 

For  this  reason  it  will  be  useless  for  you  to  file  amended  re- 
turns for  years  prior  to  1914.” 

You  question  the  statement  made  therein  and  refer  to  Sections  3220 
[1f2497J  and  3223  [^[2315]  of  the  Revised  Statutes  in  support  of  your  con- 
tention that  the  company  should  be  entitled  to  file  amended  returns  for 
1909  and  all  subsequent  years.  Ifin  reply,  you  are  advised  that  the  state- 
ment of  the  Revenue  Agent  is  erroneous. 

3653  The  five-year  limitation  on  assessment  and  suit  contained  in  Sec- 
2360  tion  250  (d)  [^[2360]  applies  only  to  taxes  due  under  the  Revenue 

Act  of  1918. 

3654  Section  252  [^[24881  does  not  operate  so  as  to  take  away  the  rights 
2488  which  a taxpayer  has  under  Section  3228,  Revised  Statutes  [1[2615], 
2615  to  file  a claim  for  refund  whithin  two  years  after  the  time  the  cause 

of  action  accrued.  ^The  five-year  limitation  in  Section  252  does 
not  apply  to  claims  for  abatement.  (Letter  to  Ernst  and  Ernst,  Washing- 
ton, D.  C.,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  October 
9,  1919.) 


(T.  D.  2956.) 

3655  Deductions  allowed-Depletion  after  discovery  of  Oil  and 

2948  Gas  wells.  Proven  tract  or  lease.  Disproportionate  value, 

2949  Articles  220  and  221  of  Regulations  45,  amended. — Regula- 
tions 45  are  hereby  amended  by  substituting  for  Articles  220  and 

221  as  they  now  stand  the  following  three  articles: 

3656  Art.  220.  Oil  and  Gas  Wells.  Section  214  (a)  (10)  and  Section 
2948  234  (a)  (9)  provide  that  taxpayers  who  discover  oil  and  gas  wells 

on  or  after  March  1,  1913,  may,  under  the  circumstances  therein 
prescribed,  determine  the  fair  market  value  of  such  property  at  tbe  date  of 
discovery  or  within  30  days  thereafter  for  the  purpose  of  ascertaining 
allowable  deductions  for  depletion.  Before  such  valuation  may  be  made 
the  statute  requires  that  two  conditions  precedent  be  satisfied,  (1)  that  the 
fair  market  value  of  such  property  (oil  and  gas  wells)  on  the  date  of  discov- 
ery or  within  30  days  thereafter  became  materially  disproportionate  to 
the  cost,  by  virtue  of  the  discovery,  and  (2)  that  such  oil  and  gas  wells 
were  not  acquired  as  the  result  of  purchase  of  a proven  tract  or  lease. 

3657  Art.  220  (a).  Discovery  - Proven  Tract  or  Lease  - Property 
Disproportionate  Value.  (1)  For  the  purpose  of  these  sections 

of  the  Revenue  Act  of  1918,  an  oil  or  gas  well  may  be  said  to  be  discovered 
when  there  is  either  a natural  exposure  of  oil  or  gas,  or  a drilling  that  dis- 
closes the  actual  and  physical  presence  of  oil  or  gas  in  quantities  sufficient 
to  justify  commercial  exploitation.  Quantities  sufficient  to  justify  com- 
mercial exploitation  are  deemed  to  exist  when  the  quantity  and  quality  of 
the  oil  or  gas  so  recovered  from  the  well  are  such  as  to^afford^a  reasonable 

529  TAX 


INC. 


expectation  of  at  least  returning  the  capital  invested  in  such  well  through 
the  sale  of  the  oil  or  gas,  or  both,  to  be  derived  therefrom. 

3658  (2)  A proven  tract  or  lease  may  be  a part  or  the  whole  of  a proven 
area.  A proven  area  for  the  purposes  of  this  statute  shall  be  presumed 

to  be  that  portion  of  the  productive  sand  or  zone  or  reservoir  included  in 
a square  surface  area  of  160  acres  having  as  its  center  the  mouth  of  a well 
producing  oil  or  gas  in  commercial  quantities.  In  other  words,  a producing 
well  shall  be  presumed  to  prove  that  portion  of  a given  sand,  zone  or  res- 
ervoir which  is  included  in  an  area  of  160  acres  of  land,  regardless  of  pri- 
vate boundaries.  The  center  of  such  square  area  shall  be  the  mouth 
of  the  well,  and  its  sides  shall  be  parallel  to  the  section  lines  established  ' 
by  the  United  States  system  of  public  land  surveys  in  the  district  in  which 
it  is  located.  Where  a district  is  not  covered  by  the  United  States  Land 
surveys,  the  sides  of  said  area  shall  run  north  and  south,  east  and  west. 

3659  So  much  of  a taxpayer’s  tract  or  lease  which  lies  within  an  area 
proven  either  by  himself  or  by  another  is  “a  proven  tract  of  lease” 

as"^contemplated  by  the  statute,  and  the  discovery  of  a well  thereon  will 
not  entitle  such  taxpayer  to  revalue  such  well  for  the  purpose  of  depletion 
allowances,  unless  the  tract  or  lease  had  been  acquired  before  it  became 
proven.  And  even  though  a well  is  brought  in  on  a tract  or  lease  not  in- 
cluded in  a proven  area  as  heretofore  defined,  nevertheless  it  may  not 
entitle  the  owner  of  the  tract  or  lease  in  which  such  well  is  located  to  re- 
valuation for  depletion  purposes,  if  such  tract  or  lease  lies  within  a compact 
area  which  is  immediately  surrounded  by  proven  land,  and  the  geologic 
structural  conditions  on  or  under  the  land  so  inclosed  may  reasonably 
warrant  the  belief  that  the  oil  or  gas  of  the  proven  areas  extends  thereunder. 
Under  such  circumstances  the  entire  area  is  to  be  regarded  as  proven  land. 

3660  (3)  The  “property”  which  may  be  valued  after  discovery  is  the 
“weU”.  For  the  purposes  of  these  sections  the  “well”  is  the  drill 

hole,  the  surface  necessary  for  the  drilling  and  operation  of  the  well,  the 
oil  or  gas  content  of  the  particular  sand,  zone  or  reservoir  (limestone, 
breccia,  crevice,  etc.)  in  which  the  discovery  was  made  by  the  drilling 
and  from  which  the  production  is  drawn,  to  the  limit  of  the  taxpayer’s 
private  bounding  hnes,  but  not  beyond  the  limits  of  the  proven  area  as 
heretofore  provided. 

3661  (4)  A taxpayer  to  be  entitled  to  revalue  his  property  after  March 

1 1,  1913,  for  the  purpose  of  depletion  allowances  must  make  a dis- 

covery after  said  date  and  such  discovery  must  result  in  the  fair  market 
value  of  the  property  becoming  disproportionate  to  the  cost.  The  fair 
market  value  of  the  property  will  be  deemed  to  have  become  disproportion- 
ate to  the  cost  when  the  output  of  such  w^ell  of  oil  or  gas  affords  a reasonable 
expectation  of  returning  to  the  taxpayer  an  amount  materially  in  excess 
of  the  cost  of  the  land  or  lease  if  acquired  since  March  1,  1913,  or 
its  fair  market  value  on  March  1,  1913,  if  acquired  prior  thereto,  plus  the 
cost  of  exploration  and  development  work  to  the  time  the  well  was  brought 
in. 

3662  Art.  221.  Proof  of  discovery  of  oil  and  gas  wells.  In  order  to 
2945  meet  the  requirements  of  the  preceding  article  to  the  satisfaction  of 

the  Commissioner  the  taxpayer  will  be  required,  among  other  things, 
to  submit -the  following  with  his  return:  (a)  a map  of  convenient  scale, 
showing  ther  location  of  the  tract  and  discovery  well  in  question  and  of  the 


INC. 


530  TAX 


12-26-19. 


nearest  producing  well,  and  the  development  for  a radius  of  at  least  three 
miles  from  the  tract  in  question,  both  on  the  date  of  discovery  and  on  the 
date  when  the  fair  market  value  was  set;  (b)  a certified  copy  of  the  log  of 
i\'  the  discovery  well,  showing  the  location,  the  date  drilling  began,  the  date 

of  completion  and  beginning  of  production,  the  formations  penetrated,  the 
oil;  gas  and  water  sands  penetrated,  the  casing  record,  including  the  record 
of  perforations,  and  any  other  information  tending  to  show  the  condition 
of  the  well  and  the  location  of  the  sand  or  zone  from  which  the  oil  or  gas  is 
produced  on  the  date  the  discovery  was  claimed;  (c)  a sworn  record  of  pro- 
duction, clearly  proving  the  commercial  productivity  of  the  discovery  well; 
I (d)  a sworn  copy  of  the  records,  showing  the  cost  of  the  property;  and  (e) 

a full  explanation  of  the  method  of  determining  the  value  on  the  date  of 
discovery  or  within  30  days  thereafter,  supported  by  satisfactory  evidence 
of  the  fairness  of  this  value.  (T.  D.  2956,  signed  by  Commissioner  Daniel 
C.  Roper,  and  dated  December  2,  1919.) 


3663  Re  method  of  computing  tax  in  the  case  of  fiscal  year 
[53 121  corporations. — Reference  is  made  to  your  letter  dated  October 

27,  1919,  addressed  to  the  Chairman  of  Committee  on  Appeals 
and  Review,  and  by  him  referred  to  this  office  for  reply,  after  full 
consideration  had  been  given  to  the  subject  matter  contained  therein. 
Ifin  reply  you  are  advised  that  the  questions  presented  were  carefully 
considered  before  the  regulations  were  issued  or  the  forms'^were  drafted, 
and  have  since  that  time  been  the  subject  of  most  thoughtful  con- 
sideration and  analysis.  The  view  of  the  Department  is  expressed  in 
the  regulations  and  the  forms  now  in  use.  1[The  Bureau,  therefore, 
does  not  deem  it  advisable  to  modify  the  regulations  or  to  make  any 
change  in  the  forms  until  such  time  as  it  may  be  [required  to  do  so  by  a 
court  decision.  (Letter|to  K.  Sheridan  Hayes,  Washington,  D.  C.,  signed 
by  Commissioner  Daniel  C.  Roper,  and  dated  November  5,  1919.) 


INC. 


531 


TAX 


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9 17-19. 


COMMENT 

The  regulations  in  the  body  of  the  book,  on  pages  55  to  300, 
consist  in  the  main  of  the  Treasury  Decisions  (T.  D.’s)  issued  by 
the  Treasury  Department  through  the  office  of  the  Commissioner 
of  Internal  Revenue  from  the  time  of  the  approval  of  the  original 
Income  Tax  Law,  Act  of  October  3,  1913,  up  to  and  including 
February  12,  1919.  In  addition  are  given  court  decisions  and 
numerous  letters  and  extracts  from  letters  emanating  from  the 
office  of  the  Commissioner  of  Internal  Revenue,  most  of  which 
were  embodied  in  The  Corporation  Trust  Company’s  Income  Tax 
Service  for  1914,  for  1915,  for  1916,  for  1917,  or  for  1918.  ; 

At  this  writing  (February  18,  1919),  the  regulations  based  on  the 
Revenue  Act  of  1918,  have  not  been  issued  by  the  Treasury 
Department. 

Therefore,  wc  have  included  most  of  the  old  regulations  which 
have  not  been  specifically  repealed  or  superseded,  even  though 
some  of  these  contain  statements  inconsistent  with  the  changed 
provisions  of  the  law. 

As  indicated  on  page  4,  the  Income  Tax  Law  is  reprinted,  begin- 
ning on  page  55,  having  its  paragraphs  numbered  to  correspond 
with  the  numbering  of  the  paragraphs  of  the  law  as  printed  as 
a unit  beginning  on  page  5.  On  the  succeeding  pages  all  regulations 
explaining,  enlarging,  or  giving  specific  directions  for  the  enforce- 
ment of  the  law  provisions  in  a particular  paragraph  or  group  of 
paragraphs  of  the  law  are  printed  immediately  following  such  law 
paragraph  or  group  of  paragraphs. 

A generous  employment  of  titles  to  subjects  and  sub-subjects 
throughout  the  book  will  facilitate  its  use. 

Following  each  regulation  provision  is  a citation  to  its  source, 
and  the  date  thereof  and  on  Supplementary  Page  106,  following,  is 
printed  a list  of  all  sources  arranged  numerically  by  T.  D.  number, 
by  article  number  in  the  general  Regulations  No.  33  of  January  5, 
1914,  by  article  and  paragraph  number  of . Regulations  No.  33, 
Revised,  January  2,  1918,  by  dates  of  letters  and  other  special 
matters,  showing  at  what  paragraphs  these  sources  appear  in  this, 
our  1919  service. 

Each  of  the  paragraphs  reprinted  in  the  Service  contained  in  the 
government’s  several  extensive  compilations  has  been  listed  in  the 
“T.  D.  and  Special  Matter  Finder”  (beginning  with  T.  p.  2090  on 
Supplementary  Page  107)  with  a very  brief  summary  of  paragraph 
content. 

General  Regulations  No.  33  of  January  5,  1914,  and,  in  turn. 
Regulations  No.  33,  Revised,  January  2,  1918,  repeated  exactly, 
much  of  the  regulations  issued  previous  to  the  respective  dates  of 
issue.  In  such  cases  we  have  eliminated  the  earlier  rulings.  Other 
exact  duplications,  definite  repealings  and  revocations,  and  specific 
amendments  have  been  similarly  handled.  Matter  applicable  solely 
to  the  collection  of  the  tax  for  prior  years  has  not  been  included. 


Income  Tax 
Supplemeottry  Page  1 


TABLE  OF  FORMS 

Korm  Supplementary 

Number  Reproduced  on  Page 

46  - 3 

47  5 

47A 53 

1000  46 

1001  ......30 

lOOlA 31 

1012  49 

1013  32 

1031T 7-8 

1040  9-14 

1040A 15-20 

1040C 87 

1040F 21-24 

1040T 25-26 

1041  59 

1042  36 

1058  33 

1059  47 

1065 55 

1065A 77 

1078 34 

1087 18 

1096 27 

1096A 45 

1096B 28 

1098  35 

1099  29 

1114  See  U 1848  in  body  of  book 

1115  51 

1116  65 

1117  82 

1118  83 

1120 37-44 

I120A 69 

1122 48 

1124 50 


« 


Income  Tax 
Supplementary  Page  2 


IXTXKHIL  RETINTJ*. 
rorin  <»-R«TlMd  Uatcb,  UlS. 
" 160, ooa 


CLAIM  FOR  REFUND. 


TAXES  ERRONEOUSLY  OR  ILLEGALLY  COLLECTED'. 

iU50  AMOUNTTS  PAID  FOR  STAMPS  USED  IN  ERROR  OR  EXCESS. 


StMte  of. 

County  of. 


l-zj'' 


‘ IMPORTANT. 

THi  cUim  should  be  (onrarded  to  tbo  Collector  of 
Interoal  Rereiuw  to  whom  the  Tax  was  paid  and  imut 
be  accompaoied  b;  CoUectcr’s  Receipt  therefor. 


DaU  of  filing  to  It 


plainly  rtamped  hert 


I Write  Nu>< 

H a can  b. 


(Neme  ot  claimant) 


(Add^  ot  cRdmant;  ^ve  street  ^ nnmbtf  as  w^as  dt7  or  tOem,  Stt^.) 

This  deponent  being  dulv  sworn  according  to  law  deposes  and  says  that  this  claim  is  made  on  behalf  of  the 
claimant  named  ^liove,  and  that  the  facts  stated  bolow  witn  reference  to  tho  claim  are  true  and  complete: 


1.  Btisiness  engaged  in  by  claimant — .......... 

2.  Character  of  assessment  or  tax »-•. — 

(State  Ibr  or  upon  what  the  tax  was  assessed  or  the  stamps  affixed.) 


3.  Amount  of  assessment  or  stamps $ 

4.  Amount  now  asked  to  bo  refunded  (or  such  greater  amoimt  as  Is  legally  refundable) ...  $ 


5.  Date  of  payment  of  assessment  or  purchase  of  stamps 

Deponent  verily  believes  that  the  amount  stated  in  Item  i should  bo  Cefunded  and  claimant  now  asks  and 
demands  refund  of  said  amoimt  for  tho  following  reasons: 


And  this  deponent  further  alleges  that  the  said  claimant  iSiflJit  indebted  to  the  United  States  in  any  amount 
whatever,  and  that  no  claim  has  heretofore  been  presented,  ex£S^t  as  .stated  herein,  for  the  refunding  of  the  whole 
or  any  part  of  the  amount  stated  in  Item  3. 


Stoom  to  and  tubseribed  before  me-ihia. 


Signed: 


day  of 


19.. 


‘Vrui;;)  ' “ 

(TU«  affidavit  may  be  awom  to  before  a Deputy  CoUectoc  of  Internal  Revenue  without  charge.) 


Income  Tax 
Supplementary  Page  3 


CERTIFICATES. 

I certify  that  an  examination  of  the  records  of  the  Pommissioner’s  Office  shows  the  following  facts  as  to  the 
assessment  and  payment  of  tho  tax: 


Name  or  taxtateb. 

Character  of  assenment 
and  period  covered. 

Ust. 

Year. 

Month. 

Page. 

Une. 

Amount. 

Date  paid. 

District  to 
which  paid. 

$ 

1 

Asscsmenl  Clerk,  JrUcmal  Revenue  Bureau. 


I certify  that  the  records  of  my  office  show  tho  following  facts  as  to  the  purchase  of  stamps: 


To  -wnoM  SOLD  OB  JSSDED. 

SlDd. 

Number. 

Denomination. 

Date  of  sale 
or  issue. 

Amounts 

1 If  special  tai 

Serial  number. 

stamp,  state; 

Period 

eommenclDg— 



Collector J)ittricl 


Form  M. 

Schedule  Number District 

Allowed  or  Eeiected  Number. 

(Natnre  of  tax.) 

Address 


' Claim  ciamlncd  by— 


Claim  approved  by— 


Chief  of  Diotsion. 


Examined  .and  submitted  for  action. 

, Amount  claimed $ 

Amoimt  allowed 

Amount  rejected I... 


,19-. 

COMMITTEE  ON  CLAIMS.' 


Income  Tax 
Supplementary  Page  4 


CLAIM  FOR  ABATEMENT 

TAXES  ERRONEOUSLY  OR  ILLEGALLY  ASSESSED 


taSASORY  BEPARTMTKT, 
U.  8.  iMTtKNAL  Revest*. 
Ponn  47^  Revised  Aprd,  iwia 
Ed.  3W,eOO. 


State  of 

County  of^ 


IMPORTANT 

Thu  «I«im  thouM  b«  forwarded  to  the  Collector 
of  Internal  Revenue  from  whom  notice  of  aMeee- 
ment  wae  received* 


(Nome  of  claimimt.) 


DATE  OF  FIUNG  TO  8E 


PUJKIY  STASiPEOHEHE 


(Address  of  claimant;  etro  street  end  number  as  well  as  city  or  tovn,  and  Sui«.) 

This  deponent  being  duly  sworn  according  to  law,  deposes  and  says  that  this  claiin  Is  made  on  behalf  of  the 
doimant  named  above,  and  tbat  the  facts  stated  below  with  reference  to  said  claim  are  true  and  complete: 


1.  Business  engaged  in  by  claimant 

2.  Cbaracter  of  assessment  or  tax 

3.  Amount  of  assessment S. 

4.  Amount  now  asked  to  bo  abated S. 


Deponent  verily  believes  that  tho  amoimt  stated  in  item  4 should  be  abated,  and  claimant  now  asks  and 
demands  abatement  of  said  amount  for  the  following  reasons: 


Sworn  to  and  subscribed  before  mo  this 
day  of 19 


Signed: 


(Thia  allidAvit  may  be  avrora  to  before  a Deputy  Collector  of  lutomal  Revenue  without  charge.) 


Income  Tax 
Supplementary  Page  5 


CERTIFICATE  OF  ASSESSMENT 

I certify  that  an  examination  of  the  records  of  the  Commissioner’s  Office  shows  the  following  facts  as  to  the 
assessment  and  payment  of  the  tax : 


NAME  AND  ADDRESS. 


CUARACTER  OP  PERIOD 

Assessment  or  Co\'ered  rt  Lbt.  Year.  Month.  Page. 

Article  Taxed*  Assessment* 


Assessment  Clerh,  Internal  Revenue  Bureau. 


Abatement  Order  Ab, 

Claimant ... 
Addres.<i 


Cibn  eiamined  by— 


C.»\m  apprared  by  — 


Chh*/  0/  Difiiion. 


Amount  claimed,  $. 
Amount  allowed,  $. 
Amount  rejected,  $. 


Form  47 


District 


Examined  and  submitted  for  action IB. 

COMMITTEE  ON  CLAIMS. 


Income  Tax 
Supplementary  Page  6 


ORIGINAL 

Form  1C31  T— UNITED  STATES  INTERNAL  REVENUE  SERVICE 

TENTATIVE  RETURN  AND  ESTIMATE 

OF 

CORPORATION  INCOME  AND  PROFITS  TAXES 

AND 

REQUEST  FOR  EXTENSION  OF  TIME  FOR  FILING  RETURN 

THIS  FORM  WITH 
DUPLICATE  AND 
REMITTANCE 
COVERING 

ONE-FOURTH 

PRINT  BELOW  TAXPAYER’S  NAME  AND  PRINCIPAL  PLACE  OF  BUSINESS 

OF  ESTIMATED  TAX 

MUST  REACH  THE 

COLLECTOR'S  OFRCE 

ON  OR  BEFORE 

MARCH  IS.  1919. 

Da  no!  wrHe  in  this  space 

I AMOUNT  PAID 


(Cashier's  Stamp) 


Occk  «r  drall ... 

Moiitv  ar^ar 

Cvruqr  ar  rain 

Ctrtificilc  of  iihlebltdness 

— 

Date No 

(To  bo  entered  by  taxpayer.)  (To  bo  entered  by  Collector  ) 


Collector  of  Internal  Revenue, 


The  amount  stated  below  is  remitted  herewith  in  payment  of  not  les.**  than  one-fourth  of  the  estimated  amount  of  the  income,  war- 

profits,  and  excess-profits  taxes  for  the  year  ended of  the  corporation 

whose  name  and  address  appear  at  the  head  of  this  form. 

An  extension  of days  in  the  time  allowed  for  filing  a completed  return  is  requested. 

It  is  not  possible  to  file  a completed  return  on  or  before  March  15,  1919,  for  the  following  reasons: 


Note. — A parent  company  may  make  a tentative  return  and  pay  the  first  installment  of  the  tax  on  behalf  of  all  its  subsidiaries 
without  apportioning  the  tax  among  them  until  the  completed  return  is  filed. 


Estimated  amount  of  tax. $. 

Amount  of  remittance  herewith: 


Check  or  draft. 

Money  order. 

Currency  or  coui. 

Cert  i float C.S  of  uidel>tedno.s< 

Total 

1 

» 

^ 

AFFIDAVIT 


The  undersigned,  president  and  treasurer,  respectively,  of  the  corporation  whose  name  and  address  appear  at  the  head  of  this 
form,  being  severally  duly  sworn,  each  (or  himself  deposes  and  says  that  the  foregoing  is  a fair  estimate  of  the  total  amount  of  the 
income,  war-profits,  and  excess-profits  taxes  of  the  said  corporation  for  the  period  stated  above,  and  that  the  above-stated  reasons 
why  a completed  return  can  not  be  filed  on  or  before  March  15,  1919,  are  true. 

Sworn  to  and  sub-  1 ^ ,9 

•cnbed  before  me  | (ProsiJcnt.t 


(Nam*  ^ officer.)  (Treasurer.) 


(OfficUl  capacity.) 


Income  Tax 
Supplementary  Page  7 


[This  Form  1031T — Duplicate  (see  Supplementary  Page  7,  for  original)  is  at- 
tached to  the  oripnal  (perforated),  the  reverse  of  both  sheets  being  blank.] 


DUPLICATE 

I to  be  sent  to  Collec- 
tor with  original 


Form  1031T-UNITED  STATES  INTERNAL  REVENUE  SERVICE 

TENTATIVE  RETURN  AND  ESTIMATE 


OF 


* THIS  FORM 


CORPORATION  INCOME  AND  PROFITS  TAXES 


DULY  APPROVED 
BY  THE 

COLLEaORMUST 
ACCOMPANY 
THE  TAXPAYER’S 
COMPLETED 
RETURN 
WHEN  FILED 


AND 

REQUEST  FOR  EXTENSION  OF  TIME  FOR  FILING  RETURN 


PRINT  BELOW  TAXPAYER’S  NAME  AND  PRINCIPAL  PUCE  OF  BUSINESS 


PENALTIES 


Per  Making  False  or 
Fraudulent  Retern. 

Not  exceeding  $10,000 
or  not  exceeding  one 
year’s  imprisoninent, 
or  both,  in  the  dis- 
cretion of  the  court, 
and,  in  addition,  50 
per  cent  of  the  tax 
evaded. 

For  Failing  to  Mako 
Return  on  Time. 

Not  more  than  $1,000, 
and,  in  addition,  25 
per  cent  of  the 
amount  of  tax  due. 


Date. 


(To  be  enUred  by  taxpayer.) ' 


No ; : 

(To  be  entered  by  Clollector.) 


Collector  of  Internal  Revenue, 


The  amount  stated  below  is  remitted  herewith  in  payment  of  not  less  than  one-fourth  of  the  estimated  amount  of  the  income,  war- 

profits,  and  excess-profits  taxes  for  the  year  ended of  the  corporation 

whose  name  and  address  appear  at  the  head  of  this  form 


An  extension  ol days  in  the  time  allowed  for  filing  a completed  return  is  requested. 

It  is  not  possible  to  file  a completed  return  on  or  before  March  15,  1919,  for  the  following  reasons: 


Notb. — A parent  company  may  make  a tentative  return  and  pay  the  first  installment  o'  the  tax  on  behalf  of  all  its  subsidiaries 
without  ajbportioning  the  tax  among  them  until  the  completed  return  is  filed. 


Estimated  amount  of  tax $ 

Amount  of  remittance  herewith 


Check  or  draft. 

Money  order 

Currency  or  coin 

Certifleate  of  Indebtodnoss 

Total. 

$ - 

$ - 

$ 

$ 

$ 

COLLECTOR’S  APPROVAL 

In  consideration  of  the  filing  of  this  tentative  return  and  the  payment  of  not  less  than  one-fourth  of  the  estimated  amount  of  the  tax, 
and  for  the  reasons  stated  above,  the  time  for  filing  the  completed  return  of  the  taxpayer  whose  name  and  address  appear  at  the.  head 


of  this  fonn  is  hereby  extended,  by  authority  of  the  Commissioner  of  Internal  Revenue,  until 

If  the  remittance  atcompan^ng  this  tentative  return  exceeds  one-fourth  of  the  tax  as  computed  on  the  completed  return,  the 
excess  ^11  be  credited  against  the  balance  remaining  to  be  paid.  If  the  remittance  is  less  than  one-fourth  of  the  tax,  the_  balance 
due,  with  interest  at  the  rate  of  six  per  cent  per  annum  from  March  15,  1919,  must  accompany  the  completed  return.  If  the  amount 
paid  exceeds  the  total  tax  as  shown  by  the  completed  return,  the  excess  will  be  refunded. 


Date— 

a— Moi. 


Collector  of  Intamal  Revenue. 
.District  of 


P IncomeTax 
Sopplementary  Page  8 


OF  INCOME  TAXAfil*  £ 1918  RATES 


aiiNiaAOT  TVNaaxNi  no  HOioanoD  ox  u qnSs  dNV  aaan  Naoiaa  Hovxaa 


Income  Tax 
Supplementary  Page  9 


Income  Tax 
Supplementary  Page  9 


Page  1 of  Form  1040 


income  Tax 
Supplementary  Page  10 


Income  Tax 
Supplementary  Page  id 


Income  Tax 
Supplementary  Page  id 


Page  2 of  Form  1040 


Income  Tax 
Supplementary  Page  12 


Paee  3 of  Form  1' 


2 W W«fc  TAXPAYER’S  WORK  SHEET  FOR  RETURN  OF  INCOME  TAXABLE  AT  1918  RATES 

i A.  itHCOME  FROM  BUSINESS  OR  PROFESSION.  


Income  Tax 
Supplementary  Page  12 


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Income  Tax 
Supplementary  Page  12 


Income  Tax 
Supplementary  Page  12 


Page  4 of  Form  1040 


Income  Tax 

Supplementary  Page  14 


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Income  Tax 
Supplementary  Page  13 


Income  Tax 
Supplementary  Page  13 


Page  5 of  Form  1040 


INSTRUCTIONS  FOR  FILLING  IN  TAXABLE  INCOME 


Income  Tax 

Supplementary  Page  14 


Income  Tax 
Supplementary  Page  14 


o 

«4H 

o 

VO 

u 

00 

e* 


Income  Tax 
Supplementary  Page  14 


Fit  w«fTi  fint 


Page  1 of  Return 

Form  1040A.— tTNITED  STATES  INTERNAL  REVENUE  SERVICE 

INDIVIDUAL  INCOME  TAX  RETURN 

FOR  NET  INCOMES  OF  NOT  MORE  THAN  $5,000 
For  Calendar  Year  1918 


DEUVER  OR  SEND 
THIS  RETURN 
WITH  PAYMENT 
TO  COLLECTOR  OF 
INTERNAL 
REVENUE  ON  OR 
BEFORE 
MARCH  15, 1919 

DETACH  AND  KEEP 
•WORK  SHEET 
AND  INSTRUCTION 
SHEET 

1.  Did  you  2.  If  so,  what  address 

make  a re-  did  you  give  on 

turn  for  1917? that  return? 

3.  To  what  col-  4.  Give  number,  if  any,  assigned  to 

lector’s  office^  you  for  1917  if  it  does  not  appear 

was  it  sent?  1 in  address  at  head  of  return 

(Give  district  or  city  and  State.) 

6.  "Were  you  in  1918  6.  If  not,  were  you  the  head  of  a 

married  and  living  - family  as  defined  in  instructions 

with  wife  (or  husband)? under  “Personal  Exemption?”  ... 

8.  If  you  claim  any  additional  exemption  on  ac- 
count of  dependent  persons  other  than  your 

children,  what  was  their  relationship  to  you  ? 


Do  not  write  in  this  sjHce 


FIRST  PAYMENT 


(Caahier’s  Stamp.) 


CASH  CHECK  M.  0. 


Examined  by 


7.  How  many  dependent  persons  under  18  (or 
mentally  or  physically  defective)  received 
their  chief  sup^rt  from  you  during  1918  ?.. 
9.  Write  “R”  if  this  return  shows 
income  received,  or  “A”  if  it 
shows  income  accrued 


10.  Did  your  wife  (or  husband)  or 

minor  child  make  a separate  return?  

(If  so,  give  name  and  address  thereon.) 

U.  Did  you  oryour  wife  (or  husband)  or 
dependent  minor  children  receive 

any  interest  on  U.  S.  Liberty  Bonds, 
or  any  salary  not  reported  elsewhere 

in  this  return  or  in  aseparate  return?  

(If  60,  give  sources  and  amounts.) 

12.  Enter  name  and  address  of  each 
■organization  to  which  you  made 

■contributions  claimed  as  deduc- 
tions, and  amount  paid  to  each. 

13.  Enter  in  this  table  details  concerning  repairs,  wear  and  tear,  and  property  losses,  claimed  as  deductions  in  Schedules  A,  E,  and  I 
on  page  2 of  return  (see  instructions): 


I.  Refer 
to  “A," 

2.  Kind  of  property. 

(If  buildings,  state  also  ma- 
terial ol  whicn  constructed.) 

3.  Year 
ac- 
quired. 

4.  Cost  of  property 
(or  market  value 
March  1,  1913). 

5.  Repairs  not 
ofiset  by  claims 
(or  wear  and  tear 
•or  losses. 

Wear  and  tear  (depreciation)  and  depletion 
charged  off — 

Losses  not  compensated  for  by 
insurance. 

6. 

Rate. 

7.  Amount  pre- 
vious years. 

8.  Amount  this 
year. 

9.  Cause  of  loss. 

10.  Amount  of 
loss. 

t ■ 

% 

T 

$ 

t 

1 

1 

1 

CALCULATION  OF  TAX 


Do  not  write  here. 

M.  Net  incooe  shown  on  page  2,  Item  J 

$ ..J 

Do  not  write  here. 

P.  Tax  doe  (6fo  on  amount  of  Item  0) 

$ 

N.  Less  personal  exemption  (see  IiulnictioD  VI) . 

O.  Balance  (ioeonie  taxable  at  6^1 .. 

Q.  Less  normal  lax  of  2%  on  Item  F 

1 1 

R.  Balance  of  lax  due 

1 

NOTE.— If  the  amount  on  line  O exceeds  *4,000,  the  excess  is  taxable  at  12%,  I 
and  your  return  should  be  made  on  Form  1040.  | 

— 

S.  Amount  of  lax  paid  on  submission  of  return 

1 



AFFIDAVIT 

I swear  (or  affirm)  that  this  return,  to  the  best  of  my  knowledge  and  belief,  is  a true  and  complete  statement  of  all  taxable  gains, 
profits,  and  income  received  by  or  accrued  to  mo  (or  tho  person  for  whom  this  return  is  made)  during  the  year  1918,  and  that 
all  deductions  entered  or  claimed  herein  are  allowable  under  the  law. 


(If  return  U made  by  agent,  tbe  reason  tberelor  must  be  stated  on  this  line.) 
Sworn  to  and  subscribed  before  me  this day  of 1919.  


(Signature  of  individual  or  agent.) 


(Blgnature  of  officer  administering  oath.) 


(Address  of  individual  ot  agent.) 

Page  1 of  Form  1040A 


Income  Tax 
Supplementary  Page  15 


DETACH  RETURN  HERE  AND  SEND  IT  TO  COLLECTOR  OF  INTERNAL  REVENUE  AT 


fa|t2ofEeb!7B. 


RETURN  OF  TAXABLE  INCOME  inline  of  wUe  (or  lm.b«nd)tnddep#oden»iiiui«r\ 

\ tliildrea,unle»»  reported  ia  tsporate  retiBcs  (trelutrsdiM  1)  / 


A.  INCOME  FROM  BUSINESS  OR  PROFESSION. 

$ 

COST  OF  GOODS  SOLD: 

4.  Labor — 

$ 

OTHEP.  BUSINESS  DEDUCTIONS: 

12.  Salaries  and  wages  not  reported  as 
“Labor”  under  “Cost  of  Goods  Sold”.. 

1 

6.  Material  and  supplies 

1.?.  Ttfint  _ 

6.  Merchandise  bought  for  sale 

14.  Interest  on  business  indebtedness....... 

7.  Other  costs 

15.  Taxes  on  business  and  business  property 

16.  Repairs,  wear  and  tear,  and  property 

losses 

8.  Plus  inventories  at  beginning  of  year 

0.  Total 

3 

17.  Bad  debts  arising  from  sales 

10.  Less  ievestories  at  end  of  year 

18.  Other  expenses 

11.  Net  Cost  or  Goons  Sold 

S 

19.  Total  Other  Business  Deductions 

$ — 

20.  Net  Cost  or  Goons  Sold  P: 

LU3  Total  Other  Business  Deductions  

2 

21.  Net  Income  ft.om  Business  or  Profession  .. 

B.  INCOME  FROM  SALARIES,  WAGES,  COMMISSIONS,  BONUSES,  DIRECTOR’S  FEES,  AND  PENSIONS. 

I.  By  whom  received. 

2.  Occupation. 

3.  Name  and  address  of  employer. 

4.  Gross  income. 

1 5.  Deductions, 

1 if  any.  | 

s 

! 

Net  IrreoME  from  S alaries,  etc.  (total  of  column  4 minus  total  of  column  5) 

C.  INCOME  FROM  PARTNERSHIPS,  PERSONAL  SERVICE  CORPORATIONS,  AND  ESTATES  AND  TRUSTS  (not  including 

amounts  reported  under  F and  K). 

(State  name  and  addross  of  partnership,  etc.).  

1 

$ -1 

D.  PROFIT  FROM  SALE  OF  LAiN’D,  EUILDL’'iGS,  STOCKS,  BONDS,  AfID  OTHER  PROPERTY. 


1.  Kind  of  property. 

2.  Year 
acquired. 

3.  Name  of  purchaser  or  broker. 

4.  Sale  price. 

6.  Original  cost 

or  market  value 
March  1, 1913. 

6.  Cost  of  subse- 

quent improve- 
ments, if  any. 

7.  Depreciation 
subscquoatly 
sustained. 

1 

jS 

Net  Profit  from  Sales  (total  of  cols.  4 and  7 minus  total  of  | 
cols.  Sand  6) 

!s 

E.  INCOME  FROM  RENTS  AND  ROYALTIES. 


1.  Kind  of  property. 

2.  Name  and  address  of  tenant  or  lessee. 

3.  Cash  or  equiva- 
lent received. 

4,  Wear,  tear,  repair?, 
and  pTo^rty  losses. 

5.  Othersxpenses 
and  losses. 

$ 

* 

? 

NETlNcOifE  FROJI  RENTS  AND  ROYALTIES  (total  c,f  col.  3 min  US  total  of  cols.  4 and  5). 

? 

F.  INTEREST  ON  CORPORATION  BONDS  CONTAINING  TAX-FREE  COVENANT,  ON  WHICH  A TAX  OF  2^  WAS  PAID  BY  DEBTOR  C0RP0R.ATI0N 


G.  OTHER  INCOME  (not  including  dividonds)  (State  each  source  separately). 

1.  Cash  received. 

o.  Deducticfia,  if  any. 

$ 

$ 

S 

Net  Total  (total  of  column  1 minus  total  of  column  2)..„ 

3 1 



1 

H.  TOTAL  NET  INCOME  FROM  ABOVE  SOURCES. 


I.  GENERAL  DEDUCTIONS  NOT  INCLUDED  ABOVE. 


t paid. 


, Losses  by  fire,  storm,  orcas- 
ualiy  not  claimed  above. 


4 Contribotions  . 


5.  Otbcr  deductions,  if  any. 
Total 


J.  Total  net  income  on  which  normal  tax  is  to  be  caiculatsd  (H  minus  I)  (Enter  as  Item  M,  page  1) 

K.  Dividends  on  stock  of  corporations  organized  or  doing  business  in  the  United  States  (including  dividends  received  through 

partnerships,  personal  service  corporations,  and  fiduciaries) 

L.  Total  net  income  (if  this  amount  is  over  55,000,  make  your  return  on  Form  1040) 


Page  2 cf  Form  1040A 


Income  Tax 
Supplementary  Page  16 


RETAIN  THIS  SHEET  AND  INSTRUCTION  SHEET 


DETACH 

THE  RETURN  (CON- 
TAINING  AFFIDAVIT) 
AND 

DELIVER  OR  SEND  IT 
WITH  PAYMENT 
TO  COLLECTOR  OF 
INTERNAL  REVENUE 
ON  OR  BEFORE 
MARCH  15, 1919 


KEEP  THIS 
WORK  SHEET 
AND  THE 
INSTRUCTION 
SHEET 


Pag©  1 of  Work  Sheet 

Form  1040A.— UNITED  STATES  INTERNAL  REVENUE  SERVICE 

WORK  SHEET  FOR  INDIVIDUAL  INCOME  TAX  RETURN 

FOR  NET  INCOMES  OF  NOT  MORE  THAN  $5,000 
For  Calendar  Year  1918 


IF  YOU  NEED 
ASSISTANCE 
GO  TO  A 

DEPUTY  COLLECTOR 
OR  TO  THE 
COLLECTOR'S  OFFICE 
BUT  FIRST 
READ  INSTRUCTIONS 
AND 

FILL  OUT  THIS  SHEET 
(FACE  AND  BACK) 

IN  PENCIL 

AS  WELL  AS  YOU  CAN 


1.  Did  you  2.  If  so,  what  address 

make  a re-  did  you  give  on 

turn  for  1917? that  return? 

3.  To  what  col- 
lector’s office 

was  it  sent  ? 

(Give  district  or  city  and  State.) 

5.  Were  you  in  1918  6.  If  not,  were  you  the  head  of  a 

married  and  living  family  as  defined  in  instructions 

with  wife  (or  husband}? under  “Personal  Exemption  ?” — 

8.  If  you  claim  any  additional  exemption  on  ac- 
count of  dependent  persons  other  than  your 


4.  Give  number,  if  any,  assigned  lo 
you  for  1917  if  it  does  not  appear 
in  address  at  head  of  return 


7.  How  many  dependent  persons  under  18  (or 
mentally  or  physically  defective)^ received 
their  chief  support  from  you  during  1918?.. 

9.  Write  “K’’  if  this  return  shows 
income  received,  or  “A”  if  it 


children,  what  was  their  relationship  to  you? shows  income  accrued 


10.  Did  your  wife  (or  husband)  or 

minor  child  make  a separate  return? 

(If  so,  give  name  and  address  thereon.) 

11.  Did  you  or  your  wife  (or  husband)  or 
dependent  minor  children  receive 
any  interest  on  U.  S.  Liberty  Bonds, 
or  any  salary  not  reported  elsewhere 

in  this  return  or  in  a separate  return  ? 

, (If  so,  give  sources  and  amounts.) 



12.  Enter  name  and  address  of  each 
organization  to  which  you  made 
contributions  claimed  as  deduc- 
tions, and  amount  paid  to  each. 

13.  Enter  in  this  table  details  concerning  repairs,  wear  and  tear,  and  property  losses  claimed  as  deductions  in  Schedules  A,  E,  and  I 
on  page  2 of  return  (see  instructiona): 


1.  Refer 
to  “A,” 
"E,”  or 
"I.” 

2.  Kind  of  property. 

(If  building,  state  also  ma- 
terial of  wlucn  constructed.) 

3.  Year 
ac- 
quired. 

4.  Cost  of  property 
(or  market  value 
March  1, 1913). 

6.  Repairs  not 
oflset  by  claims 
for  wear  and  tear 
or  tosses. 

Wear  and  tear  (depreciation)  and  depletion 
charped  off— 

Losses  not  compensated  for  by 
insurance. 

6.  1 

Rate. 

7.  Amount  pre-  I 8.  Amount  this 

' vioiis  years.  ) year. 

9.  Cause  of  loss. 

10.  Amoimtot 
loss. 

1 

CALCULATION  OF  TAX 


M.  Nelintome  shown  on  page  2,Ileni  J 

H.  Less  personal  exemption  (see  Instmction  VI) 

0.  Balance  (income  taxable  at  6%) 

NOTE.-rir  the  amount  on  line  O exceeds  $4,000,  the  excess  Is  taxable  at  12%, 
end  your  return  should  be  mode  on  Form  1040. 


P.  Tax  due  (6%  on  amount  of  Item  0) 

Q.  Less  normal  lax  of  2%  on  amount  of  Item  F . 

R.  Balance  of  lax  due 

S.  Amount  of  lax  paid  on  submission  of  return .... 


TAXPAYER’S  RECORD  OF  PAYMENTS 


PAYMENT. 

AMOUNT. 

DATE. 

CHECK  on  M.  0.  No. 

RANK  OR  OFFICE  OF  ISSUE. 

First 

Second ............ 

Third 

Fourth 

f 

3 



Page  3 of  Form  1040A 


Income  Tax 
Supplementary  Page  17 


P^e  2 of  Work  SheoL  TAXPAYER’S  WORK  SHEET  FOR  RETURN  OF  TAXABLE  INCOME  / InclaiSiDf  ioconM  af  vi/e  (or  IioiImim])  aoJ  doprojart  mkior  \ 

V thildrep,  nnleM  raporlta  in  iepjf«t«  rotmiu  (too  lutuctM  I)  / 


A.  INCOME  FROM  BUSINESS  OR  PROFESSION. 


1.  Kind  of  busines* - 2.  Bosiness  address. 

3.  Total  sales  and  Income  from  business  or  professional  servlcea  . . . 

COST  OF  GOODS  SOLD: 

4,  Labor 


6.  Material  and  supplies 

6.  Mercbandise  bought  for  sale 

7.  Other  costs 

8.  Plus  Inventories  at  beginning  of  year 

9.  Total 


10.  Less  inventories  at  end  of  year 

11.  Net  Cost  oy  Goods  Sold 


OTHER  BUSINESS  DEDUCTIONS; 

12.  Salaries  and  wages  not  reported  as 

“Labor"  tmder  “Cost  of  Goods  Sold”_ 


IL  Interest  on  business  indebtedness 

15.  Taxes  on  business  and  business  property 

16.  Repairs,  wear  and  tear,  and  property 

1 rvgctpts 


17.  Bad  debts  arising  from  sales 

18.  Other  expenses 


19.  Total  Othzb  Business  Deductions 


20.  Net  Cost  or  Goods  Sold  Plus  Total  Othee  Business  Deductions 


B.  INCOME  FROM  SALARIES,  WAGES,  COMMISSIONS,  BONUSES,  DIRECTOR’S  FEES,  AND  PENSIONS. 

1.  By  whom  received. 

2.  Occupation. 

3.  Name  and  address  of  employer. 

4.  Gross  income. 

5.  Deductions, 

if  any. 

$ 

s 

i 



1 

Net  Income  from  Salaries,  etc.  (total  of  column  4 minus  total  of  column  5) 

C.  INCOME  FROM  PARTNERSHIPS,  PERSONAL  SERVICE  CORPORATIONS,  AND  ESTATES  AND  TRUSTS  (not  including 

amounts  reported  under  F and  K). 

(State  name  and  address  of  j>artuership,^etc. ) 


D.  PROFIT  FROM  SALE  OF  LAND,  BUILDINGS,  STOCKS,  BONDS,  AND  OTHER  PROPERTY. 

1.  Kind  of  property. 

2.  Year 
acquired. 

3.  Name  of  purchaser  or  broker. 

4.  Salaprice. 

6.  Original  cost 

or  market  value 
March  1, 1013. 

6.  Cost  of  subse- 

quent improve- 
ments, if  any. 

7.  Depreciation 

subsequently 

sustainw. 

$ 

S 

1 

1 

1 

1 

Net  Protit  from  Sales  (total  of  cols.  4 and  7 minus  total  of 
cols.  5 and  6) 

S 

8 1 

L... 

E.  INCOME  FROM  RENTS  AND  ROYALTIES. 

i_  

1.  Kind  of  property. 

2.  Name  and  address  of  tenant  or  lessee. 

3.  Cash  or  equiva- 

lent received. 

4.  iTp*ir% 

AB(]  property  loauc 

5.  Otberexpenses 

and  losses. 

J 

t 

J 

Net  Income  from  Rents  aitd  ROTAiTiEa  (total  of  col.  3 minus  total  of  cols.  4 and  5)- 

$ 

j;. 

t 

F.  INTEREST  ON  C(H(P0R.kTI0NI 

(including  such  interest  rea 

BONDS  CONTAINING  TAX-FREE  COVENANT,  ON  WHICH  A TAX  OF  2^  WAS  PAID  BY  DEBTOR  CORPORATION 

sived  tlirougli  fiduciaries) 

1- 

G.  OTHER  INCOJvIE  (not  including  dividends)  (State  each  source  separately). 

1.  Cash  received. 

z Dednctlooc,  If  Afij. 

J 

J 

Net  Total  (total  of  column  1 minus  total  of  column  2) 

I.  GENERAL  DEDUCTIONS  NOT  INCLUDED  ABOVE. 

1.  Interest  paid  on  indebt- 
edness --  . 

t 

3.  Losses  by  fire,  storm,  or  cas- 

ualty not  claimed  above. 

4.  Contributions 1 

hn 

— 

5.  Other  deductions,  if  any. !l 1 

2.  Taxes  paid 

Total . 

J.  Total  net  income  on  which  normal  tax  u to  be  calculated  (H  minus  I)  (Enter  aa  Item  M,  p^e  1)  ; ; 

K.  Dividends  on  stock  of  corporations  organixed  or  doing  business  in  the  United  States  (including  dlvidends-receivecl  through 
partnerships,  personal  service  corporations,  and  fiduciaries) 


Total  net  income  (if  this  amount  is  over  $5,()(X),  make  your  return  on  Form  1040) . 


I— 


Page  4 of  Form  1040A 


Income  Tax 
Supplementary  Page  18 


Page  1 of  Instructions 

INSTRUCTIONS  FOR  FILLING  INDIVIDUAL  INCOME  TAX  RETURN  FOR  NET  INCOMES  OF  NOT  MORE  THAN  $5,000 


I.  HOW  TO  DECIDE  WHETHER  TO  MAKE  A RETURN. 

1.  Calculate  your  net  income  by  filling  in  page  2 of  the  work  sheet  according 
to  page  2 of  the  instructions. 

2.  Add  the  nctincomcof  your  wifc(orhusband)and  dependent  minor  children, 
if  any,  except  as  provided  in  paragraph  4. 

3.  The  total  fateVy  income,  calculated  in  accordance  with  paragraphs  1 and  2, 
must  be  reported,  either  in  your  return  or  in  a separate  return  by  wife  (or  hus- 
band), if  it  equals  or  exceeds — 

(a)  $2,000  if  you  are  married  and  live  with  your  wife  (or  husband). 

(b)  51,000  if  you  are  not  married  or  do  not  live  with  your  wife  (or  husband). 

4.  Income  of  a minor  or  incompetent,  if  derived  from  a sejiarate  estate  under 
control  of  a piardian,  tntstee,  or  other  fiduciary,  must  bo  reported  by  his  guard- 
ian or  other  legal  representative. 

1!.  ACCRUED  OR  RECEIVED  INCOME. 

1.  If  you  keep  books  showing  income  accrued  and  expenses  incurred  during 
the  year,  make  your  return  from  your  books,  but  do  not  fail  to  include  all  your 
income  even  if  it  is  not  entered  in  your  books. 

2.  If  you  do  not  keep  books  showing  income  accrued  ai)d  expenses  meurred, 
report  income  received  and  expenses  paid. 

3.  If  you  report  income  accrued,  you  must  include  all  income  that, accrued 
In  1917  but  was  not  received  until  1918,  unless  it  was  reported  in  last  year’s 
return. 

4.  If  you  report  income  received,  you  must  include  all  income  constructively 
received,  as  bank  interest  credited  to  your  account. 

III.  RECEIPTS  EXEMPT  FROM  TAX. 

The  following  classes  of  receipts  are  exempt  from  income  tax,  and  need  not  be 
reported  on  page  2 of  the  return: 

1.  Pay,  not  exceeding  $3,500,  for  active  services  in  the  military  and  naval 
forces  of  tbo  United  Stales. 

2.  Gifts  (not  made  as  a consideration  for  service  rendered)  and  money  and 
property  acquired' under  a will  or  by  inheritance  (but  the  income  derivc-d  from 
money  or  property  received  by  gift,  will,  or  inheritance  is  taxable  and  must  be 

'reporle<l). 

3.  Interest  on  bends  and  other  obligations  of  the  United  States  issued  before 
September  1,  1917,  and  on  such  bonds  and  other  obligations  issued  since  that 
date,  provided  your  holdings  do  not  exceed  the  exemptions  allowed  by  law. 

4.  Interest  on  bonds  and  other  obligations  of  United  States  possessions  ( Pliilip- 
pines,  Porto  Rico,  etc.). 

5.  Interest  on  bonds  and  other  obligations  of  States,  territories,  political  suD- 
divisions  thereof  (such  as  cities,  counUes,  and  townships),  and  the  District  of 
Columbia. 

6.  Interest  on  Federal  Farm  Loan  bonds. 

7.  Proceeds  of  life  insurance  policies  paid  on  the  death  of  the  imsured. 

8.  Amounts  received  by  the  insured  under  life  insurance,  endowment,  and 
annuity  contracts,  provided  such  payments  do  not  exceed  the  premiums  paid 
In.  The  amount  by  which  the  total  payments  that  have  been  received  exceed 
tbe  total  premiums  paid  in  Is  income  and  must  be  reported  in  Schedule  O. 

9.  Amounts  received  from  accident  and  health  insurance  and  under  workman’s 
compensation  acts  plus  the  amount  of  any  dapiages  received  by  suit  or  agree- 
ment  on  account  of  injuries  or  siclmess. 

IV.  FARMER’S  INCOME  SCHEDULE. 

If  you  are  a farmer,  get  from  the  collector  and  fill  out  a “Schedule  of  Farm 
Income  and  Expenses.’’  Transfer  the  net  farm  Income  to  line  21  of  Schedule 
A of  the  return.  Report  Income  from  salaries,  rents,  interest,  sales  of  property, 
etc.,  In  Schedules  B to  G of  the  return.  Send  your  Schedule  of  Farm  Income 
and  Expenses  with  the  return  to  the  collector. 

V.  PERIOD  TO'BE  COVERED  BY  RETURN. 

1.  You  must  report  your  net  income  for  the  calendar  year  1918,  except 
under  the  conditions  stated  in  paragraph  2. 

2.  If  you  arc  engaged  in  business  and  keep  books  of  account  which  are  regu- 
larly closed  each  year  at  the  end  of  some  month  other  than  Doccmljcr  to  deter- 
mine your  aimual  profit  or  loss,  you  may,  after  obtaining  the  collector’s  ap- 
proval, mxrko  a rctinn  covering  tbo  period  from  January  1, 1918,  to  the  date  on 
which  you  closed  your  books,  and  thereafter  for  each  period  of  12  months. 

3.  If  you  make  a return  for  a part  of  the  calendar  year  1918,  your  personal 
exemption  shall  be  as  many  twelfths  of  tbe  amount  that  would  be  allowed  for 
a full  year  as  there  arc  months  In  the  period  covered  by  the  return. 

4.  Tbe  dates  on  which  the  period  covered  by  the  return  begins  and  ends,  If 
other  than  the  calendar  year  1918,  must  be  plainly  stated  at  tbe  head  of  tbe 
return;  answers  to  questions  5,  6,  and  7 must  be  given  for  that  period;  and  tbe 
affidavit  must  bo  change<l  accordingly. 


VI.  PERSONAL  AND  FAMILY  EXEMPTION. 

1.  If  you  weremarried  and  lived  with  yooi’wife  (or  husband)  or  were  head  of  & 
family  in  1918,  you  may^subtract  from  your  net  income,  before  calculating  your 
tax,  a family  e-xemptionlrf  $2,000  plus  $200  for  each  person  under  18  (or  'men- 
tally or  physically  defective)  who  received  his  chief  support  from  you.  If  husband 
and  wife  make  separate  returns,  this  exemption  may  be  claimed  by  either  (but- 
not  by  both)  or  may  be  divided  between  them. 

2.  If  you  were  not  married  or  did  not  live  with  wife  (or  husband)  and  were  not 
head  of  a family  in  1918,  you  are  entitled  to  a personal  exemption  of  $1,000  plus 
$200  for  each  dependent  person  imder  18  (or  mentally  or  physically  defective> 
who  received  his  chief  support  from  you. 

3.  If  you  were  entitled  to  any  of  the  foregoing  exemptions  during  a part  of  the 
year  only,  you  may  claim  as  many  twelfths  of  the  exemptions  stated  as  there 
were  months  in  such  part  of  the  year.  Any  part  of  a month  may  be  coimted 
as  a month. 

4.  The  personal  or  family  exemption  must  be  reported  on  line  N,  page  1,  of 
the  return,  and  must  be  supported  by  answers  to  questions  5,  6,  7,  and  8. 

5.  A “head  of  family’'  is  a person  who  is  the  chief  support  of  one  or  more  per- 
sons li^-ing  in  his  household,  who  are  closely  related  to  him  (or  her)  by  blood, 
marriage,  or  adoption. 

VII.  V/HEN  TO  USE  FORM  1040  INSTEAD  OF  THIS  FORM. 

You  must  make  your  return  on  Form  1040— 

(a)  If  your  net  income  is  over  $5,000. 

(b)  If  tbe  net  income  reported  in  this  return  exceeds  $4,000  and  the  entire 
family  exemption  has  been  claimed  in  a separate  return  m.ade  by  wife  (or 
husband). 

(c)  If  this  form  does  not  provide  for  all  the  facts  you  have  to  report  (as, for 
example,  if  you  receive  income  from  a partnership  or  persona!  service  corpora- 
tion with  a fiscal  year  falling  partly  in  1917  and  partly  in  1918). 

VIII.  AFFIDAVIT. 

1.  The  affidavit  must  be  executed  by  the  person  nhose  incomo  is  reportoef 
unle.ss  he  is  a minor  or  incompetent  or  unless  he  is  ill,  abscut  from  the  country, 
or  otherwise  incapacitated,  in  which  case  the  legal  representative  or  agent  may 
c.xecutc  the  affidavit. 

2.  The  oatii  will  be  admlnislercd  witliout  charge  by  any  collector  or  deputy 
collector  of  intemrd  revenue,  or  (if  you  are  in  the  militarj'  or  naval  service  of  the 
United  States)  by  any  military  or  naval  officer  who  is  authorized  to  administer 
oaths  for  purposes  of  military  or  naval  justice  and  administr-.t  ion.  if  .an  internal 
revenue  officer  is  not  available,  the  n lurn  should  be  swom  to  before  a notary 
public,  justice  of  the  peace,  or  other  person  authorized  to  adininis'.oi  oaths. 

IX.  WHEN  AND  WHERE  THE  RETURN  SHOULD  BE  SENT. 
Send  your  rotium  to  the  collector  of  hitcrnal  revenue  for  the  ddstrict  in  v.’liicii 
you  live  or  have  your  place  oi  business  so  that  it  will  rcai  ii  him  on  or  before 
March  15,  1919.  If  the  address  of  the  coiloctor  is  iiot  pimted  on  the  iciurn  and 
you  do  not  know  it,  ask  at  the  post  ofiice  or  bank. 

X.  WHEN  AND  TO  WHOM  THE  TAX  MUST  BE  PAID. 

1.  The  tax  should  be  paid,  if  possible,  by  sending  or  bringing  with  the  return 
a chock  or  money  order  drawn  to  the  order  of  “Collector  of  Internal  Revenue  at 
[insert  name  of  city  and  Slate].” 

■ 2.  Do  not  send  cash  through  the  mail,  or  pay  it  in  person  except  at  the  office 
of  the  collector  or  a regularly  established  internal  revenue  stamp  office. 

3.  At  least  one-tourtb  of  the  tax  is  due  at  thesame  time  that  this  return  isduo. 

4.  An  additional  amount  sufficient  to  bring  tho  total  payments  up  to  onc> 
half  of  the  tax  is  due  on  or  before  Juno  15, 1919. 

5.  An  additional  amount  sufficient  to  bring  the  total  payments  up  to  three* 
fourths  of  the  tax  is  duo  on  or  before  September  15, 1919. 

C.  Tho  entire  remainder  of  tho  tax  is  due  on  or  before  December  15, 1919. 

7.  If  any  payment  is  not  made  when  duo,  a penalty  of  5 per  cent  of  tho 
amount  due  but  impaid  will  be  incurred.  The  entire  unpaid  balance  of  the 
tax  will  also  become  duo  10  days  after  demand  therefor  by  the  coiloctor. 

8.  If  you  pay  in  cash,  do  not  fail  to  get  a receipt  at  tho  time  of  payment. 
If  you  pay  by  check  or  money  order,  your  canceled  cheek  or  your  money  order 
receipt  will  serve  as  a receipt. 

XI.  PENALTIES. 

For  Making  False  or  Fraudulent  Return. 

Not  exceeding  $10,000  or  not  exceeding  one  year’s  iraprisomnent;  or  both.  In 
tho  discretion  of  the  court,  and,  in  addition,  50  per  cent  of  tho  tax  evaded. 

For  Failing  to  Make  Retitm  on  Time 

Not  more  than  $1,000,  and,  in  addition,  25  per  cent  of  tho  amount  of  tax  duo. 

For  Falling  to  Pay  Tax  When  Due. 

Five  per  cent  of  tho  amount  impaid,  plus  1 per  cent  interest  for  each  full 
month  during  which  it  remains  unpaid. 

Page  5 of  Form  1040A 


Income  Tax 
Supplementary  Page  19 


p,ge2.fi=^ir..no3.  INSTRUCTIONS  FOR  FILLING  IN  TAX4PLE  INCOME 


A.  INCOME  FKOM  BU5 

Eeport  bers  Income  frori— 

fa)  So!e  cf  merchandise,  or  of  nroduota  of  manufacturing  ccnstnictioa, 
mirjTig,  and  agriculture.  (For  farm  income  oee  Inctruction  IV  on  the 

of  this  sheet.) 

fb)  Business  service,  such  as  transportation,  storage,  laundering,  hotel 
and  rastaurant  service,  livery  and  garage  service,  etc. , if  you  own  the  busfn<^. 

If  you_are^i^i>ged^ia  the  business  as  an  employee,  report,  ycur  salary  or 

(c)  A profession,  such  as  medicine,  law.  or  dentistry,  if  you  practice  It 
oa  your  o\vn  account.  If  you  are  employed  on  a salary,  report  ycur  salary 
in  Schedule  B. 

In  general,  report  In  Schedule  A any  income  In  the  earning  of  which  you 
incur  expenses  for  labor,  rent,  etc.  Do  not  report  here  partnership  profits 
or  profits  of  personal  service  corporations,  which  should  be  entered  under  C, 
or  dividends  from  other  corporations,  which  should  be  entered  under  K. 

If  you  are  a fanner  (or  a farm  owner  renting  ycur  farm  to  another  person 
on  shares),  enter  online  21  your  net  Income  from  farming,  as  shown  by  year 
“Schedule  of  Farm  Income  and  Expenses.” 

Kind  of  business.— Enter  "grocery,”  "retail  clothing,"  "drug  store,” 
"laundry,"  "doctor,”  “lawyer,"  etc. 

If  you  keep  hooks  showing  income  rxerued,  report  such  Income  instead  of 
cash  received,  and  report  expenses  incurred  Instead  of  expenses  paid. 

Income  received  from  sale  of  lands,  buildings,  eouiprnent,  stocks,  bonds, 
and  other  property  not  dealt  In  as  a business  should  be  reported  under  D. 

Total  sales  and  Income  from  business  or  profession. — Report  the  total 
amount  derived  from  sales,  less  any  discounts  or  allowances  from  the  sale 
price. 

J.INESS  OR  PROFESSION. 

Other  bn.stti'.os  ded  .uiiouv:.— Do  not  include  cost  of  business  oouinment 
or  ',5rn'*u.>-e,  cxpead'.tures  for  permanent  improvements  to  proberty,  or 
living  ana  family  expenses.  Do  not  deduct  interest  on  your  own  invest- 
ment in  ycur  bu.sinass  or  saiary  cr  wages  for  your  own  services  or  the  serv- 
^ c^your  family,  umeEs  these  items  are  included  as  income  In  Sehedulo 

Rent,— r.epcTf:  here  rent  for  business  oropertv  (not  including  rent  for 
dwelling  you  oocupy). 

Interest.— Report  here  interest  on  business  Indebtedness,  Inoluillng  In- 
debtedness incurred  to  purchase  or  carry  business  property. 

Taxes.— Report  here  only  taxes  on  business  property  or  for  carrying  on 
business.  Do  not  include  taxes  assessed  against  local  benefits  of  a fcmd 
tending  to  increase  the  value  of  the  property  assessed,  as  for  paving,  sewers, 
etc.,  nor  Federal  income  frtxes. 

Repairs,  wear  and  tear,  and  preperty  losses.— Report  here  (a)  ordinary 
repairs  required  to  keep  property  in  usable  condition,  (b)  depreciation  during 
the  year  on  business  property,  only  to  the  extent  not  onset  by  repairs  or  losses 
claimed  in  this  or  previous  returns,  and  (c)  losses  of  business  property  by 
fire,  storm,  theft,  etc.,  not  compensated  for  by  insurance  or  othervhse,  and 
for  which  no  claim  for  insurance  is  pending.  Explain  these  deductions  in 
table,  page  1 cf  the  return.  Item  13. 

Do  not  claim  depreciation  or  losses  on  articles  that  have  been  takm  Into 
your  inventory  at  a figure  reflecting  the  reduction  la  value. 

Bad  debts.- Report  here  only  debts  arising  from  sales  that  have  been 
reported  as  income,  which  have  been  definitely  proved  to  be  worthless 
end  have  been  charged  ofi  within  the  year. 

Other  expenses.- Do  not  include  your  personal  exemption  hero.  This  is 
to  be  reported  as  Item  N. 

Net  loss.— If  the  net  cost  of  goods  sold  plus  other  business  expenses  is  fn 
excess  of  the  total  amount  of  sales  and  in«)me  from  business  or  professional 
services,  report  the  duferenep  as  a loss  by  using  red  inkgir  a minus  sign. 

B.  INCOME  FROM  SALARIES,  WAGES,  COMMISSK 

It  salary,  wages,  or  other  compensation  received  by  you,  your  wife  (or 
husband),  or  dependent  child  was  at  the  rate  of  $1,000  or  more  per  annum, 
report  it  on  a separata  line,  together  with  the  occupation  or  position  and  em- 
ployer’s name  and  address.  All  other  Income  Irem  salaries,  wages,  com- 

>NS,  BONUSES,  DIRECTOR’S  FEES,  AND  PENSIONS. 

rtdssions,  etc.,  at  a rate  less  than  81,000  per  annum  should  he  reported  on  a 
. einglolina. 

Do  not  leport  pay,  not  exceeding  83,500,  for  active  service  In  the  Army  or 
Navy  (see  jnstruciions  III,  paragraph  !,  on  the  other  side  of  this  sheet). 

Exnlain  deductions  in  any  convenient  blank  space  on  the  return.  Do  not 
enter'your  personal  exemption  here. 

C.  INCOME  FROM  PARTNERSHIPS,  PERSONAL  SE3 

Report  your  share  (whether  received  ornot)  in  the  profits  cf  thepartner- 
ship  or  personal  service  corporation  or  in  the  Income  ol  estate  or  inist  (if 
placed  to  your  credit),  not  including  t he  part  of  such  share  that  consisted  of 
dividends  on  stock  of  ordinarv  corporations  (to  be  included  in  Item  K),  in- 
terest on  obligations  of  the  Unitoa  States  (see  question  11),  cr  (in  the  case 

\WICE  CORPORATIONS,  AND  ESTATES  AND  TRUSTS, 

of  estates  and  trusts)  interest  on  corporation  bonds  containing  a tax-free 
covenant,  upon  which  a tax  of  2 per  cent  was  paht  (or  will  be  paid)  by  the 
debtor  comoration  (to  be  Ineluded  la  Item  F). 

lieport  i h Sched'oie  B salary  received  from  partnership  or  personal  servico 
corporation. 

D.  PROFIT  FROM  SALE  OF  LAND,  BUILDINC 

Use  this  schedule  for  all  sales  of  real  estate,  and  f(»  sales  of  other  prox>erty 
that  you  do  not  deal  in  as  a business. 

Kind  of  property.— Describe  the  nroperty  as  definitely  as  you  can  in  a word 
or  two,  as  “farm,"  "house,"  "lot,"*'  “stocks,"  “bonds.” 

Sals  price.— State  the  actual  consideration  or  price,  or.  In  case  of  an  ex- 
change, the  fair  market  value  of  the  property  received. 

Cost.- Enter  the  original  cost  of  the  property  or,  if  it  was  acquired  before 

»S,  STOCKS,  BONDS,  AND  OTHER  PROPERTY. 

March  1, 1913.  its  fair  market  value  on  that  date.  Expenses  incidental  io  the 
purchase  may  be  included  in  the  cost  if  never  claimed  la  income  tax  returns 
as  deductions  from  income.  Enter  in  column  7 the  amount  of  wear  and  tear 
(depreciation)  or  depletion  sustained  since  March  1. 1913  (or  since  date  of 
acquisition  if  subsequent  to  March  1,  1913).  (This  is  a deduction  from 
cost,  though  treated  for  convenience  as  an  addition  to  the  sale  pri(».) 

losses.- If  the  total  of  columns  5 and  6 Is  In  excess  cf  tha  total  ofcclumns 

4 and  7,  report  the  diSercnce  as  a loss  by  using  red  ink  or  a minus  sign. 

E.  INCOME  FROM  RE 

Kind  of  property.— Describe  briefiy,  as  in  D. 

Cash  or  equivalent  received.— If  a tenant  rented  ycur  property  on  aeesh 
rental  basis,  but  paid  the  rent  in  crops  or  other  property,  report  the 
amount  of  the  rent  as  income  for  the  year  in  which  you  M^ived  sucii  crops 
or  other  property  (unless  your  return  shows  income  accrued). 

NTS  AND  ROYALTIES. 

Wear,  tear,  repairs,  and  property  losses.— See  Instructioiis  for  Schedule  A, 
above.  Explain  in  Item  13,  page  1 ol  the  return. 

Other  expenses  and  losses. — Report  taxes  on  rented  or  leased  prope^ 
and  interest  on  indebtedness  incurred  or  continued  to  purchase  or  carry 
it.  Do  not  include  taxes  assessed  against  local  benefits  of  a kind  tending  to 
increase  the  value  of  the  property  assessed. 

F.  INTEREST  ON  CORPORATION  BONDS  COf^FAINING  TAX-FREE  COVENANT,  ON  WHICH  TAX  OF  2fo  WAS  PAID  BY  DEBTOR  CORPORATION. 

Thisitemshouldincludeallintcrestreceivoddirectlyorthroughfldudari^  ] not  claimed  by  the  owner  of  the  bonds.  If  oxemntion  was  claimed,  the 
on  bonds  of  corporations  organized  Of  doing  business  in  the  United  States,  interest  received  must  bo  reported  in  O.  (llie  amount  of  tax  paid  by  the 

containingaclauso by  which  tbodebtorcorporationagreesto pay  theinterest  debtor  corporation  is  treated  as  a credit  against  the  tax  due.  See  Item  Q, 

without  any  deduction  for  ta.xes,  provided  exemption  from  withholding  was  1 page  1 of  the  rotum.) 

G.  OTHER  INCOME  (NOT 

Report  in  this  schedule  Interest  received  on  hank  deposits,  notes,  mort- 
gages, etc.,  and  all  other  income  net  reported  in  Schedules  A to  F,  e.xcept — 

(a)  Dividends  received  from  corporations  organized  or  doing  business  in 
the  United  States  (see  Item  K). 

(b)  Receipts  exempt  from  tax,  as  stated  in  Instruction  m on  the  other 
side  of  this  sheet. 

r INCLUDING  DIVIDENDS). 

State  separately  income  from  each  source. 

Deductions.— Interest  paid  on  loans  secured  by  bonds  may  ho  renorted 
hero  as  an  oftsot  to  the  interest  received.  Explain  deductions  in  any  ocn- 
venient  blank  space  on  the  return. 

I.  GENERAL 

Interest.- Report  hero  interest  paid  on  personal  indebtedness  as  distin- 
guished from  business  indebtedness  (which  should  be  reported  under  A, 

E,  or  O above).  Do  not  include  interest  on  indebtedness  incurred  for  the 
purchase  of  bonds  and  other  obligations,  the  interest  on  which  is  exempt 
from  tex  (see  Instruction  HI,  page  1). 

Texes.— Report  here  taxes  paid  on  your  dwelling  and  household  property, 
not  incladine  those  assessed  against  local  benefits  of  a kind  tending  to  in- 
crease the  value  of  the  property  assessed.  Do  not  include  Federal  mcome 
taxes,  nor  estate  or  inheritance  taxes. 

Losses.- Report  here  losses  of  property  not  connected  with  your  trade, 
business,  or  profession,  sustainen  during  the  year  from  fire,  storm,  ship- 

. DEDUCTIONS. 

wreck,  or  ether  casualty,  or  from  theft,  which  were  not  compensated  for  by 
Insurance  or  otherwise,  and  for  which  no  claim  for  Insurance  is  pending.  Ex- 
plain such  losses  in  Item  13  on  page  1 of  the  return. 

Contributions.— Report  hero  only  contributions  made  within  the  year  to 
corporations  organized  and  operated  exclusively  lor  religious,  charitable, 
scientific,  or  educational  purposes,  or  for  the  prevention  of  cruelty  to  children 
or  animals,  or  to  the  special  fund  for  vocational  rehabilitation.  The  total 
amount  of  contributions  to  bo  entered  here  must  not  exceed  15  per  o«nt  ol 
the  net  Income  computed  without  the  benefit  of  this  deduction. 

Other  deductions.— Bad  debts  arising  ont  of  personal  loans  may  be  re- 
ported here. 

Page  6 of  Form  1040A  § J 


Income  Tax 
Supplementary  Page  20 


rorra  1040  S’— TJKTTSD  9TATS8  ETl'ERJ^AL  RSVSNUS  SERV2C3 


SCHEDULE  OF  FARM  INCOME  AND  EXPENSES 

TO  BE  SENT  WITH  RETURN  FORM  1040A  OR  1040  TO  THE  COLLECTOR  OF 
INTERNAL  REVENUE  ON  OR  BEFORE  MARCH  15.  1919 


Name 


Address 


INSTRUCTIONS 


Tbifl  work  ckoet  or  schedulo  of  farm  income  and  espienBes  is  to 
be  need  in  determining  the  net  income  from  a farm  bnsiness.  It 
may  be  used  by  farm  ovmers  who  work  their  own  farms  or  rent  them 
out  on  shares,  or  by  tenants. 

If  you  have  two  or  more  farms,  it  may  be  desirable  to  fill  out 
a separate  sheet  for  each  farm. 

This  schedule  is  to  be  delivered  to  the  Collector  ef  Internal 
Revenue  with  your  income  tax  return  (Form  1040A  or  Form  1040). 
You  should  keep  a copy  for  reference  nest  year. 

Incohs 

All  the  farm  income  from  whatever  BOtirce  must  be  reported  in 
this  schedule.  Only  income  actually  received  need  be  included,  but 
this  does  not  mean  that  the  ta.xpayer  must  receive  cash.  Anything 
of  value  received  instead  of  cash  rn’ist  be  considered  income  to  the 
extent  of  its  cash  value.  Thus,  the  value  of  groceries,  merchandise, 
etc.,  received  in  exchange  for  eggs,  butter,  or  other  produce  must 
be  reported  as  income. 

The  value  of  farm  produce  which  is  consumed  by  the  farmer  and 
his  family  need  not  be  reported  as  income;  but  expenses  incurred 
in  raising  produce  thus  consumed  must  not  be  claimed  as  deduc- 
tions. 

If  timber  sold  in  1918  was  grown  in  part  before  March  1, 1913,  the 
income  to  be  reported  is  the  difference  between  the  fair  market 
value  of  such  timber  on  March  1,  1913,  and  the  price  received,  less 
any  expenses  of  growing  the  timber  that  have  .not  heretofore  been 
claimed  as  deductions.  Report  such  mcome  in  the  same  manner  as 
income  from  sale  of  land,  in  Schedule  D of  Form  1040A  or  Form  1040. 

Expenses  and  Other  Deductions 

Report  as  farm  expenses  only  amounts  actually  paid  out  in  carry- 
ing on  the  farm  bu-sinese. 

Labor. — Only  that  part  of  the  board  of  hired  labor  which  is  pur- 
chased should  be  included  as  a deduction.  The  value  of  products 
furnished  by  the  farm  and  used  in  the  board  of  hired  labor  is  not  a 
deductible  expense. 

Rations  purch^d  and  furnished  to  laborers  or  share-croppers  are 
deductible  as  a part  of  the  labor  expense. 

Do  not  deduct  the  value  of  your  own  laborer  that  of  your  wL'o 
or  dependent  minor  children. 

Do  not  deduct  amounts  paid  to  persons  engaged  in  household 
work  except  to  the  extent  that  the  services  of  such  employees  are 
used  in  boarding  and  otherwise  caring  for  farm  laborers.  Services 
of  employees  engaged  in  caring  for  the  farmer’s  own  household  are 
not  a deductible  expense. 

Fertilizers,  manures,  etc. — ^Tho  cost  of  manures,  commercial  ferti- 
lizers, lime,  raw  rock  phosphate,  etc.,  that  were  bought  during  the 
year  may  bo  included  as  an  expense. 

Taxes. — Do  not  deduct  inheritance  or  estate  taxes,  Federal  income 
taxes,  drainage  taxes,  or  taxes  for  any  improvement  or  betterment 


tending  to  increase  the  value  of  the  property.  Be  ready  to  show 
tax  receipts  if  possible.  Do  not  deduct  taxes  on  your  dwelling  or 
household  property 

Interest  on  indebtedness.-rAil  interest  paid  on  farm  mortgages^ 
notes,  and  other  obligations  incuaed  to  carry  on  the  farm  business 
should  be  deducted. 

Bad  debts. — Report  only  debts,  arising  from  sales  that  have  been 
reported  as  income,  whidi  have  been  definitely  proved  within  the 
year  to  bo  worthless. 

Repairs  and  depreciation. — ^Depreciation  daime-d  should  not  ex- 
ceed the  actijal  cost  of  the  property  (or  its  fair  market  value  March  1, 
1913,  if  acquired  before  that  date)  divided  by  its  probable  life  ia 
years.  Only  such  depreciation  of  farm  buildings  and  equipment  aa 
is  not  offset  by  repairs  may  be  deducted.  Do  not  deduct  repairs  or 
depreciation  of  the  dwelling  you  occupy,  or  of  your  personal  or 
household  equipment. 

Do  not  claim  as  a separate  item  depreciation  of  live  stock  or  any 
other  propertyi  included  in  your  inventory,  as  such  depreciation  ia 
taken  care  of  in  the  reduced  amount  of  the  inventory  at  the  close  of 
the  year. 

Losses. — You  may  deduct  losses  of  buildings,  machinery,  and  ether 
property  not  included  in  your  inventory,  resulting  from  fires'  or 
other  casualties  and  not  compensated  for  by  insurance  or  otherwise. 
Losses  of  property  included  in  your  inventory  are  taken  care  of  by 
the  reduced  amount  of  the  inventory  at  the  close  of  the  year. 

Automobile  expense.— Yo\i  may  deduct  expenses  of  operation, 
repairs,  and  depreciation  of  automobiles  used  exclusively  in  the 
farm  business.  If  an  automobile  is  used  in  the  farm  business  for 
a part  of  the  time  only,  a corresponding  part  of  the  expense  may  be 
deducted. 

How  TO  Fill  Out  This  Schedule 

Enter  on  pages  2 and  3 tho  amounts  received  from  sales  of  fann 
crops,  animals,  and  products,  and  the  value  of  crops,  animals,  and 
products  that  were  on  hand  at  the  beginning  and  end  of  tho  year. 
Go  over  tho  list  of  farm  expenses  on  page  3 and  enter  the  amount 
of  each  kind  of  expense  separately  so  far  as  possible.  Fill  in  tho 
statement  of  repairs  and  depreciation  of  farm  buildings,  etc.,  on 
page  4. 

In  case  you  have  complete  farm  records  already  Bummarized, 
enter  the  totals  from  your  books  in  the  spaces  provided  therefor. 

"When  all  the  receipts  and  expenses  have  been  entered,  bring  tho 
various  totals  together  in  the  summary  on  page  4.  The  figures 
inclosed  in  parenthesis  are  intended  as  a key  to  aid  you  in  bringing 
forward  the  proper  totals. 

When  you  have  determined  the  net  farm  income,  tranrfer  tho 
amount  to  lino  21  in  Schedule  A of  tho  income  tax  return  (Fomi 
1040A  or  Form  1040). 

While  this  schedule  is  intended  to  cover  in  detail  only  yonr 
income  from  the  farm  business,  there  are  added  at  tho  bottom  of 
page  4 spaces  for  making  notes  regarding  income  from  other  sourced. 
Such  income  should  be  reported  in  detail  in  Schedules  B to.K  .ok 
Form  1040A  or  Form  1040. 

Page  1 of  Form  1040F 


Income  Tax 
Supplementary  Page  21 


Page  2 CROPS  SOLD  AND  ON  HAND 


Kind  of  prop  grown 

Acres  in 
trop 

1 On  hand  at  btginning  of  year 

Sold  during  year  i 

On  hand  at  end  of  year 

Quantii7 

Inventory  value 

Quantity 

1 Sale  price  < 

Quantity 

Inventory  value 

Ter  unit 

Total  j 

jPer  unit 

Total  i 

Per  unit 

Toul 

• 

i 

f 

1 



1 

1 

i 

1 

1 

i 

j 

1 

1 

i 

I, 

” j 

1 

Totals— 

1 

1 

f 

(!)  (2;  57 

LIVE  STOCK  BOUGHT,  SOLD,  AND  ON  HAND 


Kind  of  animats 

On  band  at  beginning  of  year 

Purchased  during  year 

Sold  during  year 

On  hand  at  end  of  year 

Lost 

during 

year 

Nomber 

K um- 
ber 

Inventory  value 

Num- 

ber 

Cost 

Num- 

;bcr 

Sale  price 

Num- 

ber 

Inventory  value 

Per 

imit 

Total 

Per 

unit 

Total 

Per 

unit 

Total 

Per 

unit 

1 ToUl 

Cf)WH 

$ 

1$ 

Heifers 

1 

Calves 

r 

Bulls 

Steers. 

1 

Horsefl-... 

Mules 

Colts 

Ewes 

Lambs 

Brood  sows.  

Other  hogs 

ChielrfHH.  . 

Turkeys 

'■  1 

1 

Ducks.  _ 

Bees 

Totals 

$ 

1 

J 

$ 







: 



$ -! 1 

(4)  (5>  (6)  (7) 


Page  2 of  Form  1040F 


Income  Tax 
Supplementary  Page  22 


Pages 


-.  CROP  PRODUCTS  SOLD  AND  ON  HAND 

EXPENSES 

..  . 

'Oebonda 

ttscgmniniofycar' 

Sold  during  year 

On  ban 

d at  end  of  year 

Items 

Amount 

KiKS 

Ciiaantity 

Inventory  value 

Sale  price 

Inventory  value 

Hired  labor  (regular) 

$. 

Quib  . j, 

Per  unit 

Total 

Quan  .y 

1 

1 

1 

•f— 

— 

Hired  labor  (extra) 





1 

I 

Board  of  hired  labor. 

Cost  of  purclidsod 

— 

— 

„ 

terials  furnished  labor 

1 

1 

Feed,  hay,  straw,  etc.... 

— 

— 

... 

j 

i 

1 

1 

1 

- 1 i 

! 

......... 

5 ^ 

Feed,  grain,  concentrates 

Totals 

i 

1 

Feed  grinding 

— 

(8)  (9)  (10) 

LIVE  STOCK  PRODUCTS  SOLD  AND  ON  HAND 

Klilk 1 

5 

1 

L 

Silo  filling. 

Butter  

! 



1 : 

Corn  shredding 

rr> 

1 

1 

1 

1 

1 

1 

Colton  ginning. 

Cheese 

1 

1 

kfilk  hauling 

Egps  

i 

j 

Wool  

} 



! i 

[ 

Ice 

Hides. 

i 

Horseshoeing 

Honey 

1 

1 

Breeding  fees ' 

i 1 

■ i 

1 

Veterinary  ices 



1 

1 

Seed,  plants,  etc 

1 

j 

Fertilizers,  manure 

TojALS 

t 

|| 

1 

1 

Spray  m.aterial.s  .. 

MISCELLANEOUS  RECEIPTS 


Machine  work,  hire  of  teams,  etc. 


Totai, ; $. 


Twine 

Threshing 

Baling 

Machine  work  hired. 
Fuel  and  oil  for  farm  work 


Barrels,  bags,  crates . 


INVENTORY  OF  SUPPLIES 


(14J 


Purchased  feeds. 

Seeds 

Fertilizers 

Spray  materials.. 


IsvENTOav  Valve 


Albcc.nhmgof  Atcn-lofyear 


I i 


Farm  insurance... 

Taxes 

Water  rent 


Cash  rent 

in'erf't  cn  fjrm  cc!«  3od  norlgays 


I 1: 


Total. 


Page  3 of  Form  1040F 


Income  'i’ax 
Supplementary  Page  23 


Page  4 REPAIRS  AND  DEPRECIATION 


PucBirnoM 

Cow  OF  PROFFlltT 
(or  market  Tslue 
Harch  1, 1913) 

Dkfskutioit 

Rsrans 

Rato 

AsMont 

j 

1 

1 

f 

1 

Farm  fenceSf  drains,  ditches,  etc... .. 

Farm  machinery  and  tools  . 

Totals 

$ 



$ 





1 

Ameanl  recsireJ  ft  fum  pr*4acU  tcU  ar  auluuijad 

1.  Crops (2) 

$ 

Ferae  eipcBiee,  etc. 

14.  Cost  of  live  stock  purchased  during  year...(5) 

1.5.  ExpeTiHeB  (17) 

? 

"2.  Livestock (6) 

3.  Crop  products (9) 

16.  Repairs  (1ft) 

4.  Live  stock  products (12) 

17.  Depreciation , ()<>) 

6.  Miscellaneous (14) 

6.  Total  receipts 

loTealery  value  ef  Sum  crepe,  etc,  el  end  ft(  rear 

7,  Crons  ...  (3) 

$ 

19.  Total  expenses,  etc 

loTenterp  TtVse  ei  Sum  crepe,  etc,  et  kf  nalnf  el  peer 

20.  Crops  . . (1) 

$ 

$ 

1 

T.ive  P+orV  . (7) 

21.  Live  stock (4) 

9.  Crop  products (10) 

22.  Crop  products  . (8) 

in.  T.K’O  storV  nroniicts  (13) 

23.  Live  stock  products (11) 

11,  Supplies. (16) 

24.  Supplies.  (15) 

19  Tofnl  -invontory  st  onrl  of  year 

$ 

25.  Total  inventory  at  beginning  of  vear 

$ . . .. 

13.  Totil  receipts  plus  inventory  at  end  of  year 
^Tipin  Tiliifl  Tr.pm  1 ..  

26.  Totalexpcnaeaplusinveatory  at  begiiiniagof  1 
verj*  ('ItAra  19  nln^  Itpm  ! 

s.... 

1 ■ ■■  ■ — 
!* 

' ''  ^ ''  ■'  — " ^ - — , - 

27.  Net  farm  income  to  be  reported  in  Schedule  A,  line  21,  of  Form  1040  A or  Form  1040  (Item  13  minus  Item  26)  I $ 

...... 

OTHER  INCOME  TO  EE  REPORTED  ON  PJLTURN  (Form  1010  A or  Form  1040) 


Pescretioit 

Gross 

DEPccnoNa  1 

! Net 

Income  from  salaries,  vages,  commissions,  bonuses,  director’s  fees,  and  pensions 
(to  b**  iri  H)  . ..  - 

$ 

$ 

Income  from  partnerships,  personal  service  corporations,  and  estates  and  trusts 
(to  be  reported  as  Item  C) . — 

Income  from  sale  of  land,  buildings,  stocks,  bonds,  and  other  property  (to  be 

..  . . 

Xuconio  from  ronts  and  royalticB  (to  bo  roportod  in  Scbodul©  £<}... ............... — - 

Interest  on  corporation  bonds  containing  tax-free  covenant,  on  which  a tax  of 
2^  was  paid  by  d'^btor  /'orporation  (to  bo  Ttfim  P)  _ 

(t^  bo  . _ 

Dividends  on  stock  of  coroorations  organized  or  doing  business  in  the  United 
Statos  (to  be  reported  aa  Item  K on  Form  1040  A,  or  lv(a)  on  P'orm  1040) — 

Interest  on  obligations  of  the  United  States  in  excess  of  the  exemptions  allowed 
Ijtw  (to  be  reported  (bg  Item  K(b)  Form  1040)  

• i • ^ 

Page  4 of  Form  1040F 


I ncome  'I’ax 
Supplementary  I’age  24 


ORIGINAL 


THIS  FORM  WITH 
DUPUCATE  AND 
REMIHANCE 
COVERING 
ONE-FOURTH 
OF  ESTIMATED  TAX 
MOST  REACH  THE 
COLLEaOR'S  OFHCE 
ON  OR  BEFORE 
MARCH  IS,  1919. 


Form  1046  T^UNITED  STATES  INTEENAL  REVENUE  SERVICE 

TENTATIVE  RETURN  AND  ESTIMATE 

. OF 

INDIVIDUAL  INCOME  TAX  FOR  1918 

AND 

REQUEST  FOR  EXTENSION  OF  TIME  FOR  FaiNG  RETURN 


PRINT  BELOW  rAXPAYER’S  INAME  AND  ADDRESS 


Do  not  write  in  llib  spice 

AMOUNT  PAID 


$ 

(Cashier’s  Stamp) 


CkctstJnfl 


CnrescT  sr  nia 

Csrtificsis  sf  iWeheJscs, 


Date No 

(To  b«  entered  by  taxpayer.)  (To  be  entered  by  Collector.) 

Collector  'of  Internal  Revenue, 


The  amount  stated  below  is  remitted  herewith  in  payment  of  not  less  than  one-fourt,h  of  the  estimated  amount  of  the  income  tax 
for  1918  of  the  individual  whose  name  and  address  appear  at  the  head  of  this  form. 

An  extension  of days  in  the  time  allowed  for  filing  a completed  return  is  requested. 

It  is  not  possible  to  file  a completed  return  on  or  before  March  15,  1919,  for  the  following  reasons: 


Estimatejl  amount  of  tax $ 

Amount  of  remittance  herewith; 


Check  or  draft. 

Money  order. 

Currency  or  coin. 

Certificates  of  Indebtedness. 

Total. 

I-* 

$ 

$ 

5 



AFFIDAVIT 

I SWEAR  (or  aflirm)  that  the  foregoing  is  a fair  estimate  of  the  total  amount  of  the  income  tax  for  1918  of  the  individual  whose  name 
and  address  appear  at  the  head  of  this  form,  and  that  the  above-stated  reasons  why  a completed  return  can  not  be  filed  on  or  before 
March  15, 1919,  are  true. 

Sworn  to  ^d  sub- 1 , jgx 

scribed  before  me)  " (Ni^ture  of  Individual  or  agent.) 


(Name  of  ofBcor.) 


(Oillcial  capacity.) 


(Address  of  Individual  or  agent.) 

Page  1 of  Form  1040T 


Income  Tax 
Supplementary  Page  25 


[This  Form  1040T — Duplicate  (see  Supplementary  Page  25,  for  original)  is  attached 
to  the  original  (perforated),  the  reverse  of  both  sheets  being  blank.] 


DUPLICATE 

(to  bo  sent  to  Collec- 
tor with  original) 


THIS  FORM 
DULY  AFPRO\TD 
BY  TTIE 

COLLECTOR  MUST 
ACCOMPANY 
THE  TAXPAYER’S 
COMPLETED 
RETURN 
WHEN  HLED 


Form  1040  T— UNITED  STATES  I24TEP.NAL  REVENUE  SERVICE 

TENTATiVE  RETURN  AND  ESTIMATE 

OF 

INDIVIDUAL  INCOME  TAX  FOR  1918 

ANO 

REQUEST  FOR  EXTENSION  OF  TIME  FOR  FILING  RETURN 


PRINT  BELOW  TAXPAYER’S  NAME  AND  ADDRESS 


PE^ULTiES 


For  Making  False  or 
Fraudulent  Return. 

Not  exceeding  $10,000 
or  not  exceeding  one 
year’s  imprisonment,, 
or  both,  in  fho  dis- 
cretion of  the  court, 
and,  in  addition,  50 
'per  cent  of  the  tax 
evaded. 

For  Failing  to  Make 
Return  on  Tune. 

Not  more  than  $1,000, 
and,  in  addition,  25 
per  cent  of  the 
amount  cf  tax  due. 


Date No 

(To  be  entered  by  taxpayer.)  (To  be  entered  by  Collector.) 


Collector  of  Internal  Revenue, 


The  amount  stated  below  is  remitted  herewith  in  payment  of  not  less  than  one-fourih  of  the  estimated  amount  of  the  income  tax 
for  1918  of  the  individual  whoso  name  and  address  appear  at  the  head  of  this  form, 
f. 

An  extension  of dAys  in  the  time  allowed  for  filing  a completed  return  is  requested. 

It  is  not  possible  to  file  a completed  return  on  or  before  March  15,  1919,  for  the  following  reasons: 


Estimated  amount  of  tax $. 

Amount  of  remittance  herewith: 


Check  or  draft. 

Mocoy  or  ter. 

Currency  or  coin. 

Certificates  ot  IndebtC'lnors. 

Tote!. 

f 

$ 

S 

i i 

s ! 

: 1 : ^ 

COLLECTOR’S  APPROVAL 

In  consideration  of  the  filing  of  this  tentative  return  and  the  payment  of  not  lijes  than  one-fourth  of  tiie  estimated  amount  of  ti:-e  tax, 
and.  for  the  reasons  stated  above,  the  time  Tor  fi!in,g  il.e  completed  return  of  the  taxpayer  whose  urune  and  adcireas  apj>oar  at  the  heed 


oi  this  form  is  hereby  extended,  by  authority  of  the  Ccmioianoner  of. Interna!  Revenue,  until — 

If  the  remittance  accolmpanying  this  tentative  return  exceeds . cne-fourth  of  the  tax  as  computed  on  the  completed  return,  the 
excess  will  be  credited  a^nst  the  balance  rrmaining  to  be  paid.  If  the  rtniitUnce  is  lees  than  cne-fouith  of  the  tax,  t uc  hulance 
due,  with  interest  at  the  rate  of  six  per  cent  per  annum  from  March-15,  1S-I9,  must  accompany  the  completed  return.  If  the  .amount 
paid  exceeds  the  total  tax  as  shown  by  the  completed  return,  the  e.xccss  wrill  be  refunded. 


Date 


CoUtcLar  of  Internal  Revenue. 
.District  of 


Income  Tax 

Supplementary  Page  26 


Form  1096— Rsviszd  Fxbruast,  m»— UNITED  STATES  INTERNAL  REVENUE  SERVICE 

ANNUAL  INFORMATION  RETURN 

OF 

PAYMENTS  OF  INTEREST,  SALARIES,  RENT,  ETC.,  OF  $1,000  OR  MORE 


For  Calendar  Year  1918 


THIS  RETURN, 
ACCOMPANIED  BY 
REPORTS  ON 
FORM  1059, 

MUST  BE  MAILED  TO 
THE  COMMISSIONER 
OF 

INTERNAL  REVENUE, 
SORTING  DIVISION, 
WASHINGTON,  D.  C., 
ON  OR  BEFORE 
MARCH  IS  1519 

(Data  receivad) 

(Name  oi  person  or  organization  by  whom  payments  were  made) 

(Street  and  number  or  rural  route) 

(PostofiSce)  (State) 

Classes  or  Income 

Number  or  Reports 

ON  Form  1099 

Total  Amottnt  of 

Interest,  rent,  salaries,  wages,  premiums,  annuities,  compensation,  remuneration, 

, emoluments,  or  other  fixed  or  determinable  gains,  pronts,  and  income  of  $1,000 
or  more 

$ 

1 

INSTRUCTIONS 

Every  individual  or  organization,  in  whatever  capacity  acting,  who  made  pajonents  of  income  as  described  above  during  the  calendar 
year  1918  to  any  individual  citizen  or  resident  of  the  United  States,  or  domestic  partnership,  is  required  to  render  a return  on  this  form  on 
or  before  March  15, 1919. 

The  return  should  be  accomMnied  by  reports  on  Form  1099,  showing  the  name  and  business  address  of  the  person  or  organization 
by  whom  the  payments  were  made,  the  full  name  and  address  of  each  individual  or  partnership  to  whom  the  payments  were  made,  the 
kind  of  income  paid,  and  the  amount. 

Partnerships  and  rersonal  service  corporations  should  prepare  reports  on  Form  1099  for  each  member  of  the  partnership  or  personal 
aervice  corporation.  Fiduciaries  should  make  these  reports  for  each  beneficiary  of  the  estate  or  trust.  In  these  cases  the  word 
“partnership,”  “personal  service  corporation,”  or  “ fiduciary”  should  be  entered  on  the  blank  line  on  Form  1099,  Income  tax  returns 
of  partnerships,  personal  service  corporations,  and  fiduciaries  accompanied  by  reports  on  Form  1099  should  be  filed  with  the  Collector  of 
jTitemal  Revenue  on  or  before  March  15,  1919. 

Reportt  on  Form  1099  are  not  required  in  the  following  cases: 

1.  Interest  on  the  obligations  of  the  United  States,  of  States,  Territories,  or  political  subdivisions  thereof  or  of  the  Bisect  of 
Columbia  and  compensation  paid  officers  and  employees  by  a State  or  political  subdivision  thereof  for  personal  services. 

2.  Dividends  paid  by  domestic  or  resident  corporations  (not  including  earnings  of  personal  service  corporations).  - 

3.  Payments  by  brokers  to  their  customers. 

4.  Bills  paid  for  merchandise,  telegrams,  telephone,  freight,  storage,  and  similar  charges. 

fi.  Amounts  paid  to  employees  for  expenses  incurred  in  business. 

6.  Premiums  paid  to  insurance  companies. 

7.  Annuities  representing  return  of  capital. 

8.  Interest  accrued  on  bank  deposits  if  not  credited. 

9.  Rent  paid  to  real  estate  agents  (but  the  agent  must  report  payments  of  rent  made  to  the  landlord  if  they  amount 'in  the 
aggregate  to  $1,000  or  nmre  for  the  year). 

10.  Payments  made,  by  domestic  establishments  or  foreign  branch  houses  thereof  to  nonresident  alien  employees  for  services 
performed  entirely  in  foreign  countries. 

11.  Salary  or  compensation  of  $3,500  or  less  paid  for  active  services  to  persons  in  the  military  or  naval  forces  of  the  United  States. 

12.  Interest  on  bonds  of  domestic  and  foreign  corporations.  (See  Forms  1012  and  1096A.) 

13.  Salaries,  wages,  etc.,  paid  to  nonresident  alien  individuals  and  foreign  corporations.  (See  Form  1042.) 

-The  name  and  address  of  the  individual  or  organization  making  reports  on  Form  1099  may  be  printed  or  stamped  on  each  form, 
but  the  return  Form  1096  must  be  made  under  oath. 


I swear  (or  afiirm)  that  to  the  best  of  my  knowledge  and  belief  the  foregoing  return  and  the  accompanying  reports  constitute  a true 
and  complete  statement  of  payments  of  the  above-described  classes  of  income  made  by  the  person  or  organization  named  at  the  head 
of  tills  return  during  the  calendar  year  1918. 

Sworn  to  and  subscribed  before  me  this day  

(Signature.) 

' (State  whether  in^vidual  owner,  mem'^r  o(  firm,  or  t^bui^g  ^oer  of 

Oovernment  bureau  or  offioo,  or  i f oflloer  of  corporation  give  title. ) 


(Signature.) 


(Title.) 


(State  address  o'[perK>n  signing  if  diflerent  from  that  given  at  head  ol  return.) 


Income  Tax 
Supplementary  Page  27 


rorm  1096B-UNITED  STATES  INTERNAL  REVENUE  SERVICE 

ANNUAL  INFORMATION  RETURN 


PAYMENTS  OF  INTEREST  ON  BONDS  OF  DOMESTIC  AND  FOREIGN  CORPORATIONS  AND  COUNTRIES  AND 
DIVIDENDS  ON  STOCK  OF  FOREIGN  CORPORATIONS 


For  Calendar  Year  1918 


THIS  RETURN 
MUST  BE  MAILED  TO 
THE  COMMISSIONER 
OF 

INTERNAL  REVENUE 
SORTING  DIVISION 
WASHINGTON,  D.  C. 
ON  OR  BEFORE  • 
MARCH  15, 1919 


(Name  of  debtor  organization.) 
(Full  post-office  address.) 


(Name  of  bank  or  paying  agent.) 
(Full  post-office  address.) 


(Date  received) 


MONTH 

A.  Interest  on  bonds  and  other  sinaAR  obligations  of 

DOMESTIC  and  RESIDENT  CORPORATIONS 

B.  Interest  on  bonds  of  foreign  corporations  .and  countries 
AND  dividends  ON  STOCK  OF  FOREIGN  CORPORATIONS 

Number  of  certificates 

Amount 

Number  of  certificates 

Amount 

y^iniiary  ...  _ ... 

February. 

March...... 

April 

May  - 

June 

c 

July 

n 

August 

'I'Jf  - 

Rpptember  . 

October 

November i 

December 

• rn 

• 

Total 

$ 

, 

......Ir,:......., 

This  return  must  be  made  by  debtor  corporations,  paying  agents,  or  banks,  and  must  show,  by  months  in  which  the  income  was 
paid  and  reported  on  monthly  returns,  the  total  number  of  exemption  certificates  filed  with  such  returns  and  the  total  income  paid 
without  deduction  of  tax,  as  shown  by  such  certificates  and  returns. 


. I swear  (or  afiirm)  that  this  return  is  a full  and  complete  summary 
the  classes  shown  above  (heretofore  reported  on  monthly  returns,  which 


of  the  number  of  exemption  certificates  and  amount  of  income  of 
are  hereby  made  a part  of  this  return),  paid  during  the  year  1918. 


Sworn  to  and  sub^bed  before  me  this day 

of ,1919. 


(Signature.) 


(Signature.) 

(ritieT) 


(GapMity  in  which  acting.) 


(Address  in  full.) 


Income  Tax 
Supplementary  Page  28 


11  10-19 


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Income  Tax 

-Supplementary  Page  29 


Income  Tax 

Supplementary  Pag:e  30 


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Income  Tax 
Supplementary  Page  31 


See  Ixstruct;on3  ox  Form  109CA. 


Form  1013 — Revised  February,  1919 

CNITED  STATES  INTERNAL  REVENUE  SERVICE 

Do  not  write  in  thiz  space 

dale  el  fiGnf  ii  ihc  return  u ant 

PAYMENT 

$ 

remittuice. 

ANNUAL  RETURN  OF  NORMAL  INCOME  TAX  TO  BE  PAID  AT  SOURCE 

INTEREST  ON  BONDS  AND  OTHER  SIMILAR  OBLIGATIONS  OF 
DOMESTIC  AND  RESIDENT  CORPORATIONS  AND  FOREIGN  COR- 
PORATIONS HAVING  A PAYING  AGENT  IN  THE  UNITED  STATES 

(Caahier's  Stamp) 

For  the  Calendar  Year  1918 

i 

iName  of  debtor  organization' 

THIS  RETURN  MUST  BE  MADE 
W DUPLICATE  TO  THE  COLLEC- 
TOR OF  INTERNAL  REVENUE 
FOR  THE  DISTRICT  IN  WHICH 
THE  WITHHOLDING  AGENT  IS 

(.\ddrcss  in  lull)  - 

CASH  CHECK  M.O. 

LOCATED,  ON  OR  BEFORE 
MARCH  I.  1919,  AND  THE  TAX 
MUST  BE  PAID  ON  OR  BEFORE 
JUNE  IS,  1919, 

1 (Name  ol  \\'itbholding  agept) 

(Address  in  full) 

Examioed  b; 

INSTRUCTIONS 

If  debtor  organization  makes  its  own  return,  no  entries  need  be  made  on  lines  provided  for  name  and  address  of  withholding  agent. 


This  return  must  be  made  by  debtor  organizations,  or  their  duly  authorized  withholding  agents,  and  must  show,  by  months  in  which  the 
income  was  paid  and  reported  on  Form  1012,  the  total  amount  of  tax  to  be  paid  at  source  on  each  of  the  following  classes  of  payments: 

1.  Interest  on  bonds  with  tax-free-covenant  clauses  paid  to  citizens  and  residents  of  the  United  States  (individuals  and  fiduciaries)  not  claim- 

ing personal  exemption,  to  domestic  and  resident  partnerships,  to  nonresident  alien  individuals  or  fiduciaries,  to  foreign  partnerships, 
and  to  foreign  corporations  having  no  office  or  place  of  business  in  the  United  States. ' A normal  tax  of  2 per  centum  is  required  to  be 
withheld  and  paid  at  source  in  such  cases. 

2.  Interest  on  bonds  without  tax-free-covenant  x:lauses: 

(а)  If  paid  to  a nonresident  alien  indi^'idual,  a normal  tax  of  8 per  centum  is  required  to  be  withheld  and  paid  at  source. 

(б)  If  paid  to  a foreign  corporation  having  no  office  or  place  of  business  in  the  United  States,  a normal  tax  of  10  per  centum  is  required 

to  be  withheld  and  paid  at  source. 


MONTH 

CLASS  1 

CLASS  2(a) 

CLASS  2(b) 

TOTAL 

JAWnARY 

$ 



$ 

$ 

1 

fPRDnAPY 

march 

..... 

Appn. 

MAY 

JUNE....  

JULY  . 

Auonsi 

— 

> 

O d 

SEPTEMBER 

^ 

OCTOBER 

, 

' 

- ”1 

NOVEMBER 

^ , 

; 

DF.CF.MBF.R  . . 

: 

:3-  ' 

TOTALS 

$ 

$.. 

$- 

. 1 

1$ 

If  a withholding  agent  withheld  the  tax  pursuant  to  the”  Revenue  Act  of  1917  from  interest  paid  to  nonresident  alien  individuals  and  foreign 
-orporations  not  engaged  in  trade  or  business  within  the  United  States  and  not  having  any  office  or  place  of  business  therein,  he  need  return  only 
the  sum  withheld. 


I swear  {or  affirm)  that  the  above  return  is  a full  afid  complete  summary  of  the  amounts  of  normal  tax  Qieretofore 
reported  on  monthly  returns  on  Form  1012,  which  are  hereby  made  a part  of  this  return)  required  to  be  withheld  from 
payments  made  by  the  above  organization  during  the  year  IdlS^' 


Swam  to  and  subscribe  before  me  this 


day  of. 


. 1919. 


(Capacity  in  which  acting) 


i— !j«a 


(Tilla) 


. (Address  in  full) 


Income  Tax 
Supplementary  Page  32 


Income  Tax 
Supplementary  Page  33 


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Income  'Fax. 
Supplementary  Page  .i4 


Sworn  to  and  subscribed  before  me  this 


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fiiooinc  Tax 
S\i(>plcincntary  Page  35 


or  pcriodic&l  gains,  profits,  aud  income  paid  and  amount  of  tax  withheld. 


On^efAr  urSI  fttinp  lier« 
d*le  ef  filifif  if  the  return  U not 
aceempenieil  by  reouttencs. 

Form  1012— itevised  February,  1919 

UNITED  STATES  INTEUNAL  REVENUE  SERVICE 

ANNUAL  RETURN  OF  NORMAL  INCOME  TAX  TO  BE  PAID  AT  SOURCE 

SALARIES,  WAGES,  RENT,  ETC.,  PAID  TO  NONRESIDENT  ALIEN 
INDIVIDUALS  AND  FOREIGN  CORPORATIONS  (NOT  ENGAGED 

IN  Trade  or  business  within  the  united  states  and 

NOT  HAVING  ANY  OFFICE  OR  PLACE  OF  BUSINESS  THEREIN) 

For  the  Calendar  Year  1918 

Do  not  write  In  thii  «p*t« 

PAYMENT 

$ 

(Caihier’a  Stamp) 

THIS  RETURN  MUST  BE  MADE 

IN  DUniCATE  TO  THE  COILEC- 
TOR  OF  INTERNAL  REVENUE 
FOR  THE  DISTRICT  IN  WHICH 

CASH  CHECK  M.O. 

THE  WITHHOLDING  AGENT  IS 

(Name  of  withholding  .agent) 

Examiaed  bj 

LOCATED.  ON  OR  BEFORE 
MARCH  1.  1919.  AND  THE  TAX 
MUSI  BE  RAID  ON  OR  BEFORE 

JUNE  IS.  1919. 

(Address  in  lull) 

INSTRUCTIONS 

2— «597 

This  return  is  required  to  be  made  by  all  individuals,  corporations,  and  partnerships,  in  whatever  capacity  acting,  including  lessees  or  mortgagors 
of  real  or  personal  property,  fiduciaries,  employers,  and  olhcers  and  employees  of  the  United  States  having  the  control,  receipt,  custody,  disposal,  or 
payment  of  interest,  rent,  s.alaries,  wages,  premiums,  annuities,  compensation,  remuneration,  emoluments,  or  other  fixed  or  determinable  annual  or 
periodical  gains,  profits,  and  income  of  nonresident  alien  indivddualsor  foreign  corporations  not  engaged  in  trade  or  business  within  the  United  States 
and  not  having  any  office  or  place  of  business  w^'hin  the  United  States. 

The  law  requires  that  a tax  equal  to  8 per  centum  of  the  amount  paid  as  salaries,  wages,  rent,  etc.,  to  indi\'idual3  and  10  per  centum  of  the 
amount  paid  to  corporations  shall  be  deducted  and  withheld.  If  any  tax  required  to  be  deducted  and  withheld  is  paid  by  the  recipient  of  the 
income,  it  shall  not  be  recollected  from  the  withholding  agent.  Income  derived  from  dividends  on  the  capital  stock  or  from  the  net  earnings  of  a 
corporation,  joint-stock  company,  or  insurance  company,  which  is  taxable  upon  its  not  income  under  the  Revenue  Act  of  1918  is  exempt  from  with- 
holding and  should  not  be  reported.- ' 

This  return  must  be  accompanied  by  a report  on  Form  1093  of  income  paid  for  every  item  entered  hereon. 


I swear  (or  affirm)  that  the  following  is  a true  and  complete  return  of  all  paynrents  of  salaries,  wages,  interest,  rents,  etc.,  made  during  the  cal- 
endar year  1918  by  the  above  withholding  agent  and  of  the  tax  withheld  on  pa;^ncnts  of  income,  as  above  described,  to  nonresident  alien  individuals 
and  foreign  corporations  as  defined  above,  the  several  items  being  evidenced  by  reports  which  are  listed  below  and  inclosed  herewith  showing  the 
name  anj  address  of  the  recipient  of  the  income,  the  kind  and  amount  of  income  paid,  and  the  amount  of  tax  withheld. 

I further  declare  that  tb.?  amount  of  tax  withheld  is  $ 

Sworn  to  and  subscribed  before  me  this day  of , 19 

(Signature.) 


(Signature.)  (Title.)  (Capacity  in  which  acting.) 


NAME  OF  INDIVIDUAL  OR  CORPORATION  TO 
WHOM  PAID 

ADDRESS  IN  FULL 

AMOUNT  OF 
INCOME  PAID 

AMOUNT  OF 
TAX  WITHHELD 

.$  

' 

— 

Totals 

$ 

Income  Tax 
Supplementary  Page  36 


DELIVER  OR  SEND 
THIS  RETURN 
TO  COLLECTOR  OF 
LNTERIxAL  REVENUE 
ON  OR  BEFORE 
MARCH  15,  1919 


IF  EXTENSION  OF 
TIME  FOR  FiLiNG  REuIRN 
HAS  liELN  GRATO-EIJ 
TtlE  AUTHORIZATION 
MUST  BE  ATTACHED  TO 
THIS  RETURN 


Page  1— Sianniary 

Form  X120— tTNITED  STATES  INTERNAL  REVENUE  SERVICE 

CORPORATION  INCOME  AND  PROFITS  TAX  RETURN 

FOR  CALENDAR  YEAR  1918 

OR 

Fiscal  Period  begun , and  ended , 1913 


EienJneii  by 


AuJiled  by 


(DO  NOT  fiAl.e  IN  THIS  rwCE) 

PAYMENT 


CHECK 

M.  O. 

CZXT.  OF  INd7 


(Cashier’s  Stamp) 


SCHEDULE  I— NET  INCOME. 


Item. 

1911 

1 1012  1 L'13 

1 VrT  Tvr.nur  mp  PArw  Prrwar  Yp.ap  Ta/i  finally  rlfiterminArl  nn  inromp  return) 

1 

2.  Pits  amount  of  corporation  excise  tax  paid  in  each  year—  - 

‘■‘1 

1 

3.  Totals  fob  1911, 1912,  and  1913  . . _ . 

s 1 

1 

!* 1 i 

L 

L 

4.  Less  dividends  received  in  1913 

5.  Net  Total  for  1913  _ __  . _ . 

s 

S.  Average  Net  Income  for  Prewar  Pebiod  (sum  of  items  on  line  3 for  1911  and  1912  and  Item  5 for  1913,  divided  by  number  of  years) 

7.  Net  Income  for  Taxable  Year  fitem  25,  Schedule  A,  page  2) 

1 

SCHEDULE  ri— INVESTED  CAPITAL. 


IttH. 

1911 

1 1912 

J913 

Taxable  Year. 

1 . Capita),  onrpios,  and  undivided  (roflt:  at  the  close  of  the  preceding  year  at  shown  by 
corporotiou's  bcf&re  an/  adjoatmentt  ara  mad*  tliereiii(froiB  diibodiilc  £}.. 

f. 



$ ' 

i. 

2.  Plus  adjustments  by  way  of  additions  (from  Schedule  F)——.. 

3.  Total 

I. 

$ 

1 

$ 

4.  I.ess  adjustments  by  way  of  deductions  tfrom  Schedule  G) 

5 P.vr.Avcp, 

$— 

1 

$ 

1 1 

■.<;  

C.  Plus  or  n;inua  cliauges  iii  invested  capital  during  year  (from 
Schedules  H aud  J) 

1 ■ 

1 i 

1 

7 Total  (on  P.alance) 

1 

! 

1 

, -1 

1 

k: 

t 

8.  Leas  deduction  ou  account  of  inadmissible  assets  (from 
Schedule  L) 

1 1 

1 

j 

9.  Invested  Capital  for  Each  Year 

* 1 

L 1 

J 

I......... 

. 1 

10.  Avbraoc  Invested  Capital  for  Prewar  Period  (sum  of  itemi 

j on  line  9 for  1911.  191: 

2.  and  1913  divided  b 

y number  of  y 

ested  Cafitai 

■ears) 

11.  Increase  on  Decrease  in  Invested  Capital  for  Taxable  Year  asCompared  with  Average  Prewar  I.tv 

[.  (Indicate  decrease  by  “D”). 

$ 



SCHEDULE  III— EXCESS-PROFITS  AND  WAR-PROFITS  CREDITS. 

(If  this  return  ia  made  for  a period  leas  than  a full  year,  Items  3 aud  8 must  be  reduced  as  provided  in  paragraph  1,  page  1 of  Instructions/ 


EXCES.VFROFIT.S  CREDIT. 

1.  p^T  cent  of  iDvesU'd  capital  for  taiablo  year  (Item  9, 

last  cohinin,  Schedule  ll)......... 

$ 

WAU-PROFITO  CREDIT. 

4.  Average  net  income  for  prewar  period  (Item  0,  Schedule  I). 

5.  Plus  10^  of  increase  or'miuus  li);6  of  decrease  shown  by 

Item  11,  SehtHlule  II 

$ 

9 F.xrTnnlHin 0f>9)  - 

6.  (u)  Total  OF  (or  DtrFERENCE  Between)  Items  -1  and  5, 
or  (6)  10^^  of  invested  capital  for  taxable  year  (Item 
9j  last  colnninfSi’hptJiilo  in,  uliicbovpr  in  bn-^pr 

S 

3.  EtcRss-PRoriTs  Ch.cdit  iTtcm  1 dIus  Item  2) 

1 

1 

7.  Exemotion  (J3.000) - - 



1 

War-Profit.s  Crp-dit  (Item  G plus  Itora  7) '$ 



SCHEDULE  IV— COMPUTATION  OF  TAXES. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  (Brocksti  one  end  two). 

(If  this  return  is  for  a period  less  than  a full  year  the  invested  capital  must  be  reduced  ns  provided  in  paragraph  1,  page  1 of  Instructions.] 


1.  BaACEIRS. 

2.  Amount  or  Net  Income  (Item 
7,  Schedule!)  in  Each  Braceet. 

3.  ExcEss-Pnonrfl  Credit 
(ITE.M  3,  Schedule  HI). 

I.  Balance  Suoject  to  Tax. 

Rate. 

6.  Amount  or  Tat. 

1 'Jfit.  nvor  9i\^  r>f  rapifal 

t 

ft 

30^ 

65 

f 

2.  Over  20%  of  invested  capital..  . . 

3.  Totals .'. 

I. 

% 1 

d 

$ 

1 



$ 1 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  (Breckot  three). 


$ 

$ 

1, 

1 

7.  Eighty  per  cent  of  Item  6 J.?. 

8.  Lees  Item  3 coluion  6 (u  | 

smaller  than  Item  7) 1... 


Net  incomo  for  taxable  year  (Item  7,  Schedule  I) $ 

I.esB  amount  of  war- profits  credit  (Item  8,  Schedule  III) 

IIai.as'ce 

Tdtao  WAR-PiioriTS  AND  ICxcESH-PKonTB  Tax  AS  COMPUTED  UNDER  SECTION  301  (a)  (Item  3 column  0 plus  Item  9). 

V.n.'L  VAR-PnortTS  and  Fxcf.bs-Profitb  Tax,  if  Computed  under  Section  302,  303,  30-t  (c)  or 337  (see  Instructions,  pago  I,  psr.^nph.s  f>  nnd  7)... 

INCOME  TAX. 


Tax  IN  Bracket  TnnRE  (Item  7 minus  Item  8 — if 
Item  8 is  the  larger,  make  uo  entry). 


Netlncomcfor  taxable  year  (Item  7,  Schedule  I). 
Lui:U!'.rulMtUipti«a«rD. I.Nlii-  U 
itpt  (Iko  1,  IcWiU  i,  !).. 

Vr’ar-profits  and  execto- 
prolits  tax  (Ilea  It  or  II). 

Exemption  (lX.OOO  nu'  - 


TAX  (Item  12  i«M  1 ten's  13,  14,  and  15)- 
ToTAt.  WAII-PROnTB.  RxCERS-PROmi,  At 


17.  Tax  of  12^  on  Item  1C  . 


18.  Item  10  or  Item  11  plus  Item  17 

19.  Less  in'-ome,  war-profits,  and  exetas- profits  taxes  paid  or 

Rcerued  to  foreign  countries  on  incomo  arising  from 
sources  therein,  and  to  poBei^esiousof  tl.o  UuitedStales 
(see  Sections  238  aud  210  (c)  of  l^veuue  Act  of  1918)... 


D Income  Taxes  (except  in  case  of  a fiscal  year)  (llem  18  roiniis  Item  1?)— . 

ADJUSTMENT  OF  TAX  TOR  FISCAL  YEAR  ENDED  IN  ISIS. 


That  proportion  of  Item  20  which  the  Dumber  of  months 
within  the  calondar  year  1918  is  of  the  number  of  mouths 

In  the  ontiro  period 

Tkt»  prsyonisB  of  i Ui  uayaUl  onJor  tlis  nvonae  acU  of  IJI6  and  1»17 
wklrk  the  nnatoi'  of  Bontki  wlihlu  tbo  cal.nJar  yo»  1917  lo  of  Ibe 
nombor  of  moail^Ui  

Tax  paid  I On  tuheifiBion  of  tantativo  return  (iqilT).  ? . . 


$ 

$ 

23.  Total  tax  (Item  21 ; lus  Item  22) 

2-1.  Lt-p-s  total  tax  alrcad y jiaid  for  tlic  fiscal  yeas  ended  i 
2fi.  IUeanct:  opT.i- 


; by  reniitlapcc  accotnpanyinf}  this  return,  f . 

Income  Tax 
Supplementary  Page  37 


Totai. 


1 

f 

A 

% 

Page  1 of  Form  1120 


Page  2— Income  Scneatiles 


SCHEDULE  A— TAXABLE  NET  INCOME. 

Note. — Railroad  corporations,  banks,  insurance  cctapanies,  and  other  corporations  required  to  Eirbmit  statements  of  income  and  expenses  to  any  natiomd,  State,  municipal,  or  other 
public  officer  may  submit  instead  of  Schedule  A a statement  of  income  and  expenses  in  tho  form  in  which  submitted  to  stich  officer.  In  such  cases  the  t?.xab!e  net  income  will  be 
reconciled  by  means  of  Schedule  B trith  the  net  profit  shown  by  the  income  and  expense  statement  submitted,  an|i  should  be  entered  as  Item  7,  Schedule  I,  page  1. 


GROSS  INCOME. 

1. '^ross  sales,  less  returns  and  allov-’ances - -f- 

2.  Beds  cost  of  goods  sold,  exclusive  of  expenses,  repairs,  .and  other  items  called  for  separately 

below  (from  Schedule  A2) i . 


3.  Gross  income  from  operations  other  than  trading  or  manufacturing,  leas  allowances  (from  Schedule  A3) 

4.  Interest  on  obligations  of  the  United  States  or  its  possessions  not  exempt  (from  Schedule  A4) 

5.  Interest  from  other  sources  (from  Schedule  A5) 

8.  Share  of  net  income  earned  since  December  31,  1917,  by  personal  service  corporations  (whether  received  or  not) . 

9.  Dividends  on  stock  of  foreign  corporations  (from  Schedule  A9) 

10.  Gross  income  from  all  other  sources  except  dividends  (not  including  any  amount  i 

cellaueous  investments — see  Item  23,  below)  (from  Schedule  AlO). 


I respect  of  sales  of  capital  assets  or  mis- 


I 

i 

. i 


Total  op  Items  1 to  10„ 


DEDUCTIONS. 

12.  Ordinary  and  necessary  expenses  (except  amounts  reported  in  Item  2 above  or  called  for  separately  below,  and  not  includ- 

ing cost  or  value  oi  capital  assets  or  miscellaneous  investments  sold  during  taxable  year — see  Item  23)  (from  Schedule  A12)_ 

13.  Compensation  of  officers  (including  salaries,  commissions,  and  other  compensation  in  whatever  form  paid)  (from  Schedule 


A13). 


14.  Repairs  (including  labor,  supplies,  overhead,  and  other  items  properly  chaigeable  to  repairs)  (from  Schedule  A14) 

15.  Interest  (except  on  indebtedness  incurred  or  coniinued  to  purchase  or  carry  obligations  or  securities,  other  than  obligations 

wni(  ’ 


of  the  United  States  issued  after  September  24,  1917,  the  interest  on  which  is  wholly  exempt  from  income  ^x) 

16.  Taxes  (except  Federal  income,  war-profits,  and  excess-profits  taxes,  taxes  which  are  a credit  under  Section  238,  and 

taxes  assessed  against  local  benefits  of  a kind  tending  to  increase  the  value  of  the  property  assessed): - 


17.  Debts  ascertained  to  be  worthless  and  charged  off  within  the  taxable  year.. 

18.  Exhaustion,  wear  and  tear  (including  ohsplescence)  (from  Schedule  A18) 


19.  Amortization  of  war  facilities  (from  Schedule  A19) .■ 

20.  Depletion  (if  depletion  is  claimed.  Form  A (revised)  of  Mines  and  Minerals  Section  should  be  obtained  from  the  Collector, 

filled  in,  and  filed) 


Total  of  Items  J2  to  20 

Difference  Between  Items  11  and  21 ..... 


21. 

22. 

23.  Profit  or  loss  on  sales  of  capital  assets  and  miscellaneous  investments  (from  Schedule  A23) 

24.  Losses  sustained  during  the  taxable  year  from  fire,  tlcrm,  or  other  casualty,  or  from  theft,  nc 

ance  or  otherwise  (from  Schedule  A24)  (extend  in  last  column  net  total  of  Items  23  and  24) 

2.5. Net  Income  for  T.axable  Year  (total  of  or  difference  botween  Item  22  and  Item  24,  la.st  column)(to  be  entered  as  Item  7,  Schedule  I,  page  1) 


SCHEDULE  B— RECONCILIATION  OF  NET  PROFIT  PER  BOOKS  WITH  TAXABLE  NET  INCOME. 


1.  Net  profit  for  year  per  books,  before  any  adjustments  are  | 

made  therein * 

5.  Nontaxable  income: 

2.  Unallowable  deductions: 

(a)  Donations,  gratuities,  and  contributions ... .... 

(a)  Intereat  on  oblirotions  of  the  United  States  and  its 
possessions,  wnolly  exempt......^... 

( J)  Incomr , war-proflt«,  and  eicess-priflts  taxes  paid  or  accrued  to  the 
UoitedStates.  its  possese  ions,  or  a foreign  countrj 

(c)  Special  improvemcTit  faxps 

- 

(i)  Interest  on  obligations  of  States,  Territories,  and 
political  subdivisionB  thereof 



(c)  Interest  on  Farm  Loan  Bonds  issued  under  Federal 
Farm  T.nan  Act 

(a)  Furniture  and  fixtures,  additions,  or  betterments 
treated  as  expenses  on  the  books 

(d)  Dividends  on  stock  of  domestic  corporations 

Tleplaepmentfl  revered  hy  depreriation 

(e)  Dividends  on  stock  of  personal  service  corporations 
declared  outof  profits  earned  prior  to  January  1,1913 

(/)  Other  items  of  nontaxable  income  (to  be  detailed)... 

; 

(/)  Insurance  premiums  paid  on  the  life  of  any  officer  or 
employee  for  the  benefit  of  the  corporation  or  business. 

(M  Interest  on  indebtedness  inenrred  or  continued  to  purchase  or  carry 
otiigations  or  seenrities  {other  than  obligations  of  the  United 
^ Btates  issued  after  September  iU,  1017)  the  Interest  upon  which 

Is  wholly  exempt  from  income  tax 

(h)  Additions  to  reserves  for  bad  debts,  contingencies,  etc. 
(to  hr  drtailrd) 



(A) 

i 

G.  Charges  against  reserves  for  bad  debts,  contingencies,  etc. 
(to  be  detailed) 

, 

(^)  



(2) 

i : 

(m)  Other  unallowable  deductions  (to  be  detailed) 





— 

{jD 

1 

7.  Amount  MCemrT  to  adjust  book  profit  or  loss  with  the  amsnnts  reported 

in  Items  23  and  24,  Schedule  A (unless  entry  belongs  on  line  S) 

8.  Taxable  net  income  (Item  25.  Schedule  A) 

1 

fo)  . 1 



....  . 

1 

3.  Amount  necessary  to  hook  profit  or  loss  w|lh  the  amounts  reported 

in  Items  23  and  24,  Schedule  A (unless  entry  bt-Iocgs  on  line  7). 

4.  Total 

$ 

9.  Total .'. 

$ 

SCHEDULE  C— BALANCE  SHEETS. 

Attach  hereto  balance  sheets  as  of  the  beginning  and  end  oi  the  taxable  year  (preferably  in  parallel  columns),  shovTing  as  nearly  as  practicable  the  details  called  for  below: 


ASSETS. 

Cash  (Ificloding  cash  in  bank  and  on  hand,  certiflcatos  of  deposit,  etc.). 
Trad*  accounts  and  notes  receivable  (before  deducting  reserves  for 
losses). 

Other  account*  and  note*  receivable  (to  be  classifled). 
Inventories: 

Raw  materials. 

Work  In  progress. 

Finished  products. 

Supplies. 

Inveetmentsf 

U.  S.  bonds  and  obligations  (each  Issue  to  be  stated  separately). 
Stock  of  corporations- 
Foreign. 


Other. 

Loan*  and  advances: 

To  oificers  and  employees. 


ASSETS  (Continued). 
Deferred  cKarges  to  future  operatkma* 

Fixed  e*set»: 

Land. 

Buildings. 

Machinery. 

Tools  and  minor  equipment. 

Delivery  equipment. 

Olhce  furniture. 

Other  (state  charactw). 

Total. 

Less  reserve  for  depreciation. 

Net  Value. 

Patenti,  good  will,  and  other  Intanfible  aeeeU 
Paid  for  in  cosh  or  other  tangible  property. 

Paid  for  in  stock  (other  than  stock  dividends). 
Created  by  stock  dividend  or  otherwise. 
Discount: 

On  bonds. 

On  slock. 

Tot!^ 


LIABILITIES. 

Notes  payable: 

To  officers  and  stockholders. 

To  others  (including  bank  loans). 
Accounts  payable; 

Trade, 

Other. 


1 accounts  rscelvable. 


Reserve  for  losses  9n  notes  ai 
Reserve*  for  continesnetes,  * 

allowable  deductions  from  I 
Capital  stock  outstanding  (to  be  classifiod). 
Surplus  and  undivided  profits 
Total, 


To  others. 

A corporation  having  a net  income  of  $3,000  or  more,  which  waa  in  exisjonce  during  at  leaat  one  full  prewar  year,  ebould  also  attach  to  this  return  similar  balance  i 
I parallel  columns)  as  of  the  bogirming  of  its  full  prewar  year  and  as  qf  December  31,  1913.  • 


ets  (preferably 


SCHEDULE  IVANALYSIS  OF  SURPLUS  ACCOUNT. 

Attach  hereto  an  analj’sio  of  the  corpofation’a  eurplua  account,  ehosriu^  the  details  of  all  adjustments  of  surplus  for  the  taxable  year,  as  nearly  as  practicable  in  the  following  form: 


1.  Surplus  at  beginning  of  year  ^r  books. 

Add:  2.  Total  net  profit  per  books  and  per  &hcdule  B (Item  I). 


Deduct:  5.  Dividends  (state  date  payable  and  amount  of  each,  and  wheth.cr  in  cash  or 
in  stock). 

6.  Other  debits  to  surplus  (to  be  detailed). 

7.  Surplus  at  end  of  year  per  hooka. 

A corporation  having  a net  income  of  $3,000  or  more,  which  was  in  existence  during  at  least  one  full  prewar  year,  should  also  attach  to  Uds  return  a similar  cna’.ysi?  of  its  surplus 
^count  for  Us  first  full  prewar  year  and  for  each  subsequent  year  down  to  the  beginning  of  the  taxable  year. 


I 3.  Other  credits  to  surplus  (to  be  detailed). 
4.lTotal  of  Items  1,  2,  and  3. 


Income  Tax 
Supplementary  Page  38 


Page  2 of  Form  1120 


Pago  3— income  Schedules— Concluded 

SCHEDULES  SUPPORTING  SCHEDULE  A 

- The  sch6<lTile3  called  for  below  should  be  prepared  and  firmly  stapled  to  this  return.  Designate  each  schedule  with  the  mimber  of  the  item  in 
i.^hedule  A which  it  explains.  Make  schedules  on  paper  of  uniform  size  so  far  as  practicable,  hi  the  space  provided  for  the  purpose  on  page  6 list 
all  schedules  attached  to  this  return,  giving  the  title  and  schedule  number  of  each. 


SCHEDULE  A2:  COST  OF  GOODS  SOLD,  EXCLUSIVE  OF  EXPENSES, 

REPAIRS.  AND  OTHER  ITEMS  CALLED  FOR  SEPARATELY. 

In  support  of  Item  2,  Schedule  A,  corporations  engaged  in  manufacturing  or  trading 
operations  Aould  submit  an  analysis,  in  reasonable  detail,  of  the  cost  of  goods  sold.  This 
statement  should  ordinarily  include  the  following  items  but  should  not  include  any 
expense  items  called  for  separately  in  Schedule  A. 

1.  Inventories  at  beginning  of  period  (to  be  reconciled  with  balance  sheet). 

2.  Purchases  during  period. 

3.  labor  and  wages  ordinarily  charged  to  manufacturing  cost  on  the  corporation’s 

books,  showing  the  principal  items  separately. 

4.  Other  expenses  ordinarily  charged  to  manufacturing  cost  on  the  corporation’s 

books.  (State  separately  large  or  unusual  items.) 

6.  Total, 

Deduct: 

6.  Inventories  at  close  of  period  (to  be  reconciled  with  balance  dieet); 

7.  'Cost  of  goods'  sold  (Item  5 less  Item  6). 

Note. — Inventories  should  be  valued  at  (a)  cost  or  (5)  cost  or 'market,  whichever 
is  lower,  provided,  however,  that  whichever  basis  was  adopted  by  a taxpayer  for  the 
taxable  year  1917  must  he  continued  unless  upon  application  to  the  Commissioner 
permission  is  granted  to  change.  If  basis  (6)  is  used  it  must  be  applied  to  each  item  in 
the  inventory  and  not  to  a part  only.  - Inventories  should  be  recorded  in  a legible  manner, 
properly  computed  and  summarized,  and  should  be  preserved  as  a part  of  the  accounting 
records  of  the  taxpayer.  (See  Articles  1581  to  1585  of  Regulations  No.  45.) 

State  here  which  of  the  above-mentioned  bases  for  valuing  inventories  is  used  in  this 

return 

SCHEDULE  A3:  GROSS  INCOME  FROM  OPERATIONS  OTHER  THAN  TRAD- 
ING OR  MANUFACTURING,  LESS  ALLOWANCES. 

Submit  a schedule  showing  the  nature  and  amount  of  the  principal  items  included 
in  Item  3,  Schedule  X 

Life  insurance  companies  should  enter  as  Item  3,  Schedule  A,  the  total  premiums 
received  from  policyholders  less  such  portion  thereof  as  has  been  paid  back  or  credited  to, 

. or  treated  as  an  abatement  of  premiums  of,  such  poUcyholders  within  the  taxable  year. 
(Sec  Articles  546  and  547  of  Regulations  45.) 

Mutual  marine  insurance  companies  should  report  as  Item  3,  Schedule  A,  the  gross 
premiums  collected  and.recoived  by  them  less  amounts  paid  for  reinsurance. 

SCHEDULE  A4:  INTEREST  ON  OBLIGATION?  OF  UNITED  STATES  OR  ITS 

POSSESSIONS  NOT  EXEMPT. 

Enter  in  table  below  the  maximum  amount  of  Liberty  Bonds  and  other  obligations  of 
the  United  States  issued  siuca  September  24,  1917  (par  value)  held  at  any  one  time,  from 
which  interoEt  was  derived  during  the  taxable  year; 


L Class  or  OsuoA-ncs. 

2. 

Haxiwitm  Amount  or 
Obligations. 

3.  MAXtmni 
Exemption. 

la.  First  Libert/  lioaa  eonTeri<d  luto  Loan 

andScMol  Lil:rij  Loan  unecoTerted  (interest 
received  since  Jauoary  !•  1^18)  

$ 

[$45,000 

lb.  First  ss'i  Ssrsnii  I ibertj  toen  mnierfed  into 
Tlurd  Leas  aliI  XbirJ l^ib^riy  Loan....... 

Wote.) 

In  addition  an 
exemptionof 
tl.OOO  mar  be 
claimed  as  to 

2.  Hfst  Liberty  Lean  conrerteit  Inb  Fcnrtb  Loan.. 

30,000 

30,000 

0 

8.  Foorth Liberty Lo^iii. 

anroneof  these 
classes  or  mar 
be  diTided 

4.  mheToMiKati'mBf*^TiMi«*J!C:S'?f*mtH'r24,1S17. 

• 



among  them. 

Note. — ^This  c::;r-mption  as  to  Items  la  and  lb  (maximum  $45,000)  is  limited  to  one 
and  one-haU  times  the  amount  of  bonds  of  the  Fourth  Liberty  Loan  originally  subscribed 

for  and  still  held.  State  that  amount  here,  $ : 


In  order  to  ateertaiu  the  amount  to  be  entered  as  Item  4,  Scehedule  A,  refer  first  to  the 
table  above. 

If  the  amoimt  entered  in  column  2 of  the  table  for  any  class  of  obligations  exceeds 
the  mazimum  cxemptmn  for  the  same  class  of  obligations  plus  any  part  of  the  $5,000 
exemption  assigned  to  that  class  (see  column  3),  attach  hereto  a schedule  showing  in 
eei'arafo  columns  the  following  information: 

(а)  Class  of  obligations.  < 

(б)  First  and  last  dates  of  each  perio<l  during  which  the  corporation’s  holdings  of  that 
clan  of  obligations  roraainrd  unchanged. 

(c)  Amount  of  obligations  of  that  class  held  by  the  corporation  during  each  such  period. 
(<f)  Amount  by  which  each  amount  entered  in  column  (c)  exceeds  the  ms  Timiim  exemp- 
tion for  that  clse.i  of  obligations. 

(e)  Ibiic  of  iiiti-rot. 

(/)  Inter.vrt  derived  from  each  amount  of  principal  stated  in  column  (d). 

For  the  purpose  of  showing  changes  in  holdings  and  applying  the  exemption,  classes 
la  and  )b  must  be  taken  jointly,  but  for  the  purpose  of  computing  the  taxable  interest 
they  must  be  ‘•rtered  : rr,arately. 

Enter  as  Item  4,  Schedule  A,  the  total  cf  column  (/)  for  all  classes  of  obligations. 
Submit  also  a statement  showing  the  amount  of  interest  derived  from  bonds  and 
other  obligations  of  the  United  States  and  its  i>oaEcaeions,  exclusive  of  thoee  described  in 
the  table  above. 

SCHEDULE  AS:  INTEREST  FROM  OTHER  SOURCES. 

f.iibmit  a sehc-diilr  showing  the  so'zrce,  nature,  and  amount  of  the  principal  items 
included  herein,  the  minor  items  being  grouped  in  one  figure.  'The  total  of  the  schedule 
should  he  entered  as  It'cr.  5,  S';hed;ilo  A. 

For  inUrrst  on  fori.'(oi  bonds  submit  a'  schedule  showing  (a)  name  of  country; 
(i)  kiiid  of  obligati'  03  (wbeihor  national,  state,  municipal,  or  corporate  obligations); 
(f)  amount  of  principal;  and  (d)  amount  of  interest. 

SCHEDULE  A9:  DIVIDENDS  ON  STOCK  OF  FOREIGN  CORPORATIONS. 

Submit  a scbedulo  i howii  g (n)  name  of  corporation;  (fc)  country  in  which  organized; 
(c)  total  par  value  of  stock  held;  and  (d)  amount  of  dividends. 

SCHEDULE  Alb:  CROSS  INCOME  FROM  ALL  OTHER  SOURCES  EXCEPT 
DIVIDENDS  (not  including  any  amount  in  respect  of  capital  assets  or 
miscellencr.".'.  invettments). 

Submit  a scbHi'le  rh-u'  irig  the  soiucc,  nature,  and  amount  of  the  principal  items 
included  he.’-' -n,  the  minor  iu-tr  ' being  grouped  in  one  figure.  Tlie  total  of  the  schedule 
should  be  entered  io<  If'-m  10,  S'-hoduIo  A. 

SaiEDULE  A12:  ORDINARY  AND’nECESSARY  EXPENSES  (except  amounts 
called  for  scp.arately  in  Scliadule  A and  not  including  cost  or  value  of 
capital  ass.'ts  or  miscellaneous  investments  sold  during  taxable  year). 

Submit  a statement  showing  character  and  amount  of  the  principal  items  included 
in  Item  12,  Schedule  A. 


Insurance  companies  should  state  se^jaratcly  in  Schedule  A12  (a)  the  net  addition 
required  by  law  to  he  made  within  the  taxable  year  to  reserve  funds  (including  in  the 
case  of  assessment  insurance  companies  the  actual  deposit  of  sums  with  State  or  Terri- 
torial officers  pursuant  to  law  as  additions  to  guarantee  or  reserve  -funds;  and  (1)  the  total 
of  sums  other  than  dividends  paid  -within  the  year  on  policy  and  annuity  contri«:t8. 

Corporations  issuing  policies  covering  life,  health,  and  accident  insurance  oomhined 
in  one  policy  issued  on  the  weekly  premium  pajment  plan  continuiflg  for  life  and  not 
subject  to  cancellation  should  report  in  Schedule  A12  such  part  of  the  net  addition 
(not  required  by  law)  made  within  the  taxable  year  to  reserve  funds  as  is  required  for  the 
protection  of  the  holders  of  such  policies. 

Mutual  marine  insurance  companies  should  report  in  Schedule  A12  amounts  repaid 
to  policyholders  on  account  of  premiums  pre-viously  paid  by  them  and  interest  paid  upon 
such  amounts  between  the  ascertainment  and  the  payment  thereof. 

Mutual  insurance  companies  (other  than  mutual  life  and  mutual  marine  insurance 
companies)  that  require  their  members  to  make  premium  deposits  to  pro-vide  for  losses 
and  expenses  should  report  in  Schedule  Al2  the  amount  of  premium  deposits  returned 
to  their  policyholders  and  the  amount  of  premium  deposits  retained  tor  tho  payment  of 
losses,  expenses,  and  reinsurance  reservee  (unless  deducted  elsewhere  in  Schedule  A). 

SCHEDULE  A13:  COMPENSATION  OF  OFFICERS. 

Submit  a schedule  showing  for  each  officer  (1)  name,  (2)'dutiefl,  (3)  time  devoted 
to  such  duties,  (4)  shares  of  stock  owned,.  (5)  total  annual  compensation  for  the  years 
1916, 1917,  and  1918,  and  (C)  reasons  for  increasM. 

SCHEDULE  AI4:  REPAIRS  (including  labor,  supplies,  overhead,  and  other 
items  properly  chargeable  to  repairs). 

Submit  a schedule  showing  the  nature  and  amount  of  the  principal  items  includci\ 
in  Item  14,  Schedule  A. 

Incidental  repairs,  which  do  not  add  to  the  value  of  appreciably  prolong  the  life  of 
property,  are  deductible  as  expenses.  Expenditures  for  new  buildings  or  for  pennanent 
improvements  or  betterments  which  increase  the  value  of  the  property  are  chargeable 
to  capital  account.  Expenditures 'for  restoring  or  replacing  property  are  not  dcd-actible 
under  this  or  any  other  item  cf  the  return.  Such  expenditures  are  chargeable  to  capital 
account  or  to  depreciation  reserves,  depending  on  tho  tre^itment  of  depreciation  on  the 
books  of  tho  taxpayer.  » 

SCHEDULE  A13:  EXHAUSTION,  I^TEAR  AND  TEAR  (including  obsolescence). 

Submit  a columnar  schedule  containing,  in  the  most  practicable  form,  substantially 
the  folio-wing  information: 

1.  A classification  of  depreciable  aasets  subdi-vided  on  the  bas^h  of  (a)  character,  (6) 
term  of  useful  life. 

2.  The  fair  market  value  of  such  assets  March  1, 1913,  if  acquired  before  that  date. 

3.  The  cost  of  such  assets  if  acquired  after  February  28,  1913. 

4.  The  estimated  life  or  term  of  reasonable  usefulness  of  such  assets  from  date  acquired 
or  from  March  1,  1913,  as  the  case  requires.  Give  reasons  for  your  conclusions. 

5.  For  each  class  of  assets  state — 

(a)  The  total  amount  of  depreciation  from  March  1,  1913,  to  the  beginning 
of  the  taxable  year. 

(5)  The  total  amount  of  depreciation  (exhaustion,  wear  and  tear,  including 
obsolescence)  claimed  for  the  taxable  year. 

6.  A reconciliation  of  all  figures  shown  in  this  schedule  with  corresponding  figures 
reflected  in  the  balance  sheets. 

SCHEDULE  AID:  AMORTIZATION  OF  WAR  FACILITIES. 

If  amortization  of  war  facilities  is  claimed  the  taxpayer  is  required  to  submit  with  this 
return,  the  information  and  schedules  called  for  in  Articles  181  to  187  of  Rcgidations  45. 

SCHEDULES  A23  and  A24:  PROFIT  OR  LOSS  ON  SALES  OF  CAPITAL  ASSETS 
and  miscellaneous  investments,  and  losses  sustained  during  the  taxable 
year  from  fire,  storm,  or  other  casualty,  or  from  theft,  not  compensBte<l  for 
by  insurance  or  otherwise. 

Submit  a columnar  schedule  setting  forth  for  each  sale  of  capital  assets  or  of  miscellane- 
oufl  investments  and  for  each  loss  during  the  taxable  year  tho  information  called  for  bolow: 

1.  Description  of  property  sold  or  of  property  in  respect  of  which  a loss  is  claimed.' 

2.  Date  acquired, 

3.  Fair  market  price  or  value  on  March  1,  1913,  if  acquired  before  that  date,  or  cost 
if  acquired  after  February  28,  1913. 

4.  Cost  of  improvements,  if  any,  since  February  28, 1913,  or  since  date  of  acquisition, , 
if  acquired  after  Febniary  28,  1913. 

6.  Total  of  Items  3 and  4. 

Less — 

6.  Depreciation  or  depiction  of  property  subject  thereto— 

(a)  Per  books. 

(5)  Accrued  but  not  on  hooks. 

7.  Sal-vago  value,  if  any,  of  property  on  which  a loss  is  claimed. 

8.  Amount  of  insurance  or  other  recovery  on  property,  if  any. ' 

9.  Proceeds  of  sale  or  cash  value  of  property  received  in  exchange  (for  transactions 

falling  in  Item  23,  Schedule  A)  (see  Note).  ' 

10.  Total  of  Items  6 to  9,  inclusive. 

11.  Profit  or  loss. 

12.  Cause  of  loss  (for  losses  falling  in  Item  24,  Schedule  A). 

Note. — Submit  evidence  eubstantiating  tho  basis  used  by  you  in  arri-ving  at  the  Cash 
■value  of  property  received  in  exchange  for  other  property. 

COMPENSATION  AT  RATE  OF  $3,000  OR  MORE  PER  ANNUM. 

Submit  a schedule  showing  for  each  employee  (if  a stockholder  of  tho  corporation), 
whoso  compensation  is  at  the  rato  of  $3,000  or  more  per  annum,  facts  similar  to  thoso 
called  for  in  Schodulo  A13. 

WORKING  PAPERS. 

Every  corporation  should  proaorvo,  available  for  inspection  by  a levonuo  officer, 
working  papers  showing— 

1.  Tho  balance  in  each  account  on  tho  corporation’s  books  Uiat  was  used  {n 

preparing  Scbod-jlo  A. 

2.  The  amount  deducted  from  each  such  balance  on  account  of  each  class  of  non. 

taxable  income,  urwilowrable  deductions,  and  other  adjustmouto  indicated 
in  Schedule  B,  with  a reforonce  to  the  number  of  tho  item  in  Schedule  B 
ill  which  each  amount  so  deducted  was  included. 

3.  Tlio  roraaindcr  of  each  surh  balance,  analyzed  to  show  tho  amount  included 

in  each  item  of  Scbedulo  A,  -with  a roforonco  to  the  number  of  tho  item  in 
Sohodule  A in  which  each  such  amount  was  included.  s— Me 


Income  Tax  Page  3 of  Form  1120 

Supplementary  Page  39 


Page  4— Invested  Capital  Schedules 

Schedule  e— 'c>>iTAL,  surplus,  and  undivided  profits  as  shown  by  books  before  any  adjustments  are  made  therein. 


E4.  Stock  actually  outstanding  at  the  cad  of  tie  preceding  taxable  year  should  be 
entered  in  this  schedule  to  the  extent  that  it  is  paid  up.  Jf  stock  or  sharsa  were  issued  at 
a nominal  value  or  without  par  value,  the  entries  sbouid  reflect  the  amounts  on  the  books 
in  respect  thereof  at  the  close  of  the  preceding  taxable  year. 

ES.  This  item  should  include  paid-in  surplus  per  books  at  the  end  of  the  preceding 
year.  If  any  amount  is  claimed  under  Section  326(a)(2)  of  the  Revenue  Act  of  1918  or 
under  Article  8.37  of  Regulations  45  the  amount  claimed  should  be  entered  under  Item  1, 
Schedule  F,  and  not  in  this  schedule. 


E7.  Reserves  which  represent  allocations  of  surplus  and  were  not  accumulated  through 
deductions  made  in  computing  net  income  as  returned  in  previous  years-mayj  if  properly 
explained,  be  entered  on  line  7.  Such  entries  should  be  identified  and  if  necessary 
reconciled  with  balance-sheet  reserves. 

E9.  The  cost  (or  book  value  if  different  from  cost)  of  treasury  stock  held  at  the  end  of 
the  preceding  taxable  year  should  be  deducted  on  line  9,  if  the  par  value  of  such  stock  is 
included  in  tne  amount  entered  on  line  4.  Treasury  stock  includes  all  stock  reacquired  by 
the  corporation  and  not  canceled,  regardless  of  the  reason  for  the  acquisition. 


Item. 

J9U 

1912 

1913 

Taxable  Yeas. 

Capital  stock  paid  up  and  actually  outstanding  at  the  close  o(  the' 
preceding  y^: 

1.  T^Srst.  prf'fprrFwl 

$ 

$_  .. 

9 Rornn/I  pTA'fpTro/I 

3.  Common  

4.  Tatat.  . . 

j 

$ 

$ 

Surplus  and  undivided  profits: 

5.  Pflul-in  .9nrplns  , 

j 

fi.  Pampil  mirplns  anrl  prnfitfl 

7.  Reserves,  additions  to  which  are  not  deductible  in  comput- 
ing net  income  (to  be  reconciled  with  balance-sheet  items) 

8.  Ghand  totals  op  Itek.s  4,  5,  6,  and  7 

$ 

1 

s 

L 

9.  Deduct  cost  of  treasury  stock  (or  book  value  if  different  from 
cost),,  if  any  is  included  above  as  outstanding 

1 

1 

10.  Net  total  (Item  8 minus  Item  9) 

$ 

i 1 ^ 



$ 









SCHEDULE  F— ADJUSTMENTS  BY  WAY  OF  ADDITIONS. 


Fl.  If  an  addition  to  invested  capital  is  claimed  in  Item  1,  Schedule  F,  submit  a state- 
mentshowing (a)  the  kind  of  property,  (6)  the  year  in  which  it  was  paid  in,  (c)  from  whom 
acquired,  explaining  his  relationship  to  the  corporation,  (d)  the  actual  cash  value  of  such 
property  at  the  date  when  paid  in,  («)  the  par  value  of  stock  or  shares  issued  therefor  and 
the  amount  at  which  such  property  is  entered  in  the  accounts,  and  (/)  the  basis  upon  which 
the  actual  cash  value  of  the  property  was  determined  and  the  date  when  such  determina- 
tion was  made. 

F2.  If  an  addition  to  invested  capital  is  claimed  in  Item  2,  Schedule  F,  submit  a 
statement  showing  (o)  the  kind  of  property,  (6)  the  year  in  whicli  it  was  acquired,  (c)  its 
cost,  (d)  the  amount  of  depreciation  sustained  on  such  property  from  the  date  of  acquisition 
to  the  beginning  of  the  taxable  year.-  State  also  whether  each  item  sought  to  bo  restored 
was  actually  used  or  usable  at  the  beginning  of  the  taxable  year.  Were  these  expenditures, 


when  made,  written  off  in  lieu  of  depreciation? If  so,  explain  what  adjustments' 

have  been  made  to  provide  for  depreciation,  in  view  of  the  proposed  restoration  to  surplus. 

F3.  If  any  addition  to  invested  capital  is  claimed  in  Item  3,  Schedule  F,  state  specifi- 
cally the  amount  of  depreciation  -written  off  each  year  in  the  books  of  the  company,  and  the 
amount  allowed  as  a deduction  in  computing  net  income. 

F4.  If  any  assets  of  the  trade  or  business  in  existence  during  both  the  taxable  year 
and  any  prewar  year  are  included  in  the  invested  capital  for  the  taxable  year  but  not  for 
such  prewar  year,  or  are  valued  on  a different  basis  in  computing  the  invested  capital  for 
the  taxable  yearand  such  prewar  year,  entries  should  be  made  in  this  schedule  adjusting 
the  invested  capital  for  each  prewar  year  qgected  so  as  to  value  such,  assets  upon  the  same 
basis  in  the  prewar  period  as  in  the  taxable  year. 


Item. 

1911 

1912 

1913 

Taxable  YeaeI  " 

1.  Actaal  cash  ralne  of  tangible  property  clearly  and  substantially  in  excess  of 
par  Ta^lne^of  stock  issued  th^efor  or  of  the  cash  or  other  eousideratiou  paid 

$ , 

S 

2.  Additions  to  suiplus  (Articles  840  to  843) 



3.  Depreciation  charged  in  the  accounts  of  the  corporation  but  not 
allowable  as  a deduction  on  income  tax  returns 

4.  Adjustment  of  valuation  of  assets  in  exbtence  both  during  tax- 

ypfir  nnrl  in  prpwnr  p#irinfl  T^rtirlp 

XXX 

XXX 

XXX 

X X 

7 

8.  Total 

[ZZl 

i 


J 


SCHEDULE  G— ADJUSTMENTS  BY  WAY  OF  DEDUCTIONS. 


Gl.  Is  any  patent,  copivight,  secret  process  or  formula,  good  will,  trade-mark,  trade 
brand,  franchise,  or  other  similar  intangible  property,  paid  m for  stock,  entered  on  the 

books  of  the  corporation  at  a value  in  excess  of  its  actual  cash  value  when  paid  in? 

In  excess  of  the  par  value  of  the  stock  issued  therefor? Is  the  aggregate  of  such 

assets  acquired  prior  to  March  3,  1917,  entered  on  the  books  at  a value  in  excess  of  25 

per  cent  of  the  par  value  of  the  stock  outstanding  on  March  3,  19177 Is  the 

aggregate  of  such  assets  entered  on  the  books  at  a value  in  excess  of  25  per  cent  of  the 
par  value  of  the  stock  outstanding  at  the  beginning  of  the  taxable.year? 

If  the  answer  to  any  of  the  foregoing  questions  is  “yes,”  submit  a statement  showing 
separately  with  respect  to  such  assets  acquired  (1)  before  March  3,  1917,  and  (2)  on  or 
after  that  date:  (a)  Date  of  acquisition;  (6)  cash  value  at  that  date,  with  a complete  ex- 
planation of  the  basis  upon  which  such  cash  value  was  determined;  (c)  par  value  of  the 
stock  issued  therefor;  (d)  par  value  of  total  stock  outstanding  March  3,  1917;  (<)  par  value 
of  total  stock  outstanaing  at  the  beginning  of  the  taxable  year;  (/)  the  value  at  which 
such  assets  are  entered  on  th?  books  of  the  corporation. 

If  all  the  intangibles  were  acquired  before  March  3, 1917,  the  amount  by  which  (/)  ex- 
ceeds (6),  (c),  25  per  cent  of  (d),  or  25  per  cent  of  (e),  whichever  is  lowest,  must  be  entered  as 
Iteml,  ScheduleG,  for  the  taxable  year  and  for  each  year  of  the  prewar  period  that  is  affected. 

If  the  intangibles  were  acquired  on  or  after  starch  3,  1917,  the  amount  by  which  the 
entry  in  (/)  relating  to  such  intangibles  exceeds  (b)  or  (c)  relati.ng  thereto,  or  25  per  cent  of 
(e),  wnichever  is  lowest,  must  be  included  in  Item  1,  Schedule  G,  for  the  taxable  year: 
Provided,  that  if  intangibles  were  acquired  before  March  3,  1917,  and  also  on  or  after  that 
date,  deduction  shall  be  made  so  that  the  amount  included  in  invested  capital  forthe  aggre- 
gate 6f  intangibles  shall  not  exceed  25  per  cent  of  the  par  value  of  the  total  stock  outstand- 
ing at' the  beginning  of  the  taxable  year. 

Note. — If  the  stock  of  the  corporation  was  issued  at  a nominal  value  or  without  par 
value,  for  the  purpose  of  the  compulation  under  Item  1 the  par  value  shall  be  deemed  to  be 
the  fair  market  value  as  of  the  date  or  dates  of  issue.  The  aggregate  value  so  determined 
of  stock  outstanding  on  March  3, 1917,  or  at  the  beginning  of  the  taxable  year,  shall  be  the 
basis  for  the  computation. 

G2.  Is  any  tangible  property,  paid  in  for  stock,  entered  on  tlie  books  of  the  corporation 

at  a value  in  excess  of  its  actual  cash  value  when  received? In  excess  of  the 

par  value  of  the  stock  paid  therefor? 

•Jf  the  answer  to  either  of  the  foregoing  questions  is  “yes,”  submit  a statement  showing 

(a)  kind  of  property;  (6)  when  acquired;  (c)  par  value  of  the  stock  paid  therefor;  (d)  actual 
cash  value  of  the  property  when  paid  in;  (e)  the  basis  on  which  that  value  was  determined; 
(/)  value  at  which  the  property  is  entered, on  the  corporation’s  books;  and  (j)  amount  by 
which  such  value  exceeds  the  allowable  value  under  section  320  (a)  (2)  of  the  Revenue 
Act  of  1918.  Enter  this  amount' a,s  Item  2,  Schedule  G,  for  the  taxable  year  and  for  each 
vear  of  the  prewar  period  that  is  affected. 

. - "03.  (a)  IVas  any  stock  issued  by  the  corporation  ever  returned  as  a gif  t or  for  a consider- 
ation substantially  less  than  its  par  value?  (5)  If  so,  what  was  the  total  par 


vahie  of  such  stock?  (c)  M hat  was  the  consideration  paid  for  the  return 

thereof?  $ (d)  MTiatamountof  cash  or  its  equivalent  was  derived  from  the 

resale  of  such  stock  ? (c)  IVhat  entries  were  made  in  the  accounts  to  evi- 


dence the  return  and-the  resale  of  such  stock? 


The  excess  of  (6)  over  (d)  must  be  entered  asTtem  3,  Schedule  G,  for  the  taxable  year 
and  for  each  year  of  the  prewar  period  that  is  affected.  However,  no  deduction  is  neces- 
sary if  adequate  adjustment  has  been  made  under  Item  2 of  this  schedule. 

G4.  Was  the  business  reoi^nized  or  consolidated  or  was  its  ownership  changed  or 

was  there  a change  in  ownership  of  property  after  March  3,  1917? If  so,  answer 

the  following  questions: 

(a)  Did  an  interest  of  50  per  cent -or  more  in  the  business  or  in  the  property  which 
changed  ownership  remain  in  the  control  of  the  same  persons,  corporations,  a&sociations,  or 

partneijships,  or  of  any  of  them? ^ 

(b)  Were  any  of  the  assets  entered  on  the  books  of  the  corporation  making  this  return 

at  a higher  value  than  on  the  books  of  its'predecessor? 

(c)  I^  such  pre-vious  owner  was  not  a. corporation  attach  a statement  showing  (1)  the 
cost  of  acquisition  to  the  previous  owner  of  any  asset  so  transferred  or  received ; (2)  expendi- 
tures subsequent  to  that  date  for  betterment  or  development,  not  deducted  as  expense  or 
otherwise  since  March  1, 1913,  by  such  previous  owner;  (3)  the  allowance  fer  depreciation, 
depletion,  or  impairment  since  the  date  of  acquisition  by  such  previous  owner. 

(d)  If  all,  or  substantially  all,  of  the  property  was  acquired  from  a corporation  during 
the  taxable  year  attach  hereto  balance  sheets  of  such  predecessor  corporation  as  of  the  begin- 
ning of  the  taxable  year  and  as  of  the  date  immediately  prior  to  the  transfer  of  the  property 
to  the  corporation  making  this  return,  and  also  a balance  sheet  or  statement  of  the  corpora- 
tion making  this  return  showing  the  values  at  which  such  property  received  or  transferred 
was  entered  on  the  books. 

The  increase  in  book  value  ,of  any  property  acquired  by  reorganization,  con^Udation, 
or  change  of  ownership,  over  the  amount  allowable  to  the  predecessor  corporation  or  over 
the  amount  as  computed  under  (c),  if  the  previous  owner  was  not  a corporation,  must 
be  deducted  from  the  invested-capital  for  the  taxable  year  as  Item  4,  Schedule  G. 

GS.  Is  any  property  (including  physical  property,  securities,  and  intangible  property) 
paid  for  with  cash  or  with  other  tangible  property  entered  on  the  books  of  the  corporation 
at  a value  excess  of  the  amount  of  caDi  paid  therefor  or  the  actual  cash  value  of  the 

tangible  property  paid  therefor? If  so,  submit  a statement  showing  (a)  kind  of 

property;  (b)  amount  of  cash  paid  therefor;  (c)  actual  cash  value  of  other  tangible  property 
paid  therefor;  (d)  how  that  value  was  determined;  («)  value  at  which  the  property  is 
entered  on  the  books  of  the  corporation;  and  (/)  excess  of  (<)  over  (6)  or  (c).;  This  excess 
must  be  entered  as  Item  5,  Schedule  G,  for  the  taxable  year  and  for  each  year  of  the  prewar 
period  that  is  affected. 

G6.  Has  adequate  pro-vision  been  made  in  the  expense  accounts  of  the  company  for 

(a)  losses  of  every  kind? ; (6)  depreciation? ; (c)  obsolescence? 

(d)  depletion  of  mineral  deposits,  timber  supplies,  and  the  like? 

If  adequate  charge  has  not  been  made  for  depreciation,  depletion,  bbsole.scence,  and 
other  losses,  and  the  value  of  the  property  has  not  been  maintained  by  replacements  that 
have  been  charged  to  expense,  proper  additional  chargee  therefor  must  be  computed  for 
all  years  in  which  they  were  not  made  on  the  boqks,  and  tire  total  amount  of  such  charges 
must  be  entered  as  Item  6,  Schedule  G,  for  the  taxable  year  (and  for- each  yrar  of  the  pre- 
war period  that  -was  affected)  and  deducted  in  arriving  at  the  surplus  and  undivided  profits. 

>— s<a» 


Income  Tax 
Supplementary  Page  40 


Page  4 of  Form  1120 


Page  6 — Invested  Capital  Schedules— Continued 
SCHEDULE  G-^ADJUSTMENTS  BY  WAY  OF  DEDUCTIONS  (Concluded). 


Item. 

lOIl 

1912 

1913 

Taxable  Year. 

1.  Valuntion  of  patents,  copyrights,  secret  processes  or  foraulae,  good  will, 

$ 

$. 

4,  Valuation  of  asaeta  acquired  in  reoi^nizations 



K AppTAriftHnn  

A T^<»p>ewniofyATi  ort/T  /^opTotinn 

7 

i 

8.  . _ — -•  — . 

i 

9.  Totai,  DEDtrenoNS i 

$ 1— 



1. 1 1 k-...- 



!s 1 

SCHEDULE  H— CHANGES  IN  INVESTED  CAPITAL  DURING  TAXABLE  YEAR. 


1.  Changes  in  invested  capital  during  the  taxable  year  ordinarily  arise  in  one  or 
more  of  the  following  ways; 

(а)  Additions  by  reason  of  the  sale  of  capital  stock  or  the  issue  of  capital  stock 

for  tangible  or  other  assets.  , • 

(б)  Liquidation  of  part  of  the  capital  by  retirement  of  stock  or  purchase  of  treas- 

ury stock  not  out  of  current  earnings. 

(c)  Payment  of  cash  dividends  out  of  earnings  of  prior  years. 

(a)  Deduction  of  the  amount  of  Federal  income  and  excess-profits  taxes  for  the 
previous  year. 

(e)  Payment  of  assessments  by  stockholders,  or  creation  of  paid-in  surplus  by 
contribution,  of  stockholders. 

Specify  (by  using  rM  ink  for  distributions,  or  otherwise)  whether  each  item 
represents  an  addition  or  a distribution. 

2.  Report  di’Hdends  paid  out  of  profits  of  prior  years  but  not  dividends  paid  out  of 
profits  of  the  taxable  year.  Any  distribution  made  during  the  first  60  days  of  the  taxable 
year  shall  be  deemed  to  have  been  made  from  earnings  or  profits  accumulated  during 
preceding  taxable  years;  but  any  distribution  made  during  the  remainder  of  the  taxable 


year  shall  be  deemed  to  have  been  made  from  the  profits  for  that  year  to  the  extent  that 
such  profits  are  sufficient.  (See  Article  1541.)  \ 

3.  If  stock  is  issued  for  cash,  the  actual  cash  received  (but  not  the  amount  of  dis- 
count) should  be  entered  in  this  sihedule.  Assets  (other  than  cash)  paid  in  for  stock 
must  be  valued  in  accordance  with  Section  326  (a)  (2)  of  the  Revenue  Act  of  19.18. 

4.  The  amount  of  Federal  income  and  excess-profits  taxes  payable  should  be  deducted 
as  of  the  date  when  due  and  payable  whether  reserves  have  been  set  up  on  the  books 
or  not.  (See  Article  845.) 

5.  If  capital  stock  of  the  corporation  is  reacquired  but  not  paid  for  out  of  current 
profits,  the  cost  of  such  stock  should  be  deducted  from  invested  capital. 

6.  The  data  called  for  in  columns  1 to  5 should  be  given  for  all  transactions,  except 
that  columns  3 and  4 are  applicable  only  to  the  issue  or  reacquisition  of  the  corporation’s 
stock. 

7.  In  Column  6 enter  the  number  of  days  remaining  in  the  taxable  year  (including 
the  date  of  change). 

8.  The  net  changes,  if  not  in  accordance  with  the  increases  or  decreases  reflected  in 
the  balance  sheets,  should  be  fully  reconciled  therewith. 


I.  Natttiie  or  Additions  and  Dist«ibutions. 


1.  IrroaCASn,  5.  Amopnt  or  Cash  or  Cash  6.  Number 
State  Price  Value  Actually  Received  or  Days 
TER  Share.  or  Paid  Out.  ErrEcnvE. 


7.  Adjusted  Average. 

' Column  5 X Column  6 ^ 

Number  ol  daysin  ta.\ablu  year.; 


4. 

5. 


SCHEDULE  J— CHANGES  IN  INVESTED  CAPITAL  DURING  PREWAR  YEARS. 


(Compute  the  net  addition  or  reduction  separately  for  each  year.  See  instructions  under  Schedule  H.) 


I,  Nature  or  ADDmoNS  and  Dibtributions.' 

2.  Date. 

3.  Number  or 
Shares  Sold 

OR 

Reacouired. 

4.  Ir  FOR  Cash, 
state  Price 
PER  Share. 

5.  Amount  or  Cash  or  Cash 
Value  Actually  Received 
OR  Paid  Out. 

6.  No.  OF 
Days 

Effective. 

7.  Adjusted  Aveeaoe. 

/ Column  6 X column  6\ 
yMumber  ofdaysin  year.  / 

1. 

S 

8 

$. 

I 

i 

1 

a. 

1 

6.  

|. 

7 

1 

« 

1 



..  - 

1 

11 

! 

- 

J3"  ~ 



14 

'II' 

SCHEDULE  K— CHANGES  IN  INVESTED  CAPITAL  FROM  END  OF  PREWAR  PERIOD  TO  BEGINNING  OF  TAXABLE  YEAR,  NOT  SHOWN  IN  SCHEDULE  L 


(See  instructions  under  Schedule  H,  so  far  as  applicable.) 


•I.  )4atuee  or  Additioks  and  Distributions. 

2.  Date. 

3.  Number  or 
Shares  Soid  ok 
Reacquired. 

4.  If  foe  Cash, 
State  Price  fer 
Share. 

5.  Amount*  or  Cash  or  Cash 
Value  Actually  Received  or 
Paid  Out. 

j 

.5 

$ 

I 

■3.  ’ 

6.  

1 

1 

^ 



1 

1 .. 



I 

8 

0 

in. 

n.  . . 

12.  

13 

1 

1 

““ 

Id.  

1 

izii::; 

1 IHJ, 

Income  Tax 
Supplementary  Page  41 


Page  5 of  Form  1120 


Pasre  6— Investea  Capital  Schedviles  (Concluded)  and  Questions. 


SCHEDULE  L— INADMISSIBLE  ASSETS. 

Has  the  corporation  any  inadmissible  assets  (i.  e.,  stocks,  bondr^  and  other  obligations, 


except  obligations  of  the  United  States,  the  income  from  which  is  nr/t  taxable)? . — 

If  so,  attach  hereto  a statement  showing  for  1911,  1912,  19I3„  and  the  taxable  year, 
separately,  the  facts  called  for  in  Items  (a)  to  (j)  of  this  schedule. 

If  the  income  from  such  assets  consists  in  part  of  gain  or  profit  from  the  sale  or  other 
disposition  thereof,  or  if  all  or  part  of  the  interest  derived  from,  such  assefe  is  in  effect 
included  in  the  net  income  because  of  the  limitation  on  the  deduction  of  interest  under 
Section  234  (a)  (2)  of  the  Revenue  Act  of  1918,  then  a correspomiing  part  of  the  capital 
invested  in  such  assets  is  deemed  an  admissible  asset.  In  such  esse,  set  forth  in  detail — 
(a)  The  various  kinds  of  income  derived  from  such  assets  and  die  computation  of  the 
part  of  the  capital  invested  therein  which  is  deemed  an  admissili'n  asset. 

For  the  purpose  of  this  schedule,  inadmissible  assets  shall  be  valued  at  costot  acquisi- 
tion except  that  if  the  taxpayer  has  in  previous  years  been  allowed  a deductionon  account 
of  the  fall  in  the  market  value  of  securities,  such' assets  shall  be  valued  at  cost  less  the  deduc- 
tion allowed.  Admissible  assets  shall  be  valued  as  provided  in  Suctions  326,  330,  and  331 
of  the  Revenue  Act  of  1918  and  Articles  831-869,  931-934,  and  941  of  Regulations  45.  The 
average  amount  of  assets  of  each  kind  held  during  any  year  may  ardinarilj'  be- determined 
by  dividing  by  2 the  sum  of  the  amount  of  such  assets  held.at  Jho  beginning  of  the  year 


e,  show  in  detail- 


and  the  amount  held  at  the  end  of  the  year.  In  such  case  the  amount  of  admissible  assets 
may  best  be  determined  from  (1)  the  balance  sheet  as  of  the  beginning  of  the  year 
adjusted  with  respect  to  the  items  in  Schedules  F and  G,  and  (2)  the  balance  sheet  as  of 
the  end  of  the  year  correspondingly  adjusted.  But  if  at  any  time  during  the  year  a sub- 
stantial change  has  taken  place  in  the  amount  of  such  assets,  the  average  amount  must  bo 
determined  as  provided  in  Article  852  of  Regulations  45.  In  such  car* 

^6)  The  computation  of  such  amount. 

(c)  Amount  of  inadmissible  assets  held  at  beginning  of  the  year. 

(a)  Amount  of  inadmissible  assets  held  at  end  of  y^r. 

(e)  Average  amount  of  inadmissible  ^ets  held  during  year.- 
U)  Amount  of  admissible  assets  held  at  beginiung  of  the  year. 

Xq)  Amount  of  admissible  assets  held  at  end  of  year. 

(A)  Average  amount  of  admissible  assets  held  during  year. 

(i)  Sum  ^ («)  plus  (A), 

■ ich  ( 


on  line 

which  should  be  entered  on  line  8,  Schedule  JI. 


KIND  OF  BUSINESS. 


1.  Explain  below  the  nature  of  the  corporation’s  business  in  sufficient  d/etail  to  show 
in  which  of  the  following  general  classes  of  activities  it  falls: 

(1)  Agriculture  and  related  industries,  including  fishing;  (2)  mining,  quarrying,  pd 
related  industries;  (3)  manufacturing:  (4)  construction;  (5)  trading;  (6)  transportation; 
(7)  storage;  (8)  other  services;  (9)  banking  and  insurance. 

2.  If  the  business  falls  in  any  of  the  classes  from  1 to  5,  state  the  special  product  or 
products  handled;  if  in  class  5,  state  whether  wholesale  or  retail,  or  both:  if  in  class  6,  state 
whether  rail,  water,  or  other,  whether  general  or  local,  and  tho  special  commodities  (if 
any)  transported;  it  in  class  7,  state  the  ^cial  commodities  stored  (if  any.)  or  the  special 
kind  of  storage;  if  in  class  8,  state  in  detail  the  kind  of  service  rendered;  if  in  class  9,  state 
the  branch  of  banking  or  insurance  engaged  in. 

3.  In  all  cas-'s  state  whether  the  corporation  acts  as  principal  (asing  its  own  capital) 
or  as  agent  or  broker  (on  commission)  or  as  both. 


QUESTIONS. 

AFFILIATIONS  WITH  OTHER  CORPORATIONS  (TO  BE  ANSWERED  BY  EVERY  CORPORATION). 

11.  Do  you  own  directly  or  control  through. closely  affiliated  interests  or  by  a nominee 
or  nominees  over  50  per  cent  of  the  outstanding  capital  stock  of  another  corporation  or  of 


(c)  Main  business... 


(i)  Collateral  basinesses,  if  any.. 


OTHER  CONCERNS  IN  SAME  BUSINESS. 

4.  Enter  on  the  following  lines  the  names  and  addresses  of  five  representative  con- 
cerns in  your  locality  or  section  of  the  country  engaged  in  the  same  kind  of  business; 


INCORPORATION. 


5.  Date  of  incorporation 

6.  Under  the  laws  of  what  State  or  countrj’? 


PREDECESSOR  BUSINESSES. 

7.  If  the  corporation  was  not  in  existence  during  tho  whole  of  any  one  of  the  calendar 
years  1911-1913,  js  its  business  sul)stantially  a continuation  of  a business  carried  on  dining 

any  one  or  more  of  those  years? If  so,  give  name  under  which,  and 

address  at  which,  its  business  was  then  carried  on 


other  corporations?  

12.  Is  over'50  percent  of  your  capital  stock  owned  by  another  cotporatioh  or  by  two 

or  more  corporations  that  are  affiliated? 

13.  Is  over  50  per  cent  of  your  capital  stock  as  well  as  over  50  per  cent  of  the  capital 

stock  of  another  corporation  or  of  other  corporations  owned  or  controlled  by  the  same  indi- 
vidual or  partnership  or  by  the  same  individuals  or  partnerships? 

14.  Is  this  return  a consolidated  return  within  the  meaning  of  Articles  631  to  633,  in- 
clusive, of  Regulations  45? | 

15.  Affiliated  corporations  as  indicated  in  11,  12,  or  13  above  must  comply  with  the 
following  requirements: 

\ 16.  If  the  answer  to  question  11  is  "yes,”  submit  a statement  showing  for  each  of  the 

corporations  over  50  per  cent  of  whose  stock  is  owned  or  controlled  by  you,  either  directly 
or  through  closely  affiliated  interests  or  by  a nominee  or  nominees: — 

(а)  The  name  and  address; 

(б)  The  total  par  value  of  the  outstanding  capital  stock  at  the  beginning  of  tho 

taxable  year,  and  the  date  and  amount  of  each  change  therein; 

(c)  The  total  par  value  of  such  outstanding  capital  stock  owned  or  controlled  by 
you  at  the  beginning  of  the  taxable  year,  or  at  the  date  of  acquisition  if 
acquired  during  the  taxable  year,  and  the  date  and  amount  of  each  change 
■therein. 

17.  If  the  answer  to  question  12  is  “yes,”  state — 

(а)  The  name  and  address  of  such  corporation  or  corporations, 

(h)  The  par  value  and  percentage  of  your  stock  held  by  each. 

18.  If  the  answer  to  question  13  is  "yes,”  submit  a statement  showing— 

(al  The  names  and  addresses  of  such  corporations; 

(б)  The  name  or  names  and  address  or  addresses  of  the  owning  or  controlling 

interest  or  interests; 

(c)  The  total  par  value  of  the  outstanding  capital  stock  of  each  corporation  at 

the  beginning  of  the  taxable  year,  and  the  date  and  amount  of  each  change 
therein;  1 

(d)  The  total  par  value  of  the  outstanding  capital  stock  of  each  corporation  owned 

or  controlled  by  each  one  of  the  several  individuals  or  partnerships  at  the 
beginning  of  the  taxable  year,  and  the  date  and  amount  of  each  change 
therein. 

19.  If  the  answer  to  question  14  is  “yes,”  the  information  furnished  under  16  and  18 
should  identify  the  corporations  included  in  the  consolidation. 

20.  If  one  corporation  owns  95  per  cent  or  more  of  the  stock  of  another,  or  if  95  per  cent 
or  more  of  the  stock  of  two  or  more  corporations  is  owned  by  the  same  individual  or  indi- 
viduals in  substantially  the  same  proportion,  a consolidated  return  must  be  filed,  except 
that  the  limitations  as  to  consolidation  under  Article  635  must  be  observed.  If  the  owner- 
ship is  less  than  95  per  cent,  but  exceeds  50  per  cent,  the  parent  co^ration  or  principal 
corporation  of  any  ^oup  of  affiliated  corporations  must  furnish  the  information  called  for 
above  and  in  addition  must  file  a statement  fully  disclosing  the  details  of  affiliation  other 
than  stock  ownership  and  all  other  information  which  will  be  helpful  in  determining 
whether  or  not  a consolidated  return  should  be  filed. 

VALUATION  OF  CAPITAL  STOCK. 

21.  'Wbat  was  the  fair  value  of  the  total  capital  stock  of  tho  ebrporation  as  .determined 

in  the  last  aaseecment  of  the  capital  stock  tax  (if  any)?  $ Date  of  that 

LIST  OF  ATTACHED  SCHEDULES. 

Make  below  a list  of  aU  schedules  attached  to  this  return,  giving  for  each  a brief  title 
and  tho  schedule  number. 


ACQUISITION  OF  MIXED  AGGREGATES  OF  ASSETS.^ 

8.  Did  the  corporation  ever  take  over  a going  business  or  otherwise  acquire  a mixed 
aggregate  of  tangible  property,  patents  and  copyrights,  and  good  will  and  othqr  similar 
intangible  property,  and  pay  for  such  projierty  in  whole  or  in  part  with  stock  or  other 

securities? 

9.  If  so,  submit  a statement  showing — 

(а)  The  name  of  the  concern  taken  over  (or  from  which  the  property  was 

acquired);  j 

(б)  The  nature  of  tieWets  and  liabilities  so  acquired; 

(c.)  The  total  par  value  of  the  stock  issued  therefor;  .. 

(■^.  Tho  value  at  which  each  class  of  assets  was  carried  on  the  books  of  the  concern 
from  which  acquired  (if  obtainable  submit  a balance  sheet  of  the  prede- 
ceesor  corporation  as  of  the  date  of  acquisition);- 
(e)  Tho  value  at  which  each  item  was  entered  on  the  books  of  the  corporation 
making  this  return. 

10.  If  patents,  cop-vrights,  secret  processes  or  formulse,  good  will,  trade-marks,  trade 
brands,  franchises,  or  other  intangible  property  were  acquired,  state  also  the  basis  on  which 
their  value  was  determined  and  how  they  were  paid  for. 


We,  the  undersized,  president  and  treasurer  of  the  corporation  for  which  this  return  is  made,  being  severally  duly  sworn,  each  for  himself 
deposes  and  says  that  this  return,  including  the  accorripanyin"  schedules  and  stHtements,  has  been  examined  by  him  and  is  to  tho  best  of  his 
knowledge  and  belief  a true  and  complete  return  made  in  good  faith  pursuant  to  the  Revenue  Act  of  191S  and  tho  Regulations  issued  thereunder. 


Sworn  to  and  sub-  1 ■ 

scribed  before  me  J ^ 


day  of 


.,  19. 


Seal  ol  oScer 
lalUni  affidavit. 


(Official  capacity.) 


President. 


Treasurer: 


Income  Tax 
Supplementary  Page  42 


Page  6 of  Form  1120 


Page  1 of  Instructions 

INSTRUCTIONS  REGARDING  DETERMINATION  OF  CREDITS,  COMPUTATION  OF  TAX,  ETC. 


PROVISIONS  AFFECTING  INVESTED  CAPITAL  AND  CREDITS.  | 

RETURNS  FOR  PART  OF  A YEAR. 

1.  If  this  return  is  for  a period  less  than  a full  year,  Items  3 and 
8,  Schedule  III;  Items  1 and  2,  column  2,  Schedtde  IV;  and  Item  15, 
Schedule  IV,  shall  be  reduced  to  as  many  twelfths  of  the  figures  for  a 
full  year  as  there  are  months  in  the  period  for  which  the  return  is  made. 

If  the  period  for  which  the  return  is  made  includes  frtictions  of 
months,  there  shall  bo  added  to  the  number  of  complete  months  as  many 
thirtieths  of  a month  as  there  are  days  in  the  fractional  parts  of  months. 

CORPORATIONS  NOT  IN  EXISTENCE  DURING  PREWAR  PERIOD. 

2.  If  a corporation  was  not  in  existence  during  the  whole  of  at 
least  one  calendar  year  in  the  prewar  period,  provided  a majority  of  its 
capital  stock  was  not  owned  or  controlled,  directly  or  indirectly,  at  any 
time  during  the  taxable  year  by  a corporation  in  existence  during  the 
whole  of  at  least  one  calendar  ye.ar  in  the  prevrar  period,  and  provided 
its  gross  income  does  not  include  50  per  cent  or  more  of  gains,  profits, 
commissions,  or  other  income  derived  from  a Government  contract  or 
contracts  made  after  Aprils,  1917,  and  before  November  12,  1918,  the 
war-profits  credit  shall  be  (aj  the  sum  of  S3, 000  plus  (b)  the  sarno'pcrccnt- 
age  of  the  invested  capital  for  the  taxable  year  (not  less  than  10  per 
cent,  however)  as  the  average  j)cr  cent  of  net  income  to  invested  capital 
for  the  prewar  period  of  corporations  engaged  in  a trade  or  business  of 
the  same  general  class  as  the  taxpayer. 

3.  Pending  a determination  of  the  deduction  by  the  Commissioner, 
such  corporation  shall  deduct  10  per  cent  of  the  invested  capital  fer 
the  taxable  year.  (SeeSection  311  (c,d)of  the  Revenue  Act  of  IGlSand 
Articles  783  and  784  of  Regulations  45.) 

CREDIT  FOR  INCOME,  WAR-PROFITS,  AND  EXCESS-PROFITS  TAXES 
PAID  OR  ACCRUED  TO  FOREIGN  COUNTRY  OR  POSSESSION  OF  THE 
UNITED  STATES. 

4.  If  a credit  is  claimed  in  Item  19,  Schedule  IV,  a copy  of  Form  1118, 
completely  filled  out  and  sworn  to  or  affirmed,  must  be  submitted  with  this 
return.  If  credit  is  sought  for  taxes  already,  paid  the  form  must  have 
attached  to  it  the  receipt  for  each  such  tax  payment.  If  credit  is  sought 
for  taxes  accrued  the  form  must  have  attached  to  it  the  return  on  which 
each  such  accrued  tax  was  based.  (See  Article  611  of  Regulations  45.) 

5.  When  a credit  is  claimed  for  accrued  taxes,  the  Commissioner  m.ay, 
as  a condition  precedent  to  the  allowance  of  this  credit,  require  the  cor- 
poration to  give  a bond  (Form  1119),  with  sureties  satisfactory  to  and  to  be 
approved  by  him,  in  such  penal  sum  as  he  may  require,  oonditioned  for 
the  payment  by  the  taxpayer  of  any  amount  of  taxes  found  due  if  the 
taxes  when  paid  differ  from  the  amount  claimed  in  respect. thereof. 

PROVISIONS  AFFECTING  COMPUTATION  OF  WAR-PROFITS 
AND  EXCESS-PROFITS  TAX. 

. 6.  Item  10,  Schedule  IV,  is  the  war-pro.fits  and  excess-profits  tax, 
unless  the  taxpayer  is  entitled  to  tlie  benefits  of  one  or  m.oi’e  of  the 
following  provisions : 

(o)  Limitation  on  total  ta.x. — The  maximum  war-profits  and 
excess-profits  tax  imposed  shall  in  no  case  be  more  than  30  per  cent  of 
the  net  income  in  excess  of  S3, 000  and  not  in  excc-'is  of  $20,000  plus  80 
per  cent  of  the  net  income  in  excess  of  $20,000  (Sec.  302). 

(6)  Tax  on  profits  from  sa-o  cf  mineral  deposits. — In  the 
case  of  a bona  fide  sale  of  mines,  oil  or  g.as  wells,  or  any  interest  therein, 
where  the  principal  value  of  the  property  has  been  demonstrated  by 
prospecting  or  exploration  and.  discovery  work  done  by  the  taxpayer, 
the  portion  of  the  war-profits  and  excess-j)rofits  tax  attributable  to  such 
sale  shall  not  exceed  20  per  cent  of  the  sc! ling  price  of  such  property  or 
interest,  (.^oe  Articles  971  and  072  of  Regulations  45,  and  section  337  of 
the  Act.) 

(c)  Tax  of  corporation  engaged  in  mining  cf  geld. — If  a corjiora- 
tion  was  engaged  in  the  mining  of  gold,  its  war-profits  and  excess-profits 
tax  shall  be  that  proportion  of  Item  10,  Schedule  IV,  which  the  net  in- 
come not  derived  from  the  raining  of  gold  hears  to  tho  total  net  income 
(Ai'ticloa  752  and  753  of  Regulations  45 — ^Scc.  304). 

(d)  Tax  of  corporation  whose  income  is  derived  in  part  from 
"personal  service.” — If  part  of  the  not  income  (not  less  than  30  per 
cent)  is  derived  from  a separate  trade  or  budnoss  cf  tho  character  of 
“personal  service,”  tho  tax  .shall  bo  computed  in  accordance  with  tho 
provisions  of  Articlei  741  to  743  of  Regulations  45  (f^c.  303). 

7.  Statement  of  basis  of  claims. — If  tho  corporation  claims  tlic 
benefit  of  one  or  more  of  these  provi.sions,  it  sliould  attach  to  tho  return 
a complete  statement  of  tho  basis  for  such  claim  and  a comput.ation  of 
Lhe  tax  payable  in  the  event  that  F.nch  claim  is  allowed.  Tho  amount 
of  tax  60  computed  ahou’d  bo  entered  as  Item  11,  Schedule  IV,  but, 
except  in  cases  Falling  umler  (a)  above,  tho  taxpayer  must  nevertheless 
fill  out  oU  the  3cho<lulos  of  this  foim. 

SPECIAL  CASE.S. 

8.  Definitionof  special  cases. — Section  327  of  the  Act  provides  that 
in  the  following  cases  the  tax  shall  bedel  ermined  aa  provided  insaction  32.S; 

(a)  Wlierc  the  Commissioner  is  luiablo  to  determine  tho  invested 
capital  aa  provided  in  section  323; 

(b)  In  tho  case  of  a foreign  corporation; 

(e)  ■\Vliere  a mixed  aggrrf’ate  of  tangible  property  and  intangible 
property  baa  been  paid  in  for  stock  or  for  stock  and  bonds  and  tho  Com- 
missioner is  unable  satisfactorily  to  determine  tho  re-speetive  vaJucs  of  tho 
several  classoa  of  property  at  tho  time  of  payment,  or  to  distinguich  tho 
classes  of  property  paid  in  for  stock  and  for  bonds,  respectively; 


(d)  Where,  upon  application  by  the  corporation,  the  Commissioner 
finds  and  declares  of  record  that  the  tax  if  determined  without  benefit  of 
this  section  would,  owing  to  abnormal  conditions  affecting  the  capital  or 
income  of  the  corporation,  wo^  upon  the  corporation  an  exceptional 
hardship  evidenced  by  gross  disproportion  between  the  tax  computed 
without  benefit  of  this  section  and  the  tax  computed  by  reference  to  tho 
representative  ■ corporations  specified  in  section  328.  This  subdivision 
shall  not  apply  to  any  case  (1)  m which  the  tax  (computed  without  benefit 
of  this  section)  is  high  merely  because  the  corporation  earned  witliin  tho 
taxable  year  a high  rate  of  profits  upon  a normal  invested  capital  nor  (2) 
in  which  50  per  centum  or  more  of  the  gross  income  of  the  corporation  for 
. the  taxable  year  (computed  under  section  233  of  Title  II)  consists  of 
gains,  profits,  commissions,  or  other  income,  derived  on  a cost-plus  basis 
from  a Government  contract  or  contracts  made  between  April  6,  1917, 
and  November  II,  1918,  both  dates  inclusive. 

9.  Treatment  of  special  cases. — In  the  cases  specified  in  section 
327  the  ta.x  will  be  specially  determined  under  tfie  provisions  of  section 
328,  but  the  tax  wiU  not  ordinarily  be  compuUBj  under  section  328 
merely  because  the  corporation’s  form  or  manner  of  organization,  or  the 
limitations  imposed  by  section  326,  result  in  a greater  tax  than  would 
otherwise  be  payable.  A corporation  which  comes  within  tho  provi- 
sions of  subdivision  (d)  of  section  327  (paragi-aph  8,  above)  may  make 
application  for  assessment  under  the  provisions  of  section  328,  which  ap- 
plication shall  be  attached  to  its  return  in  tlie  form  of  a statement  setting 
forth  in  full:  (a)  the  reasons  why  the  tax  should  be  so  determined;  (b) 
tho  facts  upon  which  such  reasons  are  based;  (c)  an  e.xact  description  of 
each  trade  or  business  or  important  branch  of  a trade  or  business  carried 
on  by  it;  (d)  a statement  of  the  invested  capital  and  net  income  for  each 
year  since  the  beginning  of  the  prewar  period;  and  (e)  a statement  show- 
ing the  amount  of  gains,  profits,  commissions  or  other  inpome  derived 
on  a cost-plus  basis  from  Government  contracts  made  after  April  5, 1917, 
and  before  November  12,  1918,  and  showing  the  per  cent  which  such  in- 
come is  of  the  total  income  of  the  corporation.  (See  Article  901.) 

10.  Determination  of  first  installment  of  tax  in  special  cases. — 
In  the  case  of  a foreign  corporation,  and  in  the  case  of  any  other  corpo- 
ration where  absolutely  no  data  are  available  for  the  determination  of 
the  invested  capital  for  the  taxable  year,  the  installments  of  the  tax  shall, 
in  the  first  instance,  be  computed  and  the  first  installment  paid  upon 
the  basis  of  a tax  equal  to  50  per  cent  of  the  net  income.  In  any  other 
case  under  section  328,  including  a case  where  the  invested  capital  for 
the  taxable  year  can  not  be  accurately  determined,  but  wliere  a minimum 
amount  of  invested  capital  as  to  which  there  is  no  question  can  bo  deter- 
mined, the  inslall'ments  shall  in  tho  first  instance  be  computed  and  the 
first  installment  paid  upon  the  basis  of  a ta.x  upon  the  minimum  amount 
of  invested  capital,  not;  however,  exceeding  a tax  upon  the  basis  of  50 
per  cent  of  the  net  income.  In  any  of  tho  above  cases  tho  actual  ratio 
when  ascertained  by  tho  Commissioner  will  be  used  in  determining  the 
correct  amount  of  the  tax.  (Sec  Section  912.) 

11.  Returns  in  special  cases. — Corporations  other  than  foreign 
corporations  making  [claim  for  assessment  under  section  328  of  the  Act 
should  answer  all  questions  and  fill  all  schedules  as  far  as  possible  .and 
attach  a statement  explaining  why  it  is  impracticable  to  fill  out  the 
entire  return. 

UNDISTRIBUTED  PROFITS  TAXABLE  TO  STOCKHOLDERS. 

12.  If  any  corporation,  however  created  or  organized,  is  formed  or 
availed  of  for  the  purpose  of  preventing  the  imposition  of  the  surtax  upon 
its  stockholders  or  members  through  the  medium  of  permitting  its  gains  or 
profits  to  accumulate  instead  of  being  divided  or  distributed,  such  cor- 
poration shall  not  be  subject  to  tho  tax  imposed  by  section  230  of  tho 
Revenue  Act  of  1918,  but  tho  stockholders  or  members  thereof  shall  bo 
subject  to  taxation  under  Title  2 in  tho  same  manner  as  in  tho  case  of 
stockholders  of  a personal  service  corporation,  except  that  the  tax 
imposed  by  Title  3 of  tho  Revenue  Act  of  1918  shall  bo  deducted  from 
tho  net  income  of  the  corporation  before  tho  proportionate  share  of  each 
stockholder  or  mcm.ber  is  computed  (Section  220,  Article  351). 

LOSS  ON  INVENTORIES  AND  REBATES  UPON  SALES. 

13.  At  the  time  of  filing  returns  for  the  taxable  year  1918,  a claim  for 
abatement  may  be  filed  based  on  the  fact  that  a substantial  loss  has  been 
sustained  (whctlicr  orYiot  actually  realized  by  sale  or  other  disposition) 
resffiting  from  any  material  reduction  (not  duo  to  temporary  fluctuation) 
in  li'o  value  of  tho  inventory  as  at  tho  end  of  such  taxable  year,  or  from 
tlie  actual  payment  nficr  tho  close  of  such  taxable  year  of  rebates  in  pur- 
Ruanco  of  contracts  entered  into  during  such  year  upon  sales  made  during 
such  year.  In  auch  case  payment  of  tb.o  amount  of  the  lax  covered  by 
sucli  claim  sliail  not  be  required  until  tho  claim  is  decided,  but  tho  tox- 
p.ayor  shnll  accompany  Ivb  daira  witli  a bond  in  double  tho  amount  of  tho 
tax  covered  by  tie  claim,  witli  sureties  satisfactory  to  the  Commissioner, 
conditioned  fir  t!io  payment  of  any  part  of  such  tax  found  to  bo  due, 
with  interest  at  tlm  rate  of  1 per  cent  per  month. 

14.  If  no  sill  h claim  is  filed  with  the  return,  but  it  is  shown  to  tho 
Biilisfaction  cf  tho  Commisc.ioncr  that  duiing  the  taxable  year  1919 
tho  taxpayer  lias  sustained  a sub.stantial  loss  of  tho  character  above 
dcacrihed,  then  the  amount  of  such  loss  shall  bo  deducted  from  tho  net 
income  for  tlie  taxable  year  1918  and  tho  taxes  imposed  for  such  year 
by  Titles  2 and  3 of  the  Revenue  Act  of  1918  shall  bo  redetermined 
accordingly.  (See  Section  234  (a)  (14)  and  Article  261.) 


Page  7 of  Form  1120 


Income  Tax 
Supplementary  Page  43 


Page  2 of  Instructions 

GENERAL  INSTRUCTIONS 


1.  For  complete  instructions  concerning  the  filling  in  of  the  schedules  in  this  return,  read  the  explanatory  notes  at  the  head  thereof,  and  Part  II  of 
Regulations  45,  relating  to  the  income  tax  and  war-profits  and  excess-profits  tax  on  corporations.  Copies  of  the  regulations  can  be  obtained  from 
any  collector  of  internal  revenue  fcr  any  bank. 


RETURNS. 

LIABILITY  FOR  FILING. 

2.  Corporations  generally. — Every  corporation,  joint-stock  com- 
piiny,  association,  and  insurance  company  not  specifically  exempted  by 
Section  231  of  the  revenue  act  of  1918,  and  having  a net  income  for  the 
taxable  year  of  83,000  or  more,  is  subject  to  the  war-profits  and  excess- 
profits  tax  and  must  file  a complete  return  on  this  form. 

3.  A corporation,  joint-stock  company,  association,  or  insurance 
I company  (not  exempted  by  Section  231)  having  a net  income  less  than 

83,000  must  also  file  a return  on  this  form,  filling  that  part  of  Schedule  IV 
under  the  headings  “Income  tax”  and  (if  necessary)  “Adjustment  of  tax 
for  fiscal-  year  ended,  in.  1918,”  and  aU  the  schedules  called  for  on  pages 
2 and  3;  and  answering  aU  questions  on  page  6. 

4. .Foreign  corporations. — Foreign  corporations  subject  to  the 
law  are  required  to  make  returns  to  the  collector  in  v.'hose  district  is 
located  its  principal  office  or  agency  through  which  is  transacted  the 
busine.s3  in  the  United  States.  The  gross  income  to  be  returned  includes 
only  the  gross  income  from  sources  within  the  United  States,  including 
interest  on  bonds,  notes,  or  other  interest-bearing  obligations  of  resi- 
dents, corporate  or  otherwise,  and  all  amounts  received  representing 
profits  on  the  manufacture  and  disposition  of  goods  within  the  United 
States.  (See  Articles  91  > 92,  548,  and  625  of  Regulations  45.) 

5.  A foreign  corporation  should  fill  in  and  submit  all  the  schedules 
called  for  on  pages  2 and  3 of  the  return  with  respect  to  its  income  from 
sources  withiu  the  United  States,  and  should  compute  its  income  tax 
(Schedule  IV),  claiming,  however,  no  specific  exemption  (Item  15).  It 
should  enter  50  per  cent  of  its  net  income  as  its  war-profits  and  excess- 
profits  tax,  pending  determination  by  the  Commissioner  of  the  amount  of 
tax  a-ssessable  (see  Instructions,  page  1,  paragraph  10). 

6.  Partnerships  and  personal  service  corporations. — ^Partner- 
ships and  pci-sonal  service  corporations  must  make  a return  on  Form 
1005.  (See  Article  624  of  Regulations  45.) 

CONSOLIDATED  RETURNS. 

7.  Affiliated  corporations,  as  defined  in  Section  240  of  the  Act  and 
Articles  632  and  633  of  the  Regulations,  must  file  a consolidated  return. 
As  provided  La  Article  632,  the  parent  or  principal  reporting  company 
must  file  the  consolidated  return  on  this  form  with  the  collector  of  the 
district  in  which  its  principal  office  is  located.  AU  supplementary  and 
supporting  schedules  should  be  prepared  in  columnar  form,  one  column 
being  provided  for  each  corporation  included  in  the  consolidation,  so  that 
the  composition  of  consohdated  net  iacomo  and  consohdated  invested 
capital  may  be  readUy  examined. 

8.  Subsidiary  corporations  and  other  affiliated  corporations  whose  net 
income  and  invested  capital  are  included  in  the  return  of  a parent  corpora- 
tion or  a principal  reporting  corporation  must  fiU  in  and  file  Form  1122 
with  the  collector  in  whose  district  their  principal  office  is  located. 

PERIOD  COVERED. 

9.  The  taxable  year  is  the  calendar  year  1918  or  (if  the  corporation 
makes  its  return  for  a fiscal  period  of  12  months  ending  6a  the  last  day 
of  some  month  other  than  December)  the  fiscal  period  ended  in  the 
calendar  year  1918. 

10.  A corporation  desiring  to  change  the  period  for  which  its  return 
is  made  from  a calendar  year  to  a fiscal  year  or  vice  versa,  or  from  one 
fiscal  year  to  another,  must  give  written  notice  to  the  collector  of  such 
change  and  the  reasons  therefor  at  least  30  days  before  the  duo  date  of 
its  return  on  the  basis  of  its  existing  taxable  year  and  at  least  30  days 
before  the  due  d.at0  of  the  return  on  the  basis  of  the  proposed  taxable 
year.  (See  Articles  26  and  431  of  Regulations  45  and  Section  226  of  the 
revenue  act  of  1918.) 

11.  A new  form  will  be  issued  for  corporations  filing  returns  for  fiscal 
years  ending  in  1919. 

TIME  AND  PLACE  FOR  FILING. 

12.  Returns  for  the  calendar  year  1918  and  for  fiscal  years  ended  in 

1918  must  bo  sent  to  the  coUector  of  internal  revenue  for  the  district  in 
which  the  corporation’s  principal  place  of  business  is  located  so  as  to 
reach  the  collector’s  office  on  or  before  March  15, 1919,  unless  an  extension 
of  time  has  been  granted.  ' ' 


13.  If  it  is  not  possible  to  file  a completed  return  on  this  form  or  on 
Form  1122,  as  tho  case  may  be,  on  or  before  March  15, 1919,  an  extension 
of  time  may  be  obtained  by  filing,  on  or  before  March  1 5, 1919,  a tentative 
retm-n  and  estimate  of  taxes  assessable,  in  duplicate,  on  Porm  1031  T, 
and  remitting  with  such  return  at  least  one-fourth  of  tho  estimated  taxes 
shown  thereon. 

11.  In  case  of  neglect  to  file  either  a ccinplcted  return  or  a tentative 
return  within  the  prescribed  time  tho  ccilector  is  authorized  to  giant  an 
extension  of  not  more  than  30  days,  provided  such  neglect  was  due  to 
absence  or  sichness,  and  provided  an  application  for  such  extension  is 
made  in  writing  prior  to  the  expiration  of  the  period  for.wldch  an 
extension  may  be  granted.  In  meritorious  cases  the  Commissioner  is 
authorized  to  grant  a further  extension;  ’out  no  such  further  extension  vrIU 
be  granted  (except  on  account  of  absence  or  sickness),  unlc-ss  a tentative 
return  has  been  filed  on  Form  1031  T.  and  at  least  ono-feurth  of  tho  esti- 
mated tax  has  been  paid.  (See  Articles.  442  to  444  of  Regulations  45.) 

SIGNATURES  AND  VERIFICATION. 

15.  Returns  must  be  sworn  to  by  the  president,  vice  president,  or  other 
principal  oflicer  and  by  the  treasurer  or  assistant  treasurer  of  the  cor- 
poration. Tho  return  of  a foreign  corporation  having  an  agent  in  the 
United  States  shall  be  sworn  to  by  such  agent.  If  receivers,  trustees 
in  bankruptcy,  or  assignees  are  operating  the  property  or  businsss  of 
tho  corporation,  such  receivers,  trustees,  or  assignees  shall  execute  the 
returns  for  such'  corporations,  under  oath. 

PAYMENT  OF  TAXES. 

16.  The  tax  should  be  paid  by  sending  or  bringing  with  the  return 
a check  or  money  order  dravm  to  the  order  of  “Collector  of  Internal 
Revenue  at  [insert  name  of  city  and  State].” 

17.  Do  not  send  cash  through  the  mail  or  pay  it  in  person  except  at 
the  office  of  tho  coUector  or  a regulaily  established  internal-revenue 
atamp  oflice. 

18.  At  least  one-fourth  of  the  tax  is  due  at  the  same  time  that  the 
return  is  due. 

19.  An  additional  amount  suflicient  to  bring  the  total  payments  up 
to  one-half  of  the  tax  must  be  paid  on  or  before  June  15,  1919^ 

20.  An  additional  amount  siifncient  to  bring  the  total  payments  up  to 
three-fourths  of  the  tax  must  be  paid  on  or  before  September  15,  1919. 

21 . The  entireremainder  of  the  tax  must  bo  paid  on  or  before  December 
15,  1919. 

22.  If  any  payment  is  not  made  when  duo,  the  entire  unpaid  balance  of 
the  lax  wiU  become  due  10  days  after  demand  therefor  by  tho  collector. 

23.  If  you  pay  in  cash,  do  liot  fail  to  get  a receipt  at  the  time  of  pay- 
ment. If  you  pay  by  check  or  money'order,  your  canceled  check  or  your 
money-order  receipt  %vin  service  as  a receipt. 

PENALTIES. 

UNDERSTATEr.IE.NT  OF  TAXES  DUE  TO  NEGMCE-NCE  OR  FRAUD. 

24.  If  taxes  are  undei-stated  tlvrough  negligence  on  the  part  of  the  tax- 
payer and  wthout  attempt  to  defraud,  there  shall  bo  added  as  part  of 
the  tax  5 per  cent  of  the  total  amount  of  the  deCci.  ncy  plus  interest  at 
tho  rate  of  12  per  cent  per  annum  on  the  amount  of  the  deficiency  of  each 
installment  from  the  time  the  installment  was  due.  If  an  understatement 
is  false  or  fraudulent  with  intent  to  evade  the  tax,  there  shall  he  added 
as  part  of  the  tax  50  per  cent  of  the  amount  of  the. deficiency. 

FOR  FAILI.NG  TO  PAY  TAX  WHEN  Dl'S. 

25.  If  any  tax  remains  unpaid  after  the  date  when  it  is  due  and  ^or  10 
days  after  notice  and  demand  by  the  collector  there  shall  bo  added  as 
part  of  the  tax  the  sum  of  5 per  cent  of  tlio  amount  due  but  unpaid,  plus 
interest  at  the  rate  of  12  per  cent  per  annum  on  such  amount  frem  tho 
time  it  became  due. 

FOR  FAIUNG  TO  M-UO:  RETURN  ON  TI.ME. 

26.  A penalty  of  not  more  than  $1,000  attaches  for  fiulurc  to  fib  a re- 
turn or  to  pay  the  tax  witliiu  tho  time  required  by  law.  If  the  failure  is 
willful  or  an  attempt  is  mado  to  defeat  or  evade  tho  tax,  tlio  penalty  is 
$10,000  or  imprisonment  for  not  more  than  one  year,  or  both,  together 
with  cost  of  prosecution. 


Income  Tax 
Supplementary  Page  44 


Page  8 of  Form  1120 


Form  1096A-UNITED  STATES  INTERNAL  REVENUE  SERVICE 


MONTHLY  INFORMATION  RETURN 

PAYMENTS  OF  INTEREST  ON  BONDS  OF  DOMESTIC  AND  FOREIGN  CORPORATIONS  AND 
COUNTRIES  AND  DIVIDENDS  ON  STOCK  OF  FOREIGN  CORPORATIONS 


FOR  MONTH  OF , 1919 


THIS  RETl'RN, 
ACCOMPANIED  BY 
CEKTIRCATES  ON  FORM 
lOOI.lflfllA,  AND  ms. 
MUST  BE  MAILED  TO 
THE  COMMISSIONER  Of 
INTERNAL  REVENUE. 
SOKHNC  DIVISION, 
WASHINGTON,  D.C. 

ON  OR  B2F0f.Z  THE 
20ih  DAY  OF  THE  MONTH 
SUCCFEDING  THAT 
FOR  WHICH  MADE 


(Name  ol  debtor  organizatioa) 


(Full  post-office  address) 
(Name  ot  bank  or  paying  agent) 
(Full  post-office  address) 


(Date  received} 


Class  or  Income 


Total  Amount  of 
Payments. 


A.  Interest  on  bonds  and  other  similaj  obligations  of  domestic  and  resident 
corporations  (provided  tax  v/as  not  withlield  at  source) 


(FORM  1001) 


B.  Interest  on  bonds  and  other  eimiJar  obligations  of  domestic  and  resident 
corporations  (provided  tax  was  not  withlicid  at  iwurce) 


C.  Interest  on  bonds  of  foreign  corporations  and  countries  and  dividends  on  stock 
of  foreign  corporations 


(FORM  1058) 
(FORM  lOOl.M 


INSTRUCTIONS 

A.  A certificate  on  F.orm  1051  should  accompany  this  return  for  every  payment  of  interest  on  bonds  and  other  similar  obligations  of 

domestic  and  recent  corporations,  under  the  following  conditions: 

1.  Interest  on  bonds  with  tux-/re^-ccvenant  clauses  paid  to  citizens  and  residents  of  the  United  States  (individuals  and  fiduciaries) 

cloiming  personal  exeiMtion,  domestic  and  resident  corporations,  and  foreign  corporations  haying  an  office  or  place  of 
business  in  the  United  States. 

In  the  absence  of  ownership  certificates  mado  by  individual  owneis  of  tax-free  registered  bonds  the  debtor  organization  shall 
prepare  reports  on  Form  ICOO  and  forward  them  to  the  collector  with  return  Form  1012.  If  owned  by  a domestic  corpora- 
tion, or  foreign  corporation , having  an  office  or  place  of  business  in  the  United  States,  reports  on  Form  1001  should  be 
prepared.  V.Tien  so  used  the  forms  need  not  be  signed. 

2.  Interest  on  bonds  without  tax-free-covenant  clauses  paid  to  citizens  and  residents  of  the  United  States  (individuals  and  fiduciaries), 

domestic  and  rendent  partnerslups  and  corporations,  nonresident  alien  partnerships,  and  foreign  corporations  having  an 
office  or  place  cf  business  in  the  United  States. 

In  the  case  of  registered  bonds  not  baaing  tax-free-covenant  clauses  the  debtor  organization  will  prepare  reports  on  Form  1001 
and  forward  them  with  this  rejtiim  to  the  Commieaioner.  When  so  used  the  form  (1001)  need  not  be  signed. 

B.  Resident  collecting  agents,  responsible  banks  aijd  bankers  receiving  interest  coupons  presented  by  individual  citizens  or  reeidenta 

of  the  United  States  for  collection,  may  detach  certificate  Foim  1001  and  forveard  it  directly  to  the  Commissioner  of  Internal 
Revenue,  provided  certificate  Form  1058  (revised)  is  substituted  for  the  certificate  detached.  The  abrogate  number  of  substi- 
tute certificates,  Form  1058,  should  be  entered  by  the  debtor  corporation  on  line  B,  in  the  column  ‘‘Number  of  Certificates.” 

C.  A certificate  on  Form  lOOlA  should  be  required  by  individuals,  partnerships,  and  corporations  undertaking  as  a matter  of  busi- 

ness or  for  profit  the  collection  of  interest  on  bonds  of  foreign  corporations  and  countr&s  and  dividends  on  stock  of foreign  corporations 
by  means  of  coupons,  checks,  or  bills  of  exchange  for  citizens  and  residents  of  the  United  States  (individuals  and  fiduciaries), 
domestic  and  resident  partnerships  and  corporations,  and  nonresident  alien  indi'viduals,  partnerships,  and  coroorations. 

If  the  payments  consist  of  interest  on  bonds  (and  there  is  no  paying  agent  in  thq  United  States),  the  last  bank  or  collecting  agent 
handling  the  item  shall  detach  the  certificate.  Form  lOOlA,  and  forward  it  directly  to  the  Commissioner  of  Internal  Revenue, 
accompanied  by  a return  on  this  form. 

If  the  payments  consist  of  dividends  on  stock  of  foreign  corporations,  the  first  bank  or  collecting  agent  receiving  the  certificate 
(Form  1001  A)  is  required  to  detach  and  forward  it  directly  to  the  Commuidoner  of  Internal  Revenue.  The  first  bank  Hh.oll 
indor£«  upon  the  foreign  item  “Certificate  detached  and  information  furnished  (insert  name  and  address  of  licensee).”  Sub- 
stitute certificates  are  not  permitted  to  be  used  in  the  case  of  foreign  items. 

K boeds  are  owned  jointly,  separate  certificates  should  be  made  by  or  for  each  joint  ovmer.  Fiduciaries  must  enter  on  the  certificates 
under  “Owner  of  bonds”  the  name  of  estate,  ti-ust,  or  beneficiary  on  behalf  of  whom  the  exemption  is  claimed.  Licensed  banks  and 
coll^-ting  agents  not  acting  as  withholding  or  paying  agents  for  debtor  organizations  may  file  one  return  on  this  form,  making  no 
entries  in  the  spaces  at  the  head  of  the  form  for  name  and  address  of  debtor  organization. 


1 CERTirr  that  the  foregoing  return  and  the  accompanying  certificates  constitute  a true  and  complete  statement  of  payments  of  the 
above-described  classes  of  income  made  by  the  person  or  organization  named  at  the  head  of  this  return,  during  the  month  stated  above. 


Dated 


(Slg^ture) 


(Capad'ty  lii  which  acthie} 


(Addreu  In  full) 


Income  Tax 
Supplementary  Page  45 


OWNERSHIP  CERTIFICATE— TAX  TO  BE  PAID  AT  SOURCE  names  must  be  printeo 

U.  S.  I’  TERNAL  REVENUE.  INTEREST  ON  BONDS  AND  OTHER  SIMILAR  OBLIGATIONS  OF  DOMESTIC  AND  RESIDENT  CORPORATIONS  OR  WRITTEN  PLAINLY. 
DEBTOR  ORGANIZATION  | OWNER  OF  BONDS  (Give  name  in  full) 


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Income  Tax 

Supplementary  Page  46. 


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Income  Tax 
Supplementary  Page  47 


See  lusTRUCTioNS  on  Form  1012. 


Form  ll23-UNrrED  STATES  INTERNAL  REVENUE  SERVICE. 

INFORMATION  RETURN  OF  SUBSIDIARY  OR  AFnUATED  CORPORATION 

WHOSE  NET  INCOME  AND  INVESTED  CAPITAL  ARE  INCLUDED  IN  RETURN  OF  A PARENT  OR  PRINCIPAL 
REPORTING  CORPORATION  FOR  PURPOSES  OF  INCOME  AND  PROFITS  TAXES 

FOR  CALENDAR  YEAR  1918 


This  Return 

Must  Be  Filed 

On  or  Before 
March  15, 1919 
With  the  Collector 

Fiscal  period  begun 

OR 

and  ended ... 

1918 

(Date  Received) 

of  Internal  Revenue 
For  the  District  in 
Which  the  Subsidiary 
or  Affiliated  Corpora* 
tion  has  its  Principal 
Office. 

Businut  address 

(Street  and  number.) 

(City  or  town.) 

(State.) 

■ 1 

1.  Date  incorporated - - - Under  laws  of  what  State  1. 

2.  Kind  of  business - - - - 

3.  Par  value  of  capital  stock  outstanding  at  beginning  of  taxable  year:  (a)  common,  . 

(&)  preferred,  $ 


4.  Par  value  of  capital  stock  held  during  the  taxable  year  by  (a)  the  parent  corporation  or  (6)  the  same  interest: 


Periods  in  the  Tax.sble 
YeaeDufino  Which  the 
Stock  Held  Remained 
Unchanged. 

Pak  Value  or  Stock. 

Periods  in  the  Taxable 
Year  During  Which  the 
Stock  Held  Remained 
Unchanged. 

Par  Value  of  Stock. 

FROM— 

TO— 

Common. 

Peeferred. 

PROM— 

TO— 

Common. 

Preferred. 

% 

1 

s 

Note. — All  stock  should  be  designated  as  voting  (“v.”)  or  nonvoting  (“n.  v.”). 


5.  Name  of  parent  corporation 

6.  Address  of  parent  corporation - : 

7.  Internal  revenue  district  in  which  consolidated  return  has  been  filed...- 

(Cfive  distri(  t,  or  city  and  State.) 

8.  If  affiliation  occurs  through  ownership  of  stock  by  the  same  interests,  attach  to  this  form  a list  showing  the  names 

and  addresses  of  stockholders  and  amoimt  ana  description  of  stock  held  by  each. 

9.  State  amoimt  of  income  and  profits  taxes  for  the  taxaole  year  apportioned  to  the  subsidiary  or  affiliated  cor- 

poration  making  this  return — S 

We,  the  undersigned,  president  and  treasurer  of  the  above-named  subsidiary  or  affiliated  corporation,  being 
severally  duly  sworn,  each  for  himself  deposes  and  says  that  the  foregoing  retm-n,  including  the  accompanying 
list  (if  any),  has  been  examined  by  him  and  is  to  the  best  of  his  knowledge  and  belief  a true  and  complete  return 
of  information  made  in  good  faith  pursuant  to  the  Revenue  Act  of  1918  and  the  regulations  thereunder. 

Sworn  to  and  subscribed  before  me  this 


.day  of. 


19. 


(Name  of  officer.) 


(Title.) 


President. 


Treasurer. 


Income  Tax 
Supplementary  Page  48 


10-9^19. 


Form  1013.-RtvnE0  FEBBuijay,  m»-nNJTED  STATES  INTERNAL  BEVEITOE  SERVICE 

MONTHLY  RETURN  OF  NORMAL  INCOME  TAX  TO  BE  PAID  AT 

INTEREST  ON  BONDS  AND  OTHER  SIMILAR  OBLIGATIONS  OF  DOMESTIC 
RESIDENT  CORPORATIONS  AND  FOREIGN  CORPORATIONS  HAVING 
A PAYING  AGENT  IN  THE  UNITED  STATES 

(To  tn  ojed  by  paylas  ejent  of  forefsn  oorporatioo  only  In  esse  the  bonds  ooalsln  s tvt-;ro»-C3Tan»nt  cleuse.) 


SOURCE 

AND 


FOR  MONTH  OF 1919 


Date  received 


INSTRUCTIONS 

ll  debtor  organization  makes  its  own  withholding  return,  no  entries  need  bo  made  on  lines  provided  above  fer  name  and  address  of  withholding 

■gent. 

A ivtum  on  this  fomi  must  be  made  to  cover  the  following  classes  of  payments: 

1.  Interut  on  bond)  with  tax-free-covenant  clauses  paid  to  citizens  and  residents  of  the  TTnited  States  (individuals  and  fiduciaries)  not  claiming 

Vpe.>aonal  exetnpdon,  to  domestic  and  resident  partnerships,  to  nonresident  alien  individuals  or  fiduciaries,  to  loreign  partnerships,  and 
t«  foreign  corporation j having  no  office  or  place  of  business  in  the  United  States,  or  in  case  owner  is  unknown.  A normal  tax  of  2 
per  centum  is  required  to  be  withheld  and  paid  at  source  in  such  cases. 

2.  Interest  on  bonds  without  tax-&ee-c(yi'cnant  clauses: 

(a)  If  paid  to  a nonresidont  alien  individual,  or  in  caso  owner  is  unknown,  a normal  tax  cf  8 per  centum  is  required  to  bo  withheld 

and  paid  at  source. 

(b)  If  paid  to  a foreign  corporation  having  no  office  or  place  of  business  in  the  United  States,  a normal  tax  of  10  per  centum  is 

required  to  be  withheld  and  paid  at  source. 

A certificate  on  Form  1000  should  accompany  this  return  for  every  payment  entered  hereon. 

In  tho  absence  of  ownerthip  certificates  covering  registered  bonds  owned  by  a person  or  organization  falling  within  the  classes  named  above, 
the  debtor  corporation  shall  prepare  reportaon  Form  1000.  When  so  used  the  forms  need  not  bo  signed. 

In  the  case  of  payments  of  interest  on  tax'^ee-covenant  bonds  to  citizens  and  residents  of  the  United  States  (individuals  and' fiduciaries)  and 
to  domestic  and  resident  partnerships,  resident  collecting  agents,  and  responsible  banks  and  bankers  receiving  interest  coupons  for  collection  may 
detach  certificate  Form  1000  and  forward  it  directly  to  the  Commissioner  of  Internal  Revenue  provided  certificate  Form  1059  (revised)  is  substitutea 
for  the  certificate  detached.  Substitute  certificates  Form  1059  should  be  listed  by  the  debtor  corporation  on  this  return,  the  serial  number  given 
the  original  cerrificate  being  entered  in  the  column  “ Name  of  Payee.” 

If  coupons  ere  receivea  not  accompanied  by  certificates  of  ownership,  thj  first  bank  receiving  such  coupons  will  require  of  the  payee  an 
affidavit  showing  (be  fbllowing: 

(a)  Name  and  address  of  payee,  (6)  name  and  address  of  debtor  corporation  (c)  date  of  maturity  of  interest,  (d)  name  and  address  of  person 
hrom  whoni  the  coupons  were  received,  (<)  amount  of  interest,  and  (/)  a statement  that  owner  of  bonds  is  unknown  to  him'. 

The  first  bank  shall  prepare  Form  1000,  crossingout  “owner"  and  inserting  “payee,”  entering  the  amount  of  interest,  due  date,  find 
date  paid  in  tho  proper  spaces  and  stamping  or  writing  across  the  face  of  the  certificate,  “Affidavit  furnished  (insert  name  of  bank).” 

, The  affidavit  should  accompany  the  ownership  certificate  to  the  Collector  of  Internal  Revenue.  , , 

If  bonds  are  owned  jointly,  separate  certifica^  should  be  made  by  or  for  each  joint  owner.  Fiduciaries  must  enter  on  the  certificates  under 
"owner  of  bonds"  the  name  of  estate,  trust,  or  beneficiary  on  behalf  of  whom  the  exemption  is  claimed. 


I CEBTiTY  that  the  following  is  a true  and  complete  return  of  all  payments  of  classes  1 , 2(n),  and  2(5)  described  above  made,  and  of  tho  amount 
of  tax  V \ihheld  during  the  month  staled  above  by  the  above-nameo  organization,  the  several  items  being  evidenced  by  ceiUficates  listed  below 
•nd  inclosed  herewith: 


THIS  RETDIW,  IN  DUPU- 
art  ACCOMPANIED  BY 
CU^CATES  ON  KMtM 
IM  AND  FORM  iaS»  MUST 
«E  niXO  WITH  THE  COL- 
lEaOR  OF  INTERNAl  REV- 
ENUE FOriNE  DISTRICT  IN 
WHICH  THE  v.TTHHOLDiNC 
AGENT  IS  LOCATED  ON  OR 
BEFORE  THE  me  DAT  OF 
THE  MONTH  WCCCFWNC 
THAT  FOR  WHICH  MADE 


( Nana  of  debtor  orinuMisttuu. ) 

(F^l  post-otBoe  oddrtnt.) 
(None  of  withholding  agent.) 


t Full  i>ost-offlc6  address. ) 


Class. 

iMTcacsT  Pais. 

Tax  trmniEU). 

1 

s 

5 

9(0) 

2(i) 

Totam... 

S 

$ 

(Sisnaturo.) 


(Capacity  ja  vrSlyh  hcucg  ) 


{Address  Id  lull.) 


HaMX  of  PsTYiS. 


Tax  17|thd«lb. 


CONTINUE  ON  FORM  1012A 


Income  Tax 

Supplcmimtary  Page  49. 


TllASTTRY  DEPARTMENT, 

XSTEXNAL  REVEKXJX  BCREAU 
Form  1124. 

INCOME  AND  PROFITS  TAXES. 

Bond  under  sections  214  (a)  (12)  and  234  (a)  (14)  of  the  Revenue  Act  of  1918. 


KNOW  ALL  MEN  BY  THESE  PRESENTS  that  as 

principal,  and  — , as  surety,  are  held  and  firmly 

bound  unto  the  United  States  of  America  in  the  sum  of  dollars, 

lawful  money  of  the  United  States,  for  the  payment  whereof  we  bind  ourselves,  our  heirs,  executors, 
administrators,  successors  and  assigns,  jointly  and  severally,  firmly  by  these  presents. 

Whereas,  at  the  time  of  filing  his  return  of  income  for  the  taxable  ]^ear  1918  the  above-boimden 
principal  has  filed  or  is  about  to  file  a claim  in  abatement  based  on  the  fact  that  he  has  sijstained  a 
substantial  loss  resulting  from  a material  reduction  (not  due  to  temporary  fluctuation)  o^  the  value 
of  his  inventory  for  such  taxable  year  or  from  the  actual  payment  after  the  close  of  such  taxable  year 
of  rebates  in  pursuance  of  contracts  entered  into  during  such  year  upon  sales  made  during  such  year; 
and 

Whereas,  sections  214  (a)  (12)  and  234  (a)  (14)  of  the  Kevenue  Act  of  1918  provide  that  in  the 
case  of  such  a claim  payment  of  the  amount  of  the  tax  covert  thereby  shall  not  be  required  until  the 
claim  is  decided,  but  that  the  taxpayer  shaU  accompany  his  claim  with  a bond  in  double  the  amount 
of  the  tax  covered  by  the  claim,  with  sureties  satisfactory  to  the  Commissioner,  conditioned  for  the 
payment  of  any  part  of  such  tax  found  to  be  due,  with  interest,  and  it  appears  that  the  amount  of  this 
bond  is  double  that  of  the  tax  covered  by  such  claim  in  abatement: 

Now,  THEREFORE,  the  Condition  of  the  foregoing  obligation  is  such  that  if  the  principal  shall  on 
notice  and  demand  by  the  collector  duly  pay  any  part  of  such  tax  foimd  by  the  Commissioner  to  be 
due,  with  interest  at -the  rate  of  twelve  per  cent  per  annmn  from  the  time  such  tax  would  have  been 
due  had  no  such  claim  been  filed,  and  shall  otherwise  well  and  truly  perform  and  observe  all  the  pro- 
visions of  law  and  the  regulations,  then  this  obligation  is  to  be  void,  but  otherwise  to  remain  in  full 
force  and  virtue. 

Witness  our  hands  and  seals  this day  of * , 1919. 

[l.  S.1 


Signed,  sealed  and  ddvoered  in  the  ‘presence  of— 


[l.  8.] 

Principal. 


II.  s.] 

8‘urety. 


Bond  approved  this day  of 1910. 

Commissioner  of  Internal  Eeven'm, 


Income  Tax. 
Supplementary  Pace  50. 


The  Withholdixo  AGEfri 
OR  COIXECTOR  IlECEIVINa 

TREASURY  DEPARTMENT 

Form  lllS— United  States  Internal  Revenue  Service 

Do  Not  WepiR  Here 

This  Claim  Sn.u-L  Enter 
■p.vTE  OF  Receipt  in  This 
Space. 

. CLAIM  BY  NONRESIDENT  ALIEN  INDIVIDUAL 

For  Benefit  of  Personal  Exemption  and  Credit  for  Dependents 

FOR  TAXABLK  YEAR 

(Name  of  withUoldini  agent?)  " **"  * TstrceVacd  nuiu'oor?)' 


(^ty  or  tovTO.)' - - - (State.)  '"1^ 

Claim  is  hereby  made  for  benefit  of  the  personal  exemption  and  the  credit  for  dependents  (if  any) 
provided  under  section  216  of  the  Revenue  Act  of  1918  by  Cor  for) — 

Name  of  claimant 

Address  in  the  [ 

United  States.  | 

1.  Of  what  country  are  you  a citizen  or  subject? ...l 

2.  Arc  you  single?  3.  Are  you  married  and  living  with  wife  or  husband  ? 

4.  Are  you  head  of  a family  ? 5.  If  head  of  a family^  give  age  and  relationship  of  those 

dependent  upon  you 

6.  If  iriarried,  has  your  wife  or  husband  derived  income  during  the  taxable  year  to  date  from  sources  in  the 

>■  United  States  separate  from  your  own  ? - - — 

7.  If  so,  is  such  income  included  in  the  income  stated  below?  — - 

8.  Ila.ve  you  filed  a return  of  net  income  for  all  or  any  of  the  past  four  years  ? 9.  If  so,  state 

•for  which  years  and  the  Internal  Revenue  Districts  in  which  filed 


INCOME  OF  CLAIMANT,  DURING  TAXABLE  YEAR  TO  DATE,  FROM  SOURCES  WITHIN  THE  UNITED  STATES. 

(1)  Salaet  or  Wages. 


Name  of  Employer. 

Address. 

Period. 

1 Amount. 

$ 

(2)  Other  Income. 

Name  or  Source. 

Address. 

Period  or  Date. 

Amount. 

$ 

' 

1 

Total  income  of  claimant,  during  taxable  year  to  date,  from  sources  v;ilhin  fho  United  Stale.-j  (X) 


STATEMENT  OF  CREDITS  CLAIMED. 

Amount  of  credits  claimed:  Personal  exemption,  $ Credit  for  dejjcndents,  $ Total  (Y)  5. 

Total  income  of  claimant,  during  taxable  year  to  date,  from  sources  within  the  United  States  (item  X from  above) ^ 

Balance  of  credit  (item  V minus  item  


I swear  (or  affirm)  that  the  above  is,  to  the  best  of  my  knowledge  and  belief,  a true  and  complete  atnic- 
ment  of  facts  in  connection  with  the  claim  for  credits  above  made. 


(If  claim  I3  made  by  agent  the  reason  therefor  must  bo  stated  on  this  line. ) 

Sworn  to  (or  affirmed)  and  subscribed  before  me  this 
day  of 19 ’ 

(Sigutluri:  of  individual  or  aH'iil.. 


(Official  capaclt;.) 


COVEU.) 


( 'iddriv.s  of  i.-nivdyil  (.,•  ) 


Income 

Supplementary  I’agc  51. 


PROVKTONS  OF  REGCLATIONS  45  APPLICABLE  TO  THE  USE  OF  THIS  FORM. 

ATPUCABILITY  OF  CREDITS,  UNDER  SECTION  216  OF  REVENUE  ACT  OF  1918,  TO  NONRESIDENT  ALIEN  EMPLOYEE. 

Aet.  316  (of  Regulations  45).  Allowance  of  personal  exemption  to  nonresident  alien  employee. — A nonresident 
alien  employee,  provided  he  is  entitled  under  section  216  of  the  statute  (see  the  articles  oelow,  particularly 
the  lists  of  countries  in  Article  307)  to  credit  for  a personal  exemption  or  for  dependents  or  both,  may  claim  the 
benefit  of  such  credit  by  filing  with  his  employer  this  form,  duly  filled  out  and  executed  under  oath.  On  the  filing 
of  such  a claim  the  employer  shall  examine  it.  If  on  such  examination  it  appears  that  the  claim  is  in  due  form,  that 
it  contains  no  statement  which  to  the  knowledge  of  the  employer  is  untrue,  that  such  employee  on  the  face  of  the 
claim  is  entitled  to  credit,  and  that  such  credit  has  not  yet  been  exhausted,  such  employer  need  not  until  such  credit 
be  in  fact  exhausted  withhold  any  tax  from  payments  of  salary  or  wages  made  to  such  employee.  Every  employer 
with  whom  aflidavits  of  claim  on  this  form  are  filed  by  employees  shall  preserve  such  affidavits  until  the  following 
calendar  year,  and  shall  then  file  them,  attached  to  his  annual  withholding  return  on  Form  1042  (rm/ised),  with  the 
Collector  on  or  before  March  1.  In  case,  however,  when  the  following  calendar  year  arrives  such  employer  has  no 
withholding  to  return,  he  shall  forward  all  such  affidavits  of  claim  directly  to  the  Commissioner  (Sorting  Division), 
■with  a letter  of  transnuttal,  on  or  before  March  15.  Where  any  tax  is  witbheld  the  employer  in  every  instance  shall 
showr  on  the  pay  envelope  or  shall  fm'nish  some  other  memorandum  showing  the  name  of  the  employee,  the  date  and 
the  amount  withheld.  This  article  applies  only  to  payments  of  compensation  by  an  employer  to  an  employee. 

Art.  306  (of  Regulations  45).  Credits  to  nonresident  alien  individual. — A nonresident  alien  individual,  similarly 
to  a citizen  or  resident,  is  entitled  for  the  purpose  of  the  noimal  tax  to  credit  * ♦ a personal  exemption,  and 
$200  for  each  dependent,  except  that  if  he  is  a citizen  or  subject  of  a country  which  imposes  an  income  tax  a personal 
exemption  or  credit  for  dependents  is  allowed  him  “ only  if  such  country  allows  a similar  credit  to  citizens  of  the 
United  States  not  residing  in  such  country.”  “ If  such  countiy  allows  a similar  credit”  means  if  such  country  in 
imposing  its  income  tax  allows  a personal  ex,emption  or  a credit  for  dependents,  as  the  case  may-  be,  and  allows  it 
without  discrimination  to  citizens  of  the  United  States  not  residing  in  such  country.  * * * 

Art.  307  (of  Regulations  45).  When  nonresident  alien  individual  entitled  to  personal  exemption. — (a)  The 
following  is  an  incomplete  list  of  countries  which  either  impose  no  income  tax  or  in  imposing  an  incofne  tax  allow 
both  a personal  exei^tion  and  a credit  for  dependents  which  satisfy  the  similar  credit  requirement  of  the  statute: 
Argentina,  Bosnia,  Brazil^  Canada,  Carinthia,  China,  Cuba,  Dalmatia,  Denmark,  France,'  Herzegovina,  Istria, 
Mexico,  Montenegro,  Persia,  Portugal,  Roumania,  Russia,  Serbia,  Union  of  South  Africa.  (6)  The  following  is 
an  incomplete  list  of  countries  which  in  imposing  an  income  tax  allow  a personal  exemption  which  satisfies  the 
similar  credit  requirement  of  the  statute,  but  do  not  allow  a credit  for  dependents:  Bachka,  Banat  of  Temesvar, 
Croatia,  Italy,  Slavonia,  (c)  The  following  is  an  incomplete  list  of  countries  which  in  imposing  an  income  tax  do 
not  allow  to  citizens  of  the  United  States  not  residing  in  such  country  either  a personal  exemption  or  a credit  for 
dependents  and,  therefore,  fail  entirely  to  satisfy  the  similar  credit  requirement  of  the  Bto.tute:  Australia,  Great 
Britain  and  Ireland,  Japan,  New  Zealand,  Spain.  The  former  names  of  certain  of  these  temtories  are  here  used 
for  convenience,  in  spite  of  an  actual  or  possible  change  in  name  or  sovereignty.  A nonresident  alien  individual 
who  is  a citizen  or  subject  of  any  country  in  the  first  list  is  entitled  for  the  purpose  of  the  normal  tax  to  such  credit 
for  a personal  exemption  and  lor  dependents  as  his  family  status  may  warrant.  If  he  is  a citizen  or  subject  of  any 
country  in  the  second  list  he  is  entitled  to  a credit  for  a personal  exemption,  but  to  none  for  dependents.  If  he  is 
a citizen  or  subject  of  any  country  in  the  third  list  he  is  not  entitled  to  credit  for  either  a personal  exemption  or  for 
dependents.  It  he  is  a citizen  or  subject  of  a country  which  is  in  none  of  the  lists,  then  to  secure  credit  for  either 
a personal  exemption  or  for  dependents  he  must  prove  to  the  satisfaction  of  the  Commissioner  that  his  country  does 
not  impose  an  income  tax  or  that  in  imposing  an  income  tax  it  grants  the  similar  credit  required  by  the  statute. 

CREDITS  UNDER  SECTION  216  (c)  AND  (d)  OF  REVENUE  ACT  OF  1918- 

PERSONAI,  EXEJiPTION. 

Status  ot  Taxpayer.  Amoont  of  Credit. 

Married,  and  living  with  husband  or  wife  (see  Article  303,  below) $2, 000 

Head  of  a family  (see  Article  302.  below) $2, 000 

Married,  and  not  living  with  husband  or  wife  and  not  head  of  a family  (see  Articles  302-303,  below) $1, 000 

Single,  and  not  head  of  a family  (see  Article  302,  below)  — $1, 000 

CREDIT  FOR  DEPENDENTS. 

Statra  of  Dependent.  Amount  of  Credit. 

For  each  person  (other  than  husband  or  wife)  who  is  (1^  (a)  under  18  or  (6)  incapable  of  self-support  because 

defective,  and  (2)  is  deiiendent  upon,  and  receiving  the  chief  support  from,  the  taxpayer  (see  Article 

304,  below) — _i H. $200 

Art.  302  (of  Reflations  45]^.  Personal  exemption  of  head  of  ffiily. — ^A  head  of  a family  is  a per^n  who 
actually  supports  and  maintains  in  one  household  one  or  more  individuids  who  are  closely  connected  with  him 
by  blood  relation^p,  relationship  by  marriage,  or  by  adoption,  and  whose  right  to  exerdse  family  control  and 
provide  for 'these  dependent  individuals  is  based  upon  some  moral  or  l^al  obliftion.  In  the  absence  of 
continuous  actual  residence  together,  whether  or  not  a person  with  dependent  relatives  is  a head  of  a family  within 
the  meaning  of  the  statute  must  depend  on  the  character  of  the  separation.  If  a father  is  absent  on  business  or  at 
war,  or  a cmid  or  other  dependent  is  away  at  school  or  on  a visit,  the  common  home  being  still  maintained,  the 
additional  exemption  applies.  If,  moreover,  through  force  of  circumstances  a parent  is  obliged  to  maintain  his 
dependent  children  with  "relatives  or  in  a boarding  house  while  he  lives  elsewhere,  the  additional  exemption  may 
still  apply.  If,  however,  without  necessity  the  dependent  continuously  makes  his  home  elsewhere,  his  benefactor 
is  not  the  head  of  a family,  irresiiective  of  the  question  of  support.  A resident  alien  with  children  abroad  is  not 
the  head  of  a family. 

Art.  303  (of  Regulations  45).  Personal  exemption  of  married  person. — In  the  case  of  a married  man  c«:  married 
woman  the  joint  exemption  replaces  the  individ^l  exemption  only  if  the  man  lives  with  his  wife  or  the  woman 
lives  with  her  husband^  In  the  absence  of  continuous  actual  residence  together,  whether  or  not  a man  or  woman 
has  a wife  or  husband  living  with  him  or  her  within  the  meaning  of  the  statute  must  depend  on  the  character  of  the 
separation.  If  merely  occasionally  and  temporarily  a wife  is  away  on  a visit  or  a husband  is  away  on  business,  the 
joint  home  being  maintained,  the  additional  exemption  applies.  The  vmavoidable  absence  of  a wife  or  husband 
at  a sanatorium  or  asylum  on  account  of  illness  does  not  preclude  claiming  the  exemption.  If,  however,  the  hus- 
band voluntarily  and  continuously  makes  his  home  at  one  place  and  the  wife  hem  at  another,  they  are  not  li'viBg 
together  for  the  purpose  of  the  statute,  irrespective  of  their  personal  relations.  A resident  alien  witn  a wife  residing 
abroad  is  not  entitled  to  the  joint  exemption. 

ART.a304  (of  Regulations  45).  Credit  for  dependents.— A taxpayer  receives  a credit  of  $200  for  each  person  (other 
than  husband  or  wife),  whether  related  to  him  or  not  and  whether  living  with  him  or  not,  dependent  upon  and 
receiving  his  chief  support  from  the  taxpayer^  provided  the  dependent  is  either  (a)  uu-der  eighteen  or  (6)  incapable 
of  self-support  because  defective.  The  credit  is  based  upon  actual  financial  dependency  and  not  mere  legsu  de- 
pendency. It  may  accrue  to  a taxiiaycr  who  is  not  the  head  of  a family.  But  a lather  wnose  children  receive  half 
or  more  of  their  support  from  a trust  fund  or  other  separate  source  is  not  entitled  to  the  credit.  • *-*773 


Income  Tax 

Supplementary  Page  52. 


TREASURY  DEPARTMENT, 
U.  S.  Internal  Rrvekue. 

. Form  47  A.— March,  1919. 


CLAIM  FOR  CREDIT 

TAXES  PAID  IN  EXCESS 


State  of 

County  of 


-1 

IMPORTANT 

This  claim  should  bo  forwarded  to  tho  Colloctor 

of  Internal  Revenue  from  whom  notice  of  eseess- 

ment  was  received* 

DATE  or  riUNC  T9  EE 


PLAINLY  stamped  HERE 


(Name  of  clainlant.) 

(Address  of  claimant:  give  street  and  number  as  well  as  city  or  town,  and  State.) . 

This  deponent  being  duly  sworn  according  to  law,  deposes  and  says  that  this  claim  is  made  on  behalf  of  the 
claimant  named  above,  and  that  the  facts  stated  below  with  reference  to  said  claim  are  true  and  complete. 

1 . Business  engaged  in  by  claimant 

2;  Character  of  assessment  or  tax 


Write  Nam« 


3.  Amount  of  tax  paid S Taxable  year 

4.  Portion  of  No.  3 claimed  as  a credit $ 

5.  Unpaid  assessment  against  which  credit  is  asked $— i Taxable  year 

Deponent  verily  believes  that  the  amount  stated  in  item  4 should  be  credited,  and  claimant  now  asks  and 

demands  credit  of  said  amoimt  for  the  following  reasons: 

(State  facts  regarding;  alleged  overpayment.) 


Sworn  to  and  subscribed  before  me  this  Signed: 


day  of  , 19. 


(fllie.) 

(This  affidavit  may  be  awom  to  before  a Deputy  Collector  of  Internal  Revenue  without  < barge.)  r-siis 


Write  N.m 


Income  Tax 

Supplementary  Page'53, 


CERTIFICATES 

I certify  that  an  examination  of  the  records  of  tho  Commissioner’s  Office  shows  the  following  facts  as  to  til6 
assessment  and  payment  of  the  tax: 

ASSESSMENT  OVERPAID 


NAME  OF  TAXPAYER. 

Character  of 
Assessment  and 
Period  Covered. 

List. 

Year. 

Month. 

Page. 

Line. 

AMOUaNT. 

IJaie  f aid. 

1 _ _ _ 

I 


Assesiment  Clerk,  Internal  Revenue  Bureau. 


Collector  of  Internai  Revenue. 


ASSESSMENT  TO  BE  CREDITED 


NAME  AND  ADDRESS. 


Character  op 
Assessment  or 
Article  Taxed. 


Period 
Covered  bt 
Assessment. 


L»st. 


Assessment  Clerk,  Internal  Revenue  Bureau. 


Collector  of  Internal  Revenue. 


Abatement  ..Order  

Claimant  

Address  


CUlns  approved 


CktcJ  DicUi&i. 


Amount  claimed,  $. 
Amount  allowed,  $. 
Amount  rejected,  $. 


Form  A7  A 


District 


(Nature  u(  tax.) 


Examined  and  submitted  for  action - , 19 — ^ 

COMMITTEE  ON  CLAIMS* 


»— 877S 


( 


( 


(' 


Income  Tax 

Supplementary  Page  54. 


DELIVER  OR  SEND 

Page  1 of  Return 

Form  1066-UNITED  STATES  INTERNAL  REVENUE  SERVICE 

(Dat«  rscelved) 

THIS  RETURN 

TO  COLLECTOR  OF 

INTERNAL  REVENUE 

pn$p  ilfis  pm  WE  G0!IP0l{ATI0)j  IHE  TAX  UN 

FOR  CALENDAR  YEAR  1918 

OR 

Fiscal  Period  begun , and  ended , 1918 

Eiaasined  by — 

■(Print  plainly  partnership’s  or  corporation’*  name  and  address) 

ON  OR  BEFORE 

JUNE  15.  1919 

Audited  by — 

STATE  WHETHER  PARTNERSHIP  OR  CORPORATION 


N«  lax  d as(e»abl«  oti  llus  return.  Tbe  Detubers  (idtribuliye  shares  ofoetiacoseofi/irisersKipi  for  tbefafl  taxable  period  acdofpersocal  service  torptfalioosearcedsobse^e&tioDeeeisber  31,  lQl7,are  to  be  r^artedbTlheiat&vidual  aenbers  thereof 

QUESTIONS. 


KIND  OF  BUSINESS. 

1.  Eiplaia  below  the  nature  of  the  partnerehip’a  or  corporation's  business  in  sufficient 
detail  to  show  in  which  of  the  following  general  classes  of  actmties  it  falls: 

(1)  Agriculture  and  related  industries,  including  fishing;  (2)  mining,  quarrying,  and 
relate  industries;  (3j  manufacturing;  (4)  construction;  (5)  trading;  (6)  transportation; 
(7)  storage;  (8)  other  services;  (9)  banking  and  insurance. 

2.  If  the  business  falls  in  any  of  the  classes  from  1 to  5,  state  the  special  product  or 
products  bandied ; if  in  class  5,  state  whether  wholesale  or  retail,  or  both ; if  in  class  6,  stato 
whether  rail,  water,  or  other,  whether  general  or  local,  and  the  special  commoditiee  (if 
any)  transported;  if  in  class  7,  state  the  special  commodities  stored  (if  any)  or  the  special 
kind  of  storage;  if  in  class  8,  state  in  detail  the  kind  of  service  tendered;  if  in  clase  9,  state 
the  branch  of  banking  or  insurance  engaged  in. 

3.  In  all  cases  state  whether  the  partnership  or  corporation  acts  as  principal  (using  its 
own  capital)  or  as  agent  or  broker  (on  comminsion)  or  as  both. 

4.  A pOTonal  eeri-ice  corporation  mast  explain  its  business  in  sufficient  detail  to 
justify  its  claim  to  be  classed  as  such.  If  necessary  its  statement  should  be  made  on  a 
separate  sheet,  which  should  be  firmly  attached  to.tnis  return- 

(а)  Main  buaineea 

(б)  Collateral  businesaos,  if  any- 


OTHER  CONCERNS  IN  SAME  BUSINESS. 

6.  Attach  hereto  a list  of  the  names  and  addresses  of  five  representative  concerns  in  your 
locality  or  section  of  tho  country  engaged  in  the  same  kind  of  business. 

ORGANIZATION  OR  INCORPORATION. 


TABLE  II. 


l.  Class  or  Obligatidh. 

J.  Haxoium  Amoont 
or  Obuoatio.vs. 

3.  Alinv>tT  or 
Interest. 

(a)  Fir&t  Liliertf  Lom  conrerted  4'8  &nd  Secosd  Liberty 
DDCoDTerted  (iuiereBt  recelrcd  dIqco January  1, 

$ 

$ 

(b)  First  and  Sefond  Liberty  leans  conrertd  4i’8  and 
Third  Liberty  Loan  (dated  May  9, 1918)  L 

(e)  Rrat  Liberty  loan  eecoad  conrerted  41'a  (dated 
October  24,1916) 

fd)  Fborth  Libsrty  Loan  ...  ...  . 

(e)  Other  oblfjations  issned  since  September  21, 1917 

(/)  Total 

$ 

$ i 

AFFILIATIONS  WITH  CORPORATIONS. 

(To  be  answered  by  every  partnership  or  personal  service  corporation). 

12.  Do  you  own  directly  or  control  through  closely  affiliated  interests  or  by  a nomineo 
or  nominees  over  50  per  cent  of  the  outstanding  capital  stock  of  a corporation  or  of  other 

corporations? 

13.  Is  over  50  per  cent  of  your  capital  stock  owned  by  another  corporation  or  by  two  or 

more  coiporations  that  are  affiliated? 

14.  Is  over  50  per  cent  of  your  capital  stock  as  well  aeover50  per  cent  of  the  capital  stock 
of  another  corporation  or  of  other  corporations  owned  or  controlled  by  the  same  individual 


6.  Dale  of  organization  or  incorporation; 

7.  If  incorporated,  under  the  laws  of  what  State  nr  country? 

8.  Aro  you  a successor  to  or  were  you  formed  to  take  over  or  conduct  part  of  tho  busi- 


ness of  another  organization  ? ; 

If  BO,  state  name  and  address  of  predecessor  or  other  organization,  and  in  the  latter  case, 
the  financial,  managerial,  and  contractual  relationshijis  existing  between  yourselves  and 

the  other  organization  — , 


VALUATIONS*OF  CAPITAL  STOCK. 

9.  What  was  the  fair  value  of  tho  total  capital  stack-of.  the  corporation  aa  determined 
in  the  Ust  assessment  of  the  capital  stoik  tax  (if  any)? 

Data'of  that  assessment 

BASIS  OF  VALUING  INVENTORIES. 

10.  Stato  hero  which  of  the  methods  described  on  page  2 of  tho  Instructions,  in  the 
note  under  tho  beading  “Schedule  A2,”  wsotised  in  valuing  inventoriea 


INTEREST  ON  LIBERTY  BONDS,  ETC. 

11.  Enter  in  table  at  top  of  next  column  the  maximum  amountof  Liberty  Bonds  and 
other  obligations  of  the  United  States  issued  since  September  24,  1917  (par  value),  held  at 
any  one  time,  from  which  interest  was  derived  during  tho  taxable  period,  together  with 
tbe  amount  of  such  interest  (see  Instructions  Schedule  A4). 


or  partnership  or  by  the  same  individuals  or  partnerships? 

15.  ,If  any  of  the  conditions  indicated  in  12, 13,  or  14  exist,  the  following  requirements 
must  be  complied  with. 

16.  If  the  answer  to  Question  12  is  “Yes,”  eubnfit  a statement  showing  for  each  of  the 
corporations  over  50  Mr  cent  of  vzhose  stock  is  owned  or  controlled  by  you,  either  directly 
or  through  closely  affiliated  interests  or  by  a nominee  or  nominees; 

(a)  The  name  and  address. 

(5)  The  total  par  value  of  the  outstanding  capital  stock  at  tho  beginning  of  tho 
taxable  year,  and  the  date  and  amount  of  each  change  therein. 

(c)  Tho  total  par  value  of  such  outstanding  capital  stock  owned  or  controlled  by  you 
at  the  beginningof  tho  taxable  year,  or  at  the  date  of  acquisition  if  acquired 
during  the  taxable  year,  and  the  date  and  amount  of  each  charge  therein. 

17.  If  the  answer  to  Question  13  is  “ Yes,”  stato — 

(a)  The  name  and  address  of  ouch  corporation  or  corporations. 

(b)  The  par  value  and  percentage  of  your  stock  held  by  each. 

18.  If  the  answer  to  Question  14  is  “ Yes,"  submit  a statement  showing — 

(a)  The  names  and  addresses  of  such  corporations. 

(5)  Tho  name  or  names  and  address  or  addresses  of  the  owning  or  controlling 
intere.st  or  interests. 

(c)  The  total  par  value  of  t^^o  outstanding  capital  stock  of  each  corporation  at  the 

beginning  of  the  taxable  year,  and  the  date  and  amount  of  each  change 
therein. 

(d)  The  total  par  value  of  the  outstanding  capita!  stock  of  each  corporation  owned 

or  controlled  by  qach  one  of  the  several  individuals  or  partnerships  at  the 
beginning  of  the  taxable  year,  and  tho  date  and  amount  of  each  change 
therein. 

LIST  OF  ATTACHED  SCHEDULES. 

19.  Attach  a list  of  schedules  accompan;-ing  this  return,  giving  for  each  a brief  title 
and  a schedule  number.  (See  opening  paragra;ffi  on  page  2 of  Instructions.) 


COMPUTATION  OF  DISTRIBUTABLE  INCOME. 


20.  Enter  in  the  table  below,  in  accordance  with  paragraphs  10  to  16,  page  1 of  Instructions,  the  income  and  credito  to  be  accounted  for  by  mcctbera'of  a partncnjh.ip  or  shareholders  of  a 
personal  aorvice  corporation  filing  a return  (or  the  calemlar  year  1918  or  for  a fiscal  period  ended  in  tho  calendar  year  1018. 


2.  CMh  dlrtdcnda. 

3.  Stock  dlvldonds. 

4.  Interest  on  Liberty 
Hrjcds,  etr.,  Issued 
sinco  ^plcmbor  24, 

5.  Othar  Lacomo. 

8.  tccome,  wux-prorUs, 
Qixtoxcoavprodu,  tAxAS 
fbtilii  or  accrued  to  n 
posso&sloii  ol  the  U.  fl. 
or  to  a forolpn  country. 

(a)  Total  iacomc  for  calcodar  or  60cal  year  computed  under  Tlevenue  Act  of  1918. 

$ 

$ 

$ 

$ 

(6)  Portion  anigDablo  to  1918  (for  rctuma  covering  fiBcaJ  year  ended  in  1918) 

(e)  Total  incomo  of  partnenihip  wboae  Cacal  year  began  in  1917,  computed  under 

BAVflnnA  ArUnMnir»-ini7 

X X X X.  X 

X X 

(if)  Portion  terignablo  to  1917  (for  partnership  whcee  fiscal  year  began  in  1917) 

1 

XX  X X X 

X r 

MEMBERS’  SHARES  OF  INCOMI^,  ETC. 

21.  Enter  in  the  table  below  the  name  and  address  of  each  member  of  the  iiartnerehip  or  shareholder  of  tho  personal  service  corporation  and  show  the  share  of  each  in  tho  income  of  tho 
partnership  or  pcrsrinal  service  corporation  (whether  received  or  not)  and  his  share  of  any  income,  war-profits,  and  o-xecas-profits  taxes  paid  by  tho  partnership  or  corporation 
to  a poaspoDon  of  the  United  .States  or  to  a foreign  country.  (See  page  1 of  instructions,  paragraphs  17  to  21  ) 


1.  Merobm  of  pAnuenblp  or  shareholders  of  personal  service  corporation. 

2,  Cosh  divfdmdj. 

3.  Stock  dJrldonds. 

i.  Interest  on  Liberty 
IlOflfJ.,  el.'.,  12311041 
slnin  September  24, 
li)l7. 

5.  Other  ineoma. 

0.  Incomo,  war-pronis, 
andexcAw-pronlstatn 
paid  or  accrue'!  to  a 
passo9slon  ol  tbe  U.  8. 
or  to  a If^rolgocouniry. 

Kama  and  addrou  of  each. 

$ 

$ 

y._ 

$ 

$ 

1 

— 

Total* 

1 

$ 

1 

The  undersigned,  Ireing  severally  duly  sworn,  each  lor  Inmsclf  deposes  and  says  that  this  return,  including  tho  accompanying  schedules  and  statonionls,  has  beoti  oxaraiiicd  by  him 
and  ij  to  the  best  ol  his  knowtedgo  anti  Irelief  a truo  and  complcto  return  made  in  good  faith  pursuant  to  tho  Rovenuo  Act  of  1918  and  the  regulations  ir-.iicl  thcrcumbT. 


Sworn  to  and  subscrlbod  before  mo  tliie. day  of - 19.. 


Pniiilent  of  corporation. 
Member  of  parlrurthip. 


Voii*ei»l  *-vn  * Tnoturer  of  corporation. 


Page  1 of  Form  1065 


Income  Tax 
Supplementary  Page  55 


Page  2 of  Return. 

SCHEDULE  A— INCOME  TO  BE  ACCOUNTED  FOR  BY  MEMBERS. 


GROSS  INCOME. 

t 

1 

1 

1 

i 

1 

2.  Leas  cost  of  goods  sold,  exclusive  of  expenses,  repairs,  and  other  items  called  (or  separately 
below  (from  Schedule  A2)..  . . . „ ... 

3.  Gross  income  from  services  or  from  operations  other  than  trading  or  manufacturing,  less  allowances  (fri 

4.  Interest  on  obligations  of  the  United  States  issued  since  September  24,  1917  (from  Table  11,  page  1 — e 

)m  Sche 
ee  page 

dule  A3) 

2 of  Instruc- 

: 

— 

— 

8.  Paftnership’e  distributive  share  of  net  income  earned  since  December  31,  1917,  by  personai  service  corporations  (whether 

1 

1 

I 

I 

I 

I 

I 

9.  Cash  divideuds  ou  stock  of  domestic  and  resident  corporations  (excluding  dividends  on  stocks  of  personai  service  corpora- 

i 

10.  Stock  dividends  on  stock  ol  domestic  and  resident  corporations  (excluding  those  ol  personal  service  corporation"  .loclared 
out  of  1918  earnings)  declared  out  of  earnings  accumulated  in — 

(a)  1918,  (6)  1917,  (c)  1916,  (d)  From  March  1,  1913. 

j 

12.  Gross  income  from  all  other" sources  (not  including  any  amount  in  respect  of  sales  of  capiQ  assetsor  miscellaneous  invest-  i 

ments — see  Item  25.  below)  (from  Schedule  A12) ..... 

1 

i 

13  TfjTAi.  nr  Itfms  1 to  12 _ . . 

$ 

DEDUCTIONS. 

14.  Ordinary  and  necessary  expenses  (except  amounts  reported  in  Item  2 above  or  called  for  separately  below,  and  not  includ- 

ing cost  or  value  of  capital  assets  or  miscellaneous  investments  sold  during  taxable  year— see  Item  25)  (from  Schedule  A14). 

15.  Compensation  of  members  (including  shareholders  of  personal  service  corporation  who  drew  salaries  therefrom  and  salaries, 

commissions,  and  other  compensation  in  whatever  form  paid)  (from  Schedule  A15) 

16.  Kepairs  (including  labor,  supplies  overhead  and  other  items  properly  chargeable  to  repairs)  (from  Schedule  A16) 

17.  Interrat  (^xcept  on  indebtedness  immrred  or  continued  to^urchase  or  carr^obligations  or  securities,  other  than  obligations 

» 

i 

1 



— 

18  Taxes  (except  Federal  income,  war-profits,  and  excess-profits  taxes,  taxes  which  are  a credit  under  Section  222  or 
Section  238,  and  taxes  assessed  against  local  benefits  of  a kind  tending  to  increase  the  value  of  the  property  assessed) 

20  E^lrrD'w^and\llXrfrdmg^oh^l^tre)'^fti Sch^^e '120^ 

91  ATnnrti7ntinn  of  wnr  facilitipR  Grom  Rrbpdnls  A91) 

— 

$ 

22.  Depletion  (if  depletion  is  claimed,  Form  A (revised)  of  Mines  and  Minerals  Section  or  Form  N of  Oil  and  Gas  Section 
should  be  obtained  irom  the  Collector,  filled  in.  and  filed) 

23  Total  OF  Items  14  TO  22  . . . ...  

94  DTFPF.REVrF  TIfTWF.FV  TtFM<;  13  A>JT>  23  . . . . - - * 

$ 

I 

91  Pro6.orln«on.»lp.nfp,pl„1,"pp,ppn,)mi.p.»11,p,^ (from  A91)  If  1 

26.  Losses  sustained  during  the  taxable  vear  from  fire,  storm,  or  other  casualty,  or  from  theft,  not  compensated  for  by  insur- 
ance or  otherwise  (from  Schedule  A26)  (extend  in  last  column  net  total  ol  Items  25  and  26) 

27.  Total  to  be  Accounted  for  by  Members  (Total  of  or  Difference  Between  Item  24  and  Item  26,  Last  Column). 

* 

SCHEDULE  B— RECONCILIATION  OF  NET  PROFIT  PER  BOOKS  WITH  INCOME  SHOWN  ON  LINE  27,  SCHEDULE  A. 


1.  Net  profit  for  year  per  books,  before  any  adjustments  are  | 
made  therein i 

!i  1 

i 

|i  6.  Income  not  to  be  accounted  for  by  members; 

2.  Unallowable  deductions;  j 

(a)  Donations,  gratuities,  and  contributions _j 

1 

: i 

Note. — Submit  a statement  for  each  of  the  obligations 
included  in  items  (a),  (6),  and  (c)  showing  (1)  the 
description,  (2)  total  (par  value)  held,  and  (3)  the 
total  amount  of  interest  derived  therefrom. 

(a)  Interest  on  obligations  of  the' United  States  issued 
before  September  24,  1917,  and  on  obligations  of 

itfl  poaopj^sinn-u 

(6)  Income,  war-j>rofits,  and  excess-profits  taxes  paid  or  1 
accrued  fo  the  United  Staten  ' 

! ! i 

$ 

(f)  Incoras,  rar-proflts,  and  ficeas-proflts  laTespald  er  accroedtoa  1 
' ' posaeesioD  of  the  United  St&les.  or  to  a f country  ...... 



frf)  5^pftcial  iTnprovftTnpnt  t-axpR  . 1 

(<)  Furniture  and  fixtures,  additione,  or  bettermenle 
treated  as  expenses  on  the  books. 

(/)  Replacements  covered  by  depreciation. 1 

i:zi 

— 

...... 

(5)  Interest  on  obligations  of  States,  Territories,  and 

political  subdivisions  thereof 

(c)  Interest  on  Farm  Loan  Bonds  issued  under  Federal 
Farm  T,nfin  Art  .. 

! 

7;ij 

! 1 

1 1 

1 

1 

(a)  Insnraocepronjionjepaldpnlholiff  ofanypartosr.offlrfr.oremploToe 
for  the  benefit  of  tbe  partnemtup  or  corporation  or  tbe  tusinvis .. 

(d)  Other  items  of  nontaxable  income  (to  be  detailed) . ! 

1 

(/A  Interest  on  Indebtedness  iocorreil  or  sonlinoed  to  purchase  or  carry 
oMigatione  or  eecnriliee  'Other  than  oblijations  of  the  United 
States  Issned  a ffer  September  24.  1917)  the  interest  upon  which 
is  wholly  exempt  from  income  tax 

1 

(/■)..  . . . 

(t)  Addition?  to  resen-es  for  bad  debts,  contingencies,  etc. 

(to  hp  flptAilfid) 

<n\ 

[ 1 

(fi 

^ i 

1 



1 

1 

1 

1 

(0 

7.  Charges  against  reserves  for  bad  debts,  contingencies,  etc.  1 
(t/>  be  dfttailwD  i\ 

1 

i 

l_....... 

1 

fnD 

(6)  7- 

fn>  Olllpr  unallotrahlp  dpclnrtions  (to  hp  dptailpd) 

8.  Amoout  oecessaj’T  to  adjust  bool  profit  or  loss  with  tbe  amoxmU  reported 
io  Juma  25  and  26.  Scbedule  A (unless  entry  belong  on  line  4).... 

1 

1 

i 

(0)  

1 

: 1 

!_ 

3.  Partnership's  ili^lribntivc  share  of  net  income  eirned  since  December  31. 

9.  Income  lo  be  accounted  for  by  members  (Item  27, 
Schedule  A)..  _ 

1 

4.  AmooDt  LPCe«3ary  l(»a.l.mst  hook  profit  or  loss  with  the  amounts  reported 
in  Items  2:>auil  26,  Schedule  A (unless  entry  belongs  on  Hue  6) 1 

10.  Total 

$ 

1 ' 

n 

1 

5.  Total 

'$ 1 

SCHEDULE  C— BALANCE  SHEETS. 

Attach  hereto  balance  sheets  as  of  the  beginning  and  end  of  the  taxable  year  (preferably  in  parallel  columns),  showing  as  nearly  as  practicable  the  details  called  for  below: 


ASSETS. 


Ca.K  (incladm;  cash  in  t^ok  and  on  hand,  eertl&cates  of  deposit.  Kc.). 
Trade  account*  and  notes  receiroble  (before  deducting  reserres  for 
lo^rses). 

Other  account*  and  note*  rMeieable  (to  be  classkied). 
Inventories; 

haw  matcriats. 

l-'iubhed  pri^ucts, 

Supplies  * 


Dumeoiic. 

Bonds— 

Fxemrt  (municipal.  State,  etc.). 


Lo 


To  mcniben-  anu  employees. 
Toothers. 


ASSETS  (Continued). 
Deferred  charfe*  to  futuro*operati(ma« 
FUed  a*a«Ui 


Tools  sod  minor  equipment. 

Office  furniture. 

Other  (state  character). 

Total. 

Less'resorve  for  depreciation. 

N£T  Value. 

Patents,  good  will,  end  other  Intangible  a 
Paid  for  i o cash  or  other  taueible  property 


Paid  for  Id  stock  (other 
partnership. 

Created  by  stock  dividend  or  othenrbe. 
Di*counti 
On  bonds. 


siock.divKknds)  or  in  shares  of  t 


LIABILITIES. 

Note*  payable: 

To  members. 

To  others  (Including  bonk  loans) 

AccounU  payable: 

Trade. 

Other. 

Accrued  expense*  and  raaerre*,  the  Charges  creating  ahich  ar* 
allowable  deductions  Irom  income  (to  be  deUiled). 

Raeerea  for  loaaee  on  note*  and  accounts  roceivablo. 


Resereeo  for  contingencies,  etc.,  the  cbcrges  Creating  which  are  not 
allowable  deducirans  from  iocoine  (to  be  detailed). 

Capital  stock  outstanding  (to  be  classified)  or  all  partoars'  cai>itaJ 
and  current  accounts  (to  m detailed). 

Surplus  and  undivided  profits* 

Total. 


SCHEDULE  D— ANALYSIS  OF  SURPLUS  OR  PARTNERSHIP  NET  WORTH  ACCOUNTS. 

Attach  hereto  an  analysis  of  the  surjiius  or  partnerehip  net  worth  accounts,  showing  the  details  of  all  changes  therein  during  the  taxable  year,  as  nearly 
following  form:  ■' 


I practicable  fa  the 


J.  .'Surplus  or  partnership  net  worth  at  begicnine  of  year  per  books. 
Add;  2.  Total  net  profit  per  books  and  per  Schedule’li  (Item  1). 

3 Other  credils  (to  be  detailed). 

4,  Total  of  Items  1,  2.  and  3 


Deduct:  5.  Withdrawal"  or  dividends  (state  date  dii'idends  payable,  amount  ol  each, 
, and  whether  in  cash  or  in  stock). 

6.  Other  debits  (to  be  detailed). 

7.  Surplus  or  partnerahip  net  worth  at  end  ol  year  per  books.  »— tr. 


Income  Tax 
Supplementary  Page  56 


Page  2 of  Form  106,S 


Page  1 of  Instructions. 

GENERAL  INSTRUCTIONS. 


PARTNERSHIPS  AND  PERSONAL  SERVICE  CORPORATIONS  REQUIRED  TO 
MAKE  A RETORN  OF  INCOME. 

1.  PartTUTships  — Every  domestic  partnership  and  every  foreign  partnership  doing 
business  in  the  United  States  must  make  a return  of  income  on  this  form  regardless  of  the 
amount  of  its  gross  or  net  income.  (See  P.cgulations  45,  Articles  321,  1503,  and  1505  td 
1507  and  1509.) 

2.  Personal  service  corporations. — Every  personal  service  corporation,  as  defined  below, 
must  make  a return  of  income  on  this  form  regardless  of  the  amount  of  its  gross  or  net  income. 
(See  Article  C24  of  Regulations  45. ) 

3.  Personal  service  corporation  de  fined. — The  term  “ phtsonal  service  corporation  ” means 
a corporation,  not  expressly  exclude,  the  income  of  tv^ch  is  derived  from  a profession  or 
business  (a)  which  consists  principally  of  rendering,  personal  service,  (5)  the  earnings  4)f 
which  are  to  be  ascribed  primarily  to  the  actimties  of  the  principal  owners  or  stockholders 
(who  are  referred  to  in  tnis  return  as  “members"),  and  (c)  in  which  the  employment  of 
capital  is  not  necessary  or  is  only  incidental.  No  definite  and  conclusive  tests  can  be 
prescribed  by  which  it  can  be  finally  determined  in  advance  of  an  examination  of  the 
corporation 's  return  whether  or  not  it  is  a personal  service  corporation.  The  general  prin- 
ciples under  wliich  such  determination  will  be  made  are  laid  down  in  Articles  1523  to  1532 
of  Regulations  45. 

4.  Corporations  excluded.— Tito  following  classes  of  corporations  are  expressly  excluded 
from  classification  as  personal  service  corporations:  (a)  foreign  corporations;  (5)  coiporations 
50  per  cent  or  more  of  whose  gross  income  consists  of  gains,  profits,  or  income  derived  from 
trading  as  a principal;  and  (c)  corporations  50  per  cent  or  more  of  whose  gross  income  con- 
sists of  gains,  profits,  commissions,  or  other  income  derived  from  a Government  contract  or 
contracts  made  ^tween  April  6, 1917,  and  November  11,  1918,  inclusive. 

5.  .Vore  than  one  business.— K corporation  engaged  in  tv/o  or  more  professions  or  busi- 
nesses which  are  more  or  less  related,  one  of  which  does  not  consist  of  tendering  personal 
service,  is  not  a personal  ssrvice  corporation  unless  the  nonpereonal  service  mement  is 
negligible  or  merely  incidental  and  no  appreciable  part  of  its  earnings  are  to  be  ascribed  to 
such  sources.  (See  also  Section  303  of  the  Statute.) 

6.  Activities  of  stockholders. — In  determining  whether  a corporation  is  a personal  service 
corporation,  no  weight  can  be  given  to  the  fact  that  it  renders  personal  services  unless  (o) 
the  principal  owners  or  stockholders  are  regularly  engaged  in  the  active  conduct  of  its 
aSairs  and  are  engaged  in  such  a manner  that  the  earnings  are  to  be  escribed  primarily  to 
their  activities,  and  (6)  its  affairs  are  conducted  principally  by  such  owners  oretockhoftcis. 
If  employees  contribute  substantially  to  the  services  rendered  by  a corponilibn(  it  is  'aata 
personal  service  corporation  unless  in  every  case  in  which  services  ate  so  rendered  the 
value  of  and  the  compensation  charged  for  such  services  are  to  be  attributed  primarily  to 
the  experience  or  skill  of  the  princijial  owners  or  stockholders. 

7.  Slock  interest  of  active  members. — No  corporation  or  its  owners  or  stockholders  shall 
make  a return  in  the  first  instance  on  the  basis  of  its  being  a personal  service  corporation 
unless  at  least  80  per  cent  of  its  stock  is  held  by  those  regularly  engaged  in  the  active  conduct 
of  its  affairs. 

8.  Capital. — In  determining  whether  a corporation  is  a personal  service  corporation, 
no  weight  can  be  given  to  the  fact  that  the  invested  capital  of  the  corporation  under  Title 
III  of  the  statute  or  the  actual  investment  of  the  principal  owners  or  stockholders  is  com- 
paratively small.  If  the  use  of  capital  is  necessary  or  more  than  incidental,  capital  is  a 
material  income-producing  factor  and  the  corporation  is  not  a personal  service  corporation. 

AFFILIATION  OF  PERSONAL  SERVICE  CORPORATIONS 

9.  In  order  to  come  under  the  provisions  of  Section  218  (<)  of  the  Law,  and  the  Regula- 
tions relating  thereto,  a personal  service  corporation  must  normally  be  owned  by  individuals. 
Ordinarily  afifilialion  ot  a so-called  personal  service  corporation  with  another  corporation 
sets  up  a presumption  that  such  personal  service  corporation  is  merely  a department  or  unit 
of  another  business  organization.  The  income  of  such  a.corporation  shall  be  included  with 
the  income  of  the  corporation  or  corporations  owning  its  stock.  A personal  service  corpora- 
tion return  will  not  be  accepted  if  (a)  the  so-called  personal  service  corporation  is  in  effect 
merely  the  selling  agency  of  another  corporation  or  other  corporations,  or  (6)  the  so-called 
personal  service  corporation  is  used  for  the  purpose  of  performing  any  part  of  the  service 
incident  to  the  busmess  of  an  affiliated  coloration  principally  engaged  in  trade,  or  in 
contracting  or  manufacturing. 

INSTRUCTIONS  FOR  FILLING  IN  TABLE;  20,  PAGE  1. 

10.  Returns  of  partnerships  and  personal  service  corporations  for  calendar  year  1918. — 
On  line  (a)  enter  In  column  .2  the  amount  of  Item  9,  Schedule  A;  in  column  3,  the  amount 
of  Item  10(a),  Schedule  A,  in  column  4,  the  amount  of  Item  4.  Schedule  A;  in  column  5, 
the  amount  of  Item  27,  Schedule  A,  less  the  total  of  Items  4,  9,  and  10  of  that  Schedule, 
:n  column  6,  the  amount  of  2 (c).  Schedule  B. 

11.  Returns  of  partnerships  and  personal  service  corporations  for  fiscal  period  beginning  in 
J9/7.— On  line  (a)  enter  in  column  2 the  amount  of  Item  9,  Schedule  A;  in  column  3,  the 
amount  of  Item  10,  Schedule  A; in  column  4,  the  amount  of  Item  4,  Schedule  A;  in  column 
6,  the  amount  of  Item  27,  Schedule  A,  less  the  total  of  Items  4,  9,  and  10  of  that  Schedule; 
in  column  6,  the  amount  of  2 (c).  Schedule  B. 

12.  On  line  (5)  enter  in  columns  2,  4,  5,  and  6 as  many  twelfths  of  the  amounts  entered 
in  the  same  columns  on  line  (a)  as  the  number  of  months  of  the  partnership’s  or  corpora- 
tion's fiscal  year  that  fell  in  the  calendar  year  1918.  On  line  (6)  column  3,  enter  the  same 
number  of  twelfths  of  Items  10  (o),  Schecfule  A.- 

Note. — Lines  (c)  and  (d)  should  be  used  only  by  partnerships  having  fiscal  periods 
beginning  in  1917. 

13.  On  line  (c)  of  Table  20  enter  in  columns  2 and  3 the  toUl  cash  dividends  and  the 
foul  stock  dividends,  respectively,  included  in  Schedule  H,  columns  2 to  6,  inclusive,  of 
the  partnership  return  for  the  fiscal  period  ended  in  1918,  filed  under  the  Revenue  Acts 
of  1916-1917;  in  column  4,  the  amount  of  Item  4,  Schedule  A of  this  return;  in  column  6, 
the  amount  of  Item  K of  the  partnership  return  filed  under  the  Revenue  Acts  of  1916-1917, 
less  the  amounU  entered  in  Schedule  E,  column  "T  and  Schedule  H,  columns  2 to  6,  inclu- 
sive, and  plus  the  amount  entered  in  Schedule  E,  column  6,  of  that  return. 

14.  Online  (d)  of  Table  20,  enter  in  columns  2 and  3 as  many  twelfths  of  the  cash  divi- 
dends and  stock  dividends,  respectively,  entered  in  Schedule  H,  column  6,  of  the  partner- 
ship return  filed  under  the  Revenue  Acts  of  1916-1917,  as  the  number  of  months  of  the 
partnership’s  fiscal  year  that  fell  in  the  calendar  year  1917.  On  line  (d)  enter  in  columns 
4 and  6 the  same  number  of  twelfths  of  the  amounts  entered  in  the  same  columns  on  line  (c). 

15.  If  the  partnership  having  a fiscal  year  ended  in  1918  made  no  return  under  the 
Revenue  Acts  of  1916-1917,  a return  prepared  in  accordance  with  the  provisions  of  llioso 
Acta  must  be  prepared  and  filed  with  this  return  (see  par.  ^ below).  The  principal  dif- 
ferences between  the  provisions  of  the  Revenue  Acta  of  1916-1917  and  that  of  1918  are: 

Amortization  of  war  facilities  and  obsolescense  of  plant  and  equipment  are  deductible 
under  the  1918  Act  but  not  under  the  l916-1917  Acts. 

Income,  war  profits,  and  excess-profits  taxes  paid  or  accrued  to  foreign  countries  or 
pasMasioos  of  the  United  States  are  deductible  from  gross  income  under  the  1916-1917 
Acts  but  not  under  the  1918  Act  (under  which  they  are  treated  as  a credit  against  taxes). 

All  interest  on  indebtedness  incurred  or  continued  to  purchase  or  carry  obligations 
of  the  United  Stales  issued  since  September  24,  1917,  is  dMuctible  under  the  Rovenuo 
Act  of  1918,  while  under  the  Revenue  Acta  of  1916-1917  such  interest  is  treated  as  a deduc- 
tion from  the  interest  received  on  such  obligations  (see  page  2 of  Instructions  under 
Schedule  A4). 

Under  the  1916-1917  Acts,  cash  dividends  accumulated  in  1913  to  1917  are  taxable 
St  the  rates  applicable  to  the  year  in  which  the  dividends  were  accumulated,  while  under 
the  1918  Act  all  such  dividends  are  taxable  at  the  rates  lor  the  taxable  year  in  which  received. 

16.  If  the  fiscal  period  of  the  partnership  included  fractions  of  months,  add  to  the 
number  of  twelfths  taken  under  paragraphs  IZ'and  14,  above,  as  many  thirtieths  of  one- 
twelfth  as  there  are  days  in  such  fractions  of  mouths. 

INSTRUCTIONS  FOR  FILLING  IN  TABLE  21,  PAGE  I. 

17.  This  table  Is  to  be  use<l  for  showing  the  share  of  each  partner  or  member  in  the 
income  of  the  partnership  or  personal  service  corporation,  whether  received  or  not. 

18.  Returns  of  partnerships  and  ffersonal  service  corporations  for  calendar  year  1918. — 
Enter  separately  the  share  of  each  member  In  each  of  the  following; 

(a)  Income,  etc.,  computed  under  the  Revenue  Act  of  1918  (lino  (a).  Table  20  of  this 
return). 

(5)  .Stock  dividends  accumulated  in  llfl7  (Item  10  (6),  Schedule  A of  this  return). 

(e)  Btock  dividends  accumulated  in  19l6  (Item  10  (c).  Schedule  A of  this  return). 


19.  Return  of  partnerships  fetr  fiscal  period  beginning  in  i9tTK — Enter  separately  the 
share  ot  each  partner  in  each  of  the  following: 

(a)  Income,  etc.,  computed  under  the  Revenue  Act  of  1918  (line  (&),  Table  20  of  this 

return). 

(b)  Income  computed  under  tho  Revenue  Acts  of  1916-1917  (line  (d),  Table  20),  plus 

as  many  twelfths  of  stock  dividends  accumulated  in  1917  (Item  10  (6),  Schedule 
A ol  tins  return)  as  the  number  of  months  of  the  fiscal  year  that  fell  in  1918. 

(c)  Income  computed  under  the  Revenue  Act  of  1916  (Item  10  (c), .Schedule  A of  this 

return),  plus  as  many  twelfths  of  the  cash  dividends  accumulated  in  1916  (in- 
cluded in  column  6 of  Schedule  H of  the  1917  return  form),  as  the  number  ol 
months  of  the  fiscal  year  that  fell  in  1917. 

(d)  Income  computed  under  the  Revenue  Act  of  1913  (Item  10  (</),  Schedule  A of  this 

return),  plus  as  many  twelfths  of  the  cash  dividends  accumulated  in  the  years 
1913,  1914,  and  1915  (included  in  columns  2,  3,  and  4 ol  Schedule  H ol  the  1917 
return  form),  as  the  number  of  months  of  the  fiscal  year  that  fell  in  1917. 

20.  Returns  of  personal  service  corporations  for  the  fiscal  period  beginning  in  7917.— Enter 
separately  the  share  of  each  member  in  each  of  the  following: 

(а)  Income,  etc.,  computed  under  the  Revenue  Act  of  1918  (line  (5),  ’Table  20  of  this 

return). 

(б)  As  many  twelfths  of  the  stock  dividends  accumulated  in  1917  (Item  10  (f ),  Schedule 

A),  as  the  number  of  months  of  the  fiscal  year  that  fell  in  1918. 

(c)  As  many  twelfths  of  the  stock  dividepds  accumulated  in  1916  (Item  10  (c).  Schedule 

A),  as  the  number  of  months  of  the  fiscal  year  that  fell  in  1918. 

(d)  As  many  twelfths  of  the  stock  dividends  accumulated  in  1913,  1914,  and  1915  (Item 

10  (</),  Schedule  A),  as  the  number  of  months  of  the  fiscal  year  that  fell  in  1918. 

21.  -If  the  space  provided  in  Table  21  is  insufficient  in  which  to  make  the  necessary 
entries,  attach  a supplemental  table  in  the  same  form  as  Table  21. 

CREDIT  FOR  INCOME,  WAR-PROFITS,  AND  EXCESS  PROFITS  TAXES 
PAID  OR  ACCRUED  TO  A FOREIGN  COUNTRY  OR  TO  A 
POSSESSION  OF  THE  UNITED  STATES. 

22.  If  a credit  is  claimed  in  column  6 of  Tables  20  and  21,  a copy  of  Form  1118,  com- 
pletely filled  out  and  sworn  to  or  affirmed,  must  be  submitted  with  this  reaim.  If  credit 
IS  sought  for  taxes  already  paid,  the  form  must  have  attached  to  it  the  receipt  for  each  such 
tax  payment.  If  credit  is  sought  for  taxes  accrued,  the  form  must  have  attached  to  it  the 
return  on  which  each  such  accrued  tax  was  based.  (See  Article  611  of  Regulations  45). 

23.  When  a credit  is  claimed  for  accrued  taxes,  the  Commissioner  may,  as  a condition 
precedent  to  the  allowance  of  this  credit,  require  the  taxpayer  to  give  a bond  (Form  1119), 
with  sureties  satisfactory  to  and  to  be  approved  by  him,  in  such  penal  sum  as  he  may 
require,  conditioned  for  the  payment  by  the  taxpayer  of  any  amount  of  taxes  found  due 
if  the  taxes  when  paid  differ  from  the  amount  claimed  in  respect  thereof. 

PERIOD  COVERED. 

24.  'The  taxable  year  is  the  calendar  year  1918  or  (if  the  partnership  or  coiporation 
makes  its  return  for  a fiscal  period  of  12  months  ending  on  the  last  day  of  Some  month  other 
than  December)  the  fiscal  period  ended  in  the  calendar  year  1918. 

25.  A partnership  or  corporation  desiring  to  change  tlie  period  for  whifh  its  return  i- 
made  from  a calendar  year  to  a fiscal  year  or  vice  versa,  or  from  one  fiscal  year  to  aiiotUer, 
mustmve  written  notice  to  the  Collector  of  such  change  and  the  reasons  therefor  at  least  30 
days  before  the  due  dale  of  its  return  on  the  basis  of  its  existing  taxable  year  and  at  lea:i 
30  days  before  the  due  date  of  the  return  on  the  basis  of  the  proposed  taxable  year.  (See 
Articles  26,  322-324,  411,  and  431  of  Regulations  45,  and  Section  220  of  the  Revenue  A<  t 
of  1918.) 

26.  A new  form  will  be  issued  for  partnerships  and  corporations  filing  returns  for  fiscal 
years  ending  in  1919 

TAX  FOR  FISCAL  YEAR  ENDED  IN  1918. 

27.  If  the  partnership  or  personal  service  corporation  has  paid  income  or  excess-profits 
tax  for  a fiscal  year  ended  in  1918,  it  should  file  a claim  on  Form  46  (wffich  can  be  obtained 
from  the  Collector)  for  the  refund  of  as  many  twelfths  of  the  tax  paia  as  the  number  ui 
months  of  the  fiscal  year  that  fell  within  the  calendar  year  1918. 

28.  If  a return  has  been  filed  showing  the  tax  due  under  the  revenue  acts  of  1910-1917 
for  a fiscal  vear  ended  in  1918  and  the  tax  has  not  been  paid,  a claim  should  be  filed  on 
Form  47  (wluch  can  be  obtained  from  the  Collector)  for  the  abatement  of  as  many  twelfth  i 
of  the  tax  due,  as  shown  by  that  return,  as  the  number  of  months  of  the  fiscal  year  that  fell 
within  the  calendar  year  1918. 

29.  If  no  return  has  been  filed  by  a partnership  or  personal  service  corporation  having 
a fiscal  year  ended. in  1918,  there  shoula  be  filed  (in  addition  to  a return  on  this  form)  a 
return  on  Form  1065  (with  Form  1 102  if  required ) or  Form  1031  (with  Form  1 103  if  required ) 
as  issued  for  1917,  and  the  tax  due  under  the  revenue  acts  of  1910-1917  should  bo  ascer- 
tained by  taking  as  many  twelfths  of  the  tax  computed  according  to  the  instructions  on  tlie 
forms  as  the  number  of  months  of  the  fiscal  year  that  fell  in  the  calendar  year  1917 

30.  See  also  paragraph  16. 

TIME  AND  PLACE  FOR  FILING. 

31.  Returns  for  the  calendar  year  1918  and  for  fiscal  years  ended  in  1918  must  be  sent 
to  the  Collector  of  Internal  Revenue  for  the  district  in  which  the  partnership’s  or  corpora- 
tion's principal  place  of  business  is  located  so  as  to  reach  the  Collector's  office  on  or  before 
June  15^  191^  an  extension  of  time  having  been  granted.  (See  Articles  441  to  448. 
Regulations  45.) 

SIGNATURES  AND  VERIFICATION. 

32.  Returns  of  partnerships  must  be  sworn  to  bjr  a member  of  the  partnership.  Corpo- 
ration returns  must  be  sworn  to  by  the  president,  vice  president,  or  other  principal  officer 
and  by  tlie  treasurer  or  assistant  treasurer  of  the  corporation  If  receivers,  trustees  in 
bankruptcy,  or  assignees  are  operating  the  property  or  business  of  the  partnership  or  corpo- 
ration, such  receivers,  trustees,  or  assignees  shall  execute  the  return  under  oath. 

PENALTY  FOR  FAILURE  TO  FILE  RETURN  ON  TIME. 

33.  A penalty  of  not  more  than  $1,000  attaches  for  failure  to  file  a return  within  the 
time  required  by  law.  If  the  failure  is  willful  or  an  attempt  is  made  to  defeat  or  evade 
the  tax,  the  penalty  is  $10,000  or  imprisonment  for  not  more  than  one  year,  or  both,  together 
with  costs  of  prosecution. 

LOSSES  ON  INVENTORIES  AND  REBATES  ON  SALES. 

34.  At  the  time  of  filing  the  individual  income  tax  returns  of  members  of  portnereliips 
tot  the  taxable  year  1918,  a claim  for  abatement  may  be  filed,  based  on  the  fact  that  a sun- 
stantial  loss  has  been  sustained  by  tho  partnership  (wheihcr  or  not  actually  rcaliz-d  by 
sale  or  other  disposition)  resulting  from  any  material  reduction  (not  duo  to  temporary 
fluctuations)  in  the  value  of  the  inventory  of  the  partnership  os  at  the  end  of  such  taxable 
year,  or  from  the  actual  payment  by  tho  norinership  after  the  close  of  such  taxable  year^f 
rebates  in  pursuance  of  contracts  entered  into  by  the  partnershin  during  such  year  upon 
sales  mode  by  it  during  such  year.  Tho  amount  that  may  be  claimed  by  an  individuul 
member  of  the  firm  is  tJiat  (iroportioa  of  the  total  loss  susuiiucd  by  tho  partnership  winch 
his  distributive  interest  in  its  profits  bears  to  its  total  profits.  In  such  case  iiaymcnt  of  tho 
amountol  the  tax  covered  by  such  claim  shall  not  bo  required  until  the  claim  is  decided, 
but  tlie  tnxjiayer  shall  accompany  his  claim  with  a honu  in  double  the  amount  of  tho  tax 
covered  by  the  claim  with  sureties  satisfactory  to  tho  Commissioner,  conditioned  for  tho 
payment  of  any  part  of  such  wx  found  to  bo  duo,  with  interest  at  the  rate  of  1 per  cent  a 
month. 

36.  If  no  such  claim  is  filed  with  the  return,  but  it  is  shown  to  tlio  satisfaction  of  tho 
Commissioner  that  during  the  taxable  year  1919  the  parlnerahip  has  siisUiiied  a siihstaiilial 
loes  ol  tho  character  ahoyo  desi'rlh'eir.  then  the  distrihutivo  shares  of  the  individual  niem- 
hers  of  Uio  partnership  in  such  loss  shall  ho  deducted  from  their  respective  distrihutiyn 
sliares  In  the  net  income  of  tbo  partnership  for  tho  taxahle  year  1'9I8  snd  tho  taxes  luifKised 
upon  them  for  such  yc-ar  hy.Titlo  If  of  the  llevenuo  Act  of  1918  shall  he  redetermiiieil 
accordingly.  (Seo  Section  214  (o)  (12)  and  Articles  201  to  208.)  , 


Page  3 of  Form  1065 


(</)  Stock  dividends  ftccumulatcd  in  1913,  19H,  tad  1915  (Item  10  (</),  Schedule  A of 
thia  reUirti). 

Income  Tax 
Supplementary  Page  57 


Page  2 of  Instructions. 


SCHEDULES  SUPPORTING  SCHEDULE  A. 

The  schedules  called  for  below  should  be  prepared  and  firmly  stapled  to  this  return..  Designate  each  schedule  with  the  number  of  the  item  in 
Schedule  A which  it  explains.  Make  schedules  on  paper  of  uniform  size  so  far  as  practicable.  Attach  a list  of  schedules  accompanying  this  return, 
giving  for  each  a brief  title  and  schedule  number. 


SCHEDULE  A2i  COST  OF  GOODS  SOLD.  EXCLUSIVE  OF  EXPENSES, 
REPAIRS.  AND  OTHER  ITEMS  CALLED  FOR  SEPARATELY. 

In  support  of  Item  2,  Schedule  A,  partnerships  or  corporations  engaged  in  manu- 
facturing or  trading  operations  should  submit  an  an^ysis,.  ia  reasonable  detail,  of  the  coet 
of  goods  sold.  This  statement  should  ordinarily  include  the  following  items  but  should 
not  include  any  expense  items  called  for  separately  in  Schedule  A. 

1.  Inventories  at  beginning  of  period  (to  be  reconciled  with  balance  sheet). 

2.  Purchases  during  period. 

3.  Labor  and  wages  ordinarily  charged  to  manufacturing  cost  on  the  i>artner8hip’e 

or  corporation’s  books,  showing  the  principal  items  separately. 

4.  Other  expenses  ordinarily  charged  to  manufacturing'  coet  on  the  partnership’s 

or  corporation’^  books.  (State  separately  large  or  unusual  items.) 

6.  ToTiLk 

Deduct; 

6.  Inventories  at  dose  of  period  (to  be  reconciled  with  balance  sheet) 

7.  Cost  of  goods  sold  (Item  6 lees  Item.6). 

Note. — Inventories  should  be  valued  at  (a)  cost  or  (6)  cost  or  market,  whichever 
<s  lower.  A taxpayer  may,  regardless  of  his  past  practice,  iwlopt  the  basis  of  cost  or  mar-, 
ket,  whichever  is  the  lower,  for  his  1918  inventory,  provided  a disclosure  of  the  fact  and 
that  it  represents  a change  is  made  in  the  ret^.  Thrirhever  basis  is  adopted  must  be 
applied  to  each  item  of  the  inventory.  Inventories  should  be  recorded  in  a legible 
manner,  properly  computed  and  summarized,  and  should  be  preserved' ss  a part  of  the 
accounting  recoids  of  the  taxpayer.  (See  Artides'lSSl  to  1585  of  Regulations  45.) 

SCHEDULE  A3i  GROSS  INCOME  FROM  SERVICES  AND  OPERATIONS 
OTHER  THAN  TRADING  OR  MANUFACTURING,  LESS  ALLOWANCES. 

Submit  a schedule  showing  the  nature  and  amount  of  the  principal  items  included 
in  Item  3,  Schedule  A. 

SCHEDULE  A4!  INTEREST  ON  OBUGA-nONS  OF  UNITED  STATES  ISSUED 
SINCE  SEPTEMBER  24,  1917. 

Enter  in  Table  11,  page  1,  the  maximum  amount  of  Liberty  Bonds  and  other  obliga- 
tions of  the  United  ^tates  issued  since  September  24,  1917  (par  value),  held  at  any  one 
time,  from  which  ihterest  was  derived  during  the  taxable  period,  tpgether  with  the 
amount  of  such  interest. 

Information  regarding  the  amount  of  partnership’s  or  corporation’s  holdings  of 
obligations  of  the  United  States  issued  since  September  24,  1917,  and  the  interest 
received  thereirom  must  be  fumUhed  in  sufficient  detail  to  enable  the  membera  of  the 
partnership  or  personal  service  corporation  to  fill  in  Table  13,  Form  1040,  and  the  schedules 
called  for  in  Instnigtion  K (5)  on  Form  1040. 

A partnership  making  a return  for  a fiscal  year  ended  in  1918  should  submit  a state- 
incntsbowing  (a)  the  interest,  ii  any,  paid  on  indebtedness  incurred  or  continued  to  pur- 
chase or  carry  obligations  of  the  Unit^  States  issued  after  September  24.  1917.  and  (6) 
each  partner’s  share  of  such  interest  paid. 

Each  partner  may  deduct  from  his  taxable!  Liberty  Bond  utteteat  assignable  to  1917 
(computed  as  directed  in  Instruction  K (5),  Form  1040)  such  proportion  of  the  interest 
paid  on  indebtedness  incurred  or  continued  to  purchase  or  carry  the  bonds  (as  reported 
in  response  to  (5)  of  the  foregoing  paramph'as  bis  taxable  libeity  Bond  interest  assignable 
to  1917  is  of  the  total  interest  on  Liberty  Bonds,  etc.,  issued  since  September  24,  1917, 
which  he  received  througdt  the  partnership.  The  balance  after  this  deduction  is  made' 
should  be  entered  on  FomtllMO  as  Item  14  (6),  column  6. 

SCHEDULE  A5>  INTEREST  FROM  OTHER  SOURCES  (not  including  interest 
referred  to  in  Schedule  B,  Item  6). 

Submit  a schedule  showing  the  source,  nature,  and  amount  of  the  principal  items 
included  herein,  the  minor  items  being  grouped  in  one  figure.  The  total -of  the  schedule 
should  be  entered  ae  Item  6,  Schedule  A. 

For  interest  on  foreign  bonds  show  (a)  name  of  country;  (6)  kind  of  obligations 
(whether  national.  State,  municipal,  pc  corporate  obligations);  (c)  amount  of  principal ; 
and  (d)  amount  of  interest. 

SCHEDULE  A9:  CASH  DIVIDENDS  ON  STOCK  OF  DOMESTIC  AND  RESIDENT 
iRPORATIONS. 

Submit  a schedule  showing  (a)  name  of  corporation;  (6)  State  in  which  organized: 
(c)  total  par  value  of  stock  held;  and  (d)  amount  of  dividends. 

SCHEDULE  All:  DIVIDENDS  ON  STOCK  OF  FOREIGN  CORPORATIONS. 

Submit  a schedule  showing  (a)  name  of  corporation;  (i)  country  in  which  organized; 
(e)  total  par  value  of  stock  held;  and  (d)  amount  of  dividends. 

SCHEDULE  A12:  GROSS  INCOME  FROM  ALL  OTHER  SOURCES  (not  in- 
cluding any  amount  in  respect  of  sales  of  capital  asseta  or  miscellaneous 
investments). 

Submit  a schedule  showing  the  source,  nature,  and  amount  of  the  principal  items 
included  herein,  the  minor  items  being  grouped  in  one  figure.  The  total  of  the  schedule 
should  be  entered  as  Item  12,  Schedule  A. 

SCHEDULE  AI4;  ORDINARY  AND  NECESSARY  EXPENSES  (except  amounts 
called  for  separately  in  Schedulk'A  and  not  including  cost  or  value  of 
capital  assets  or  miscellaneous  investments  sold  during  taxable  year). 

Submit  a statement  showing  character  and  amount  of  the  principal  items  iiided 
in  Item  14,  Schedule  A. 


SCHEDULE  AIS:  COMPENSATION  OF  MEMBERS  OF  THE  PARTNERSHIP  OR 
CORPORATION. 

Submit  a schedule  showing  for  each  member  of  the  partnership  or  for  each  eharo- 
holder  who  draws  a salary  from  the  corporation  or  is  engaged  in  its  business,  (1)  oamo, 
(2)  duties,  "(3)  time  devoted  to  such  duties,  and  (4)  total  aimua!  compensation  for  each  of 
the  years  1916,  1917,  and  1918'.  A personal  service  corporation  should  also  explain  fvUy 
the  manner  and  degree  in  which  the  earnings  of  the  corporation  .are  dependent  on  the 
activities  of  the  active  shareholders  or  “members.” 

SCHEDULE  A16:  REPAIRS  (including  labor,  supplies,  • overhead,  and  other 
items  properly  chargeable  to  repairs). 

Submit  a schedule  showing  the  nature  and  amount  of  the  principal  items  included 
in  Item  16,  Schedule  A. 

Incidental  repairs,  which  do  not  add  to  the  value  or  appreciably  prolong  the  life  of 
property,  are  deductible  as  expenses.  Expenditures  for  new  buildings  or  for  permanent 
improvements  or  betterments  which  increase  the  value  of  the  property  are  chargeable 
to  capital  account.  Expenditures  for  r^toring  or  replacing  property  ate  not  deductible 
under  this  or  any  other  item  of  the  return.  Such  expenditures  are  chargeable  to  capital 
account  or  to  depreciation  reserves,  depending  .on  the  treatment  of  depreciation  on  the 
books  of  the  taxpayer. 

SCHEDULE  A2d:  EXHAUSTION.  WEAR  AND  TEAR  (including  obsolsscenes). 
Submit  a columnar  schedule  containing,  substantially  the  following  information; 

1.  A classification  of  depreciable  assets  subdivided  on  the  bases  of  (o)  character,  (5) 
term  of  useful  life. 

2.  The  fair  market  value  of  such  assets  March  1, 1913,  if  acquired  before  that  date. 

3.  The  cost  of  such  assets  if  acquired  after  February  28,  1913. 

4.  The  estimated  life  or  term  of  reasonable  usefulness  of  such  assets  from  date  acquired 
or  from  March  1,  1913,  as  the  case  requires.  Give  reasons  for  your  conclusions. 

5.  For  each  class  of  assets  state — 

(а)  The  total  amount  of  depreciation  from  March  1,  1913,  to  the  beginning 

of  the  ta.xable  year. 

(б)  The  total  amount  of  depreciation  (exhaustion,  wear  and  tofW,  including 

obsolescence)  claimed  for  the  taxable  year. 

6.  A reconciliation  of  all  figures  shown  in  this -schedule  with  corresponding  figures 
reflected  in  the  balance  sheets. 

SCHEDULE  A21:  AMORTIZATION  OF  WAR  FACILITIES. 

If  amortization  of  war  facilities  is  claimed  the  taxpayer  is  required  to  submit  with  this 
return  the  information  and  schedules  called  ior  in  Articles  181  to  188  of  Regulations  45. 

SCHEDULES  A25  and  A26:  PROFIT  OR  LOSS  ON  SALES  OF  CAPITAL  ASSETS 
and  miccellansoua  investments,  and  losses  sustained  during  the  taxable 
year  from  fire,  storm,  or  other  casualty,  or  from  theft,  not  compensated  for 
by  insurance  or  otherwise. 

Submit  a columnar  schedule  setting  forth  for  each  sale  of  capital  asseta  or  of  miscellane- 
ous investments  and  for  each  loss  during  the  taxable  year  the  information  called  for  below: 

1.  Description  of  property  sold  or  of  property  in  respect  of  which  a loss  is  claimed. 

2.  Date  acquired. 

3.  Fair  market  price  or  value  on  March  1,  1913,  if  acquired  before  that  date,  or  cost 
if  acquired  after  February  28,  1913. 

4.  Coat  of  improvemcat?  ay,  since  February  28, 1913,  or  since  date  of  acquisition, 

if  acquired  after  February  2-  3. 

5.  Total  of  Items  3 and  > 

Lees— 

6.  Depreciation  cr  d- , ;on  of  property  subject  thereto— 

(a)  Per  book. 

(4).  Accrued  jot  on  books. 

7.  Salvage  value.  /,  of  property  on  which  a loss  is  claimed. 

8.  Amount,  of  ir'  .e  or  other  recovery  on  property,  if  any. 

9.  Proceeds  cash  value  of  property  received  in  exchange  (for  traosactfons 

falling  in  Item  23,  :;-aedule  A)  (see  Note). 

10.  Total  of  Items  6 to  9,  inclusive. 

11.  Profit  or  loss. 

12.  Cause  of  loss  (for  losses  falling  in  Item  26,  Schedule  A). 

Notc. — Submit  evidence  substantiating  the  basis  used  by  you  in  arriving  at  the  cash 
value  of  property  received  in  exchange  for  other  property. 

WORKING  PAPERS. 

Every  partnership  or  corporation  should  preserve,  available  for  inspection  by  a revenue 
officer,  working-papers  showing — 

1.  Tho  balance  in  each  account  on  the  partnership’s  or  corporation's  books  that 

was  used  in  preparing  Schedule  A. 

2.  The  amount  deducted  from  each  such  balance  on  account  of  each  class  of  non- 

taxable  income,  unallowable  deductions,  and  other  adjustments  indicated 
in  Schedule  B,  with  a roforence  to  the  number  .of  the  item  in  Schedule  B 
in  which  each  amount  so  deducted  was  included. 

3.  The  remainder  of  each  such  balance,  analyzed  to  show  tno  amount  included 

in  each  item  of  Schcdulo.A,  with  a reference  to  the  number  of  tho  item  in 
Schedule  A in  which  each  such  amount  was  included. 

CAPITAL  EMPLOYED  IN  BUSINESS. 

If  tho  balance  sheet  (Schedule  C)  of  a personal  service  corporation  indicates  that  a 
substantial  amount  of  capital  (invostod  or  borrowed)  is  employed  in  the  buamom,  submit" 
statement  explaining  why  the  employment  of  such  capital  is  incidental  and  net 
.-.-ceesary. 


Income  Tax 

Supplementary  Page  58. 


Page  4 of  Form  1065 


THIS  KOURN  IS  NOT  THE  BASIS  OF  ASSESSMENT  AND  IS  NOT  TO  BE  USED  FOR  ESTATES  IN  PROCESS  OF  ADMINISTRATON. 

Page  1 of  Rotvun. 

(Date  received. 

DELIVER 

OR 

iSEND 

THIS  RETURN 

TO 

COLLECTOR  OF 

INTERNAL 

REVENUE 

ON  OR  BEFORE 

JUNE  15,  1919. 

FIDl 

Fiscal  p« 

Form  1041 UNITED  STATES  INTERNAL  REVENUE  SERVICE. 

UCIARY  INCOME  TAX  RETURN. 

FOR  CALENDAR  YEAR  1918 

OR 

f nnrl  ^ 191A. 

PRINT  NAMES  AND  ADDRESSES  PLAINLY- 

Name  of 

Esaniined  hy 

Name  and 
address  of 
fiduciary 

Audited  by 



1.  Did  you  make  a returo  on  Form  1041  for  1917  on  belialf  of  the  estate  or  trust  named  above? 


2.  If  BO,  to  what  collector’s  office  was  it  sent  (give  district  or  city  and  State)? 

3.  Enter  below  all  nontaxable  income  received  by  (or  accrued  to)  the  estate  or  trust  during  the  year; 


dukss  or  Sccuamxs. 

PaiNcirAL. 

INTEREST. 

Class  of  SEcuamES. 

PRINCirAL. 

Interest 

1 Amount. 

Source),  | 

B«oJi  of  First  Liberty  Loaa  anfanr^rtAit 

OblintiAnB  ot  Stateoaai)  Territorien.  pclitl* 

1 cal  siibilividinns  ttiereof,  and  the  District 

1 

OtheroMigatiooB  of  tb«  U.  8.  iBsned  before  Sept. 
24.19l7.ao<)«bl4ratiMisofU.S.posse8rtbD<i  . 

1 FeJeraJ  Farm  Loon  Bonds 

1 

4.  State  amount  of  stock  dividends  received  by  (or  accrued  to)  theeetateor  trust  directly  during  the  year,  declared  from  earnings  of  domestic  or  resident  corporations  accumulated  since 

February  28,  1913,  and  prior  to  January  1,  1918: 

(a)  Accumulated  in  1917,  $ (6)  Accumulated  in  1916,  $... (c)  Accumulated  since  February  28,  1913,  and  prior  to  January  1,  1916,  $ - 

5.  Enter  in  table  below  interest  on  Liberty  Bonds  and  other  obligations  of  the  United  States  issued  since  September  1,  1917,  received  by  (or  accrued  to)  the  estate  or  trust  during 

the  year,  and  maximum  amount  of  such  obligations  (par  value)  held  at  any  one  time  from  which  such  interest  was  derived  (see  instructions,  page  2.  under  J (b): 


1.  Class  or  Obeicatiom. 

UOLDINCS  or  Estate  or  Trust. 

Share  or  Holdings  op  Partnerships, 
PERSONAL  Service  Corporations, 

AND  OTHER  ESTATES  AND  TRUSTS. 

Columns  3 AND  5. 

7.  Maximum  Exemption. 

2.  AMouNTor  3.  Maximum  Amount 

Interest.  | or  Orucatioss. 

Intereot. 

5.  Maximum  Amount 
of  Obligations. 

(a)  Liberty  toan^eoiiTerted  into^Second  Loan  and  Second^ Liberty 

$ 

$ 

1 W5.000 
[(SocNoto.) 

30,000 

30,000 

0 

In  addition 
anexomptinn 
of  $5,000  may 
be  claimed  as 
to  any  one  of 
these  clastwa 
or  mav  l>e 
divided 
among  them. 

(5)  First  and  Second  Liberty  Loans  converted  into  Third 
And  Third  T.ih<»rt.y  T.nan 



(c)  First  Liberty  Loan  converted  into  Fourth  Loan........ 

(/fl  Fftiirth  T.ibprty  T.oan 

(<)  Other  obligations  issued  since  September  1, 1917 

1 

C/)  Totals ' 

* - Is ! 

Is 1, 's 

Note. — This  exemption  (maximum  $45,000)  is  limited  to  ono  and  one-half  times  the  amount  of  bonds  of  the  Fourth  Liberty  Loan  originally  subscribed  for 

and  still  held.  State  here  amount  of  bonds  of  the  Fourth  Liberty  Loan  originally  subscribed  for  and  still  held  $ — 


6.  Enter  in  the  table  below  income  from  partnerships,  personal  eervice  corporations,  and  other  estates  and  trusts: 


I.  Ni**  or  PERTHERsatr,  Persokae  Srrvice  ConroBETios,  Estate,  or  Trust. 
(Ir  Estats  or  Trust,  Oivr  also  Name  or  Fiduciary.) 

2.  Period  (Enter 
1918  OR  Date  on 
Wnicn  Fiscal 
Year  Ended). 

3.  Cash 
Dividends. 

4.  StocX 
Dividends. 

5.  Interest  on 
Tax-Free  Bonds 
(From  Estates 
andTrustsOnlv). 

6.  Interest  on 
Liberty  Bonds, 
ETc^  Issued 
SlNCK.SErt.  1,  1917. 

7.  OTHER 
Income. 

8.  Total. 

, 

i$ 

$ 

t 

^Et.ro.  ta.  B.  p^r.  2*" 

'(o)  Totals  taxable  at  1918  ratee(eee  instructions,  page  2,  under  B) 

$ 

$ 

under  J(b). 

$ 

% . 

X X X X 

$ 

(B)  Totals  taxable  at  1917  rates  (see  instructions,  page  2,  under  B) 

* 

$ 

f. 

(c)  Amount  of  stock  dividends  (column  4)  taxable  at  1916  rates,  $ (rf)  Amount  of  stock  dividends  taxable  at  1913-15  rates,?. 


DISTRIBUTION  OF  INCOME. 

(See  Instructions  V,  page  I.) 

7.  Enter  in  Ibc  table  below  the  name  and  address  of  each  beneficiary  and  hbow  the  rharo  of  each  in  the  income  of  the  estate  or  trust  (whether  received  or  not),  and  his  share  of  income, 
war-profits,  and  excees-profits  taxes  paid  by  the  estate  or  trust  to  a possctuion  of  the  United  States  or  to  a foreign  country. 


1.  Name  amo  Address  or  Kacii  nrsEnOARV. 

(Dwlfiuu  DonnsIdcDl  ollens.) 

VOTE.-Sl.als  «ti»lhAr  r.turn  was  fiM  by  or  tor  brnorirljrv,  and,  It  :o.  In  wlint 
dPIrlcl. 

?.  Interest  on 
Tax-Free  Bonds 

ni.FORTin  IN 
BuxK  K. 

1 

3.  Cash  Dividends. 

4.  Stoci  Dividends. 

.V  Interest  on 
Liberty  Bonds, 
ETC.,  Issued  Sinc  k 
Seftrmrer  1,  1917. 

«.  Other  Iniomk. 

7.  Incomf,  War- 
PROriTS,  AND  Kxtiss- 
rhoirr.s  T*\fx  r.^iD 

$ 

1 

$ 

1 

$ 

$ 

$ 

1..'.... 

- ^ 

: : 

Totaui 

,,  1 

$ 

_J| 



1 . . 1$ ..1 

FORM  OF  AFFIDAVIT. 


I swear  (or  affirm)  that  the  foregoing  return,  to  (ho  be«t  of  my  knowledge  and  belief,  contains  a true  and  complete  statement  of  all  taxable  Rains,  profite.  aiul  inconm  received  hy 
or  into  the  custody  or  control  and  management  of  the  fidu«  iary  as  stated,  during  the  year  for  which  the  return  is  made;  that  said  beueficiurieH  an?  entitled,  under  the  Hovenue 

Act  of  1918,  to  all  the  deductions  entered  or  claimed  therein;  and  that  there  is  contained  therein  a true  and  completo  list  of  the  names  and  aihlresses  of  all  tho  iK-noficiarios  entitled  to 
absra  fn  this  income,  and  the  amount  of  each  such  beneficiary’s  share. 


(.StKiiaturt  of  Oducurjr  or  u(  ufUrur  rvprii-4<>itl>ig  nUuciiuy.) 

Sworn  to  and  subscribed  before  mo  this day  of 1919.  

(AUdi.w.) 


(OOrial  eapartlf.) 


Income  Tax 
Supplementary  Page  59 


Page  1 of  Form  1041 


DETACH  RETURN  HERE  AND  SEND  IT  TO  COLLECTOR  OF  INTERNAL  REVENUE 


Pa|«  2 o(  Rtturn 


RETURN  OF  TAXABLE  INCOME 


A.  INCOME  FROM  BUSINESS. 


Kind  of  busineM.. 


3.  Total  sales  and  income  from  business... 
COST  OF  GOODS  SOLD: 


2.  Business  address 


4.  Labor 

5.  Material  and  supplies 

6.  Merchandise  bought  for  sale 

7.  Other  costs  (submit  schedule  of  principal  items 

at  loot  of  page  or  on  separate  sheet) 

8.  Plus  inventories  at  beginning  of  year 

9.  Tox.si, 


10.  Less  inventories  at  end  of  year. 

11,  Net  Cost  or  Goods  Sold 

20.  Net  Cost  of  Goods  Sold  Pels  Other  Business  Deductions. 

21.  Net  Income  from  Business 


OTHER  BUSINESS  DEDUCTIONS: 
aries  and  v 
Cost  of  Go 

13.  Rent 

14.  Interest  on  business  indebtedness. 


15.  Taxes  on  business  and  business  property 

16.  Repairs,  wear  and  tear,  obsolescence,  depletion,  and 

I^perty  losses  (explain  in  table  below) 

17.  Bad  debts  arising  from  sales. 

18.  Other  expenses  (submit  schedule  of  principal  items 

at  loot  of  page  or  on  separate  sheet) 

19.  Total  Other  Business  Deductions 


B.  INCOME  FROM  PARTNERSHIPS,  PERSONAL  SERVICE  CORPORATIONS,  AND  OTHER  ESTATES  AND  TRUSTS  (aaiadodi.Ei.ure.us  eo.eoaoi  toad,  reeei.ed  threoEk 

eiker  adocUriet,  wblck  .koold  ke  incinded  la  luai  £i  dlrideadt,  .kick  ekoald  ke  lacluded  la  Iteat } (a)i  latere.t  oa  .kllEatloai  «f  Ik.  U.  S.,  la.oed  dace  Sepleoiker  1, 1917,  okick  .keald  k.  Iadad.d 


C.  PROFIT  FROM  SALE  OF  LAND,  BUILDINGS,  STOCKS,  BONDS,  AND  OTHER  PROPERTY. 


1.  Kind  or  Pbopebtt. 

2.  Year 
Acquired. 

3.  Naici  anp  Apdkess  or  Pubchaser  oa  BaoXEa. 

4.  Salx  Paici. 

5.  Original  Cost 
OB  Market  Valve 

QUENT  Improve- 
ments, 9 ANT. 

7.  DtPkECUTION 
SUBSEQDENTtT 

* 

$ . 

$ 

$ 

Net  Profit  from  Sales  (total  of  columns  4 and  7 minus  total  of  colurane  5 and  6) 

$ 

$ 

* 1 

$ 

D.  INCOME  FROM  RENTS  AND  ROYALTIES. 

1.  Kim  0.  PkOFEETT. 

•2.  NaUX  AND  ADDkXSS  OT  TiNAHT,  IXSSEr.,  ElC. 

3.  Amount  or 
Rent  and 
Royaltaes. 

«.  Rbpaiw.  Weab 
tMCEBCB.  Dy^uow. 

Mn,x.x„. 

e.  taxe.. 

7.  Otrcb 
Expenses. 
(Explain  Below). 

1 

1. 

$ 

1 

Xbt  Income  fuom  Rents  and  Royalties  (total  of  column  3 minus  total  of 
columns  4.  5.  ft,  and  7) 

1, 

1 1. 1 ' 

Is 

L INTEREST  ON  CORPORATION  BONDS  CONTAINING  TAX-FREE  COVE 

NANT,  ON  WHICH  A TAJ 

t OF  2%  WAS  PAID 

BY  DEBTOR  C 

ORPORATION 

F.  OTHER  INCOME  (not  including  dividends,  or  interest  on  obligations  of  the  United  States). 


. Qroas  Income. 


).  IWerei’t  on  bonds,  mortgages,  and  other  obligations  of  domestic  and  resident  corporations  except  as  reported  in  Item 

2.  Interest  cn  bonds  of  foreign  countries  and  corporations  and  dividends  on  stock  of  foreign  corporations 

3.  Interest  on  bank  deposits,  mortgages,  etc 


Xet  Total  (total  of  column  1 minus  tola!  of  column  2) $ 


G,  TOTAL  NET  INCOME  FROM  ABOVE  SOURCES . 

H.  DEDUCTIONS  NOT  INCLUDED  ABOVE  ' 


iDlerest  paid  or  accrued $ 

Ta.xos  paid  or  accrued 


! below) I. 

4.  Total  coDtribiitiuus  (explain  below). ... 


■imounts  paid  or  set  aside  for  U.  S., 

any  Slate,  etc I 

Other  deductions,  if  any  (explain 

below) I 


Total 


I.  NET  INCOME $. 

J (a).  Dividends  on  slock  of  corporadoos  organized  or  doing  bosuMSS  in  Ibe  United  Slates  (not  including  income  from  personal  service  corporations  earned  since  Jan.  1,  1918) 

Received  directly,  $ ; received  through  partnerships,  personal  service  corporations,  and  other  fiduciaries.  $ Total $ 

J (b).  Total  amount  of  interest  on  bonds  and  other  obligations  of  the  United  States  issued  after  September  1,  1917  (see  instructions,  page  2) L 

K.  Total  net  income.  (If  Item  I shows  minus  ejuantity,  deduct  excess) k 


ENTER  IN  THIS  TABLE  DETAILS  CONCERNlNfi  REPAIRS.  WEAR  AND  TEAR,  PROPERTY  LOSSES,  ETC.,  CUIMED  AS  DEDUCTIONS  IN  SCHEDULES  A,  D,  AND  H ABOVE 


2.  Ki.stj  or  PtorERTY  ( 


7.  Amount  Pre* 


8.  Amount  tuis 


. Cav»e  or  Loss. 


10.  Amounts 


EXPLANATION  OF  DEDUCTIONS  clainu-J  in  Schcdulo  A,  Hpeo  7 and  18;  Schedule  D,  coluian  7;  Scbt-Jiile  F,  column  2;  aod  Schedule  H,  Items  4,  5,  and  6. 


Income  Tax 
Supplementary  Page  60 


Page  2 of  Form  1041 


RETAIN  THIS  SHEET  AND  INSTRUCTION  SHEET  AVAILABLE  FOR  INSPECTION  BY  REVENUE  OFFICER 


DETACH 

THE  RETURN  (CON- 
TAINING AFFIDAVIT) 
AND  DELIVER  OR 
SEND  IT  TO 
COLLECTOR  OF 
INTERNAL  REVENUE 
ON  OR  BEFORE 
JUNE  15,  1919 

KEEP  THIS 
WORK  SHEET 
AND  THE 
INSTRUCTION 
SHEET 


Page  1 of  "Work  Sheet 

Form  1041— UNITED  STATES  INTERNAL  REVENUE  SERVICE 

WORK  SHEET  FOR  FIDUCIARY  INCOME  TAX  RETURN 

FOR  CALENDAR  YEAR  1918 

OR 


Fiscal  Period  Begun and  Ended  . 


1918 


PRINT  NAMES  AND  ADDRESSES  PLAINLY 


Name  and  { 
address  of  { 
fiduciary  1 


IF  YOU  NEED 
ASSISTANCE 
GO  TO  A 

DEPUTY  COLLECTOR 
OR  TO  THE 
COLLECTOR’S  OFFICE 
BUT  FIRST 
READ  INSTRUCTIONS 
AND  FILL  OUT 
THIS  SHEET 
(FACE  AND  BACK) 
IN  PENCIL 

AS  WELL  AS  YOU  CAN 


1.  Did  you  make  a return  on  Form  1041  for  1917  on  behalf  of  the  estate  or  trust  named  above? 

2.  It  to,  to  what  collector's  office  was  it  sent  (give  district  or  city  and  State)?  - 


3.  Enter  below  all  nontaxable  income  received  by  (or  accrued  to)  the  estate  or  trust  during  the  year: 


Class  or  Securities.  I 

Principal. 

I.VTEREST. 

CiAss  OF  Securities. 

Prlscipal. 

Interest. 

Otuer  I.scomk  (Give 
Source). 

AttOtTHT. 

BuDJe  of  First  Liberty  I-oan  onfonTerted 

Obligations  of  StaleB  and  Territories,  politi- 
cal tiiibiljvislous  thereof,  and  the  District 

nf  rtihiiiihin. 

OtheroliMfation*  nfilie  U.S.  IsHUe.!  bt'fori^  Sept.  J 

‘ 1 

I 1 

FoJoral  Farm  Loan  Bonds 

4.  State  amount  of  stock  dividends  received  by  {or  accrued  to)  the  estate  or  trust  directly  during  the  year,  declared  from  earnings  of  domestic  or  resident  corporations  accumulated  since 
February  28,  1913,  and  prior  to  January  1,  1918; 

(«)  Accumulated  in  1917,  $ (b)  Accumulated  in  1916,  $ (c)  Accumulated  since  February  28, 1913,  and  prior  to  J'anuary  1, 1916,  f 


5.  Enter  in  table  below  interest  on  Liberty  Bonds  and  other  obligations  of  the  United  States  issued  since  September  1,  1917,  received  by  (or  accrued  to)  the  estate  or  trust  during 
the  year,  and  maximum  amount  of  such  obligations  (par  value)  held  at  any  one  time  from  whio'n  such  interest  was  derived  (see  instructions,  page  2,  under  J (b); 


1.  Class  or  Orlioatios. 

Holdinos  0?  Estate  or  Trust. 

Share  or  Koldinob  of  Partnerships, 

i’ERSONAL  SERVTCE  CORPORATIONS, 

A.Nu  OTHER  Estates  and  Trusts. 

0.  Total  or 
Columns  3 AND  5. 

« 

7.  MAXnitm  EixiiPTiOH. 

2.  Amount  07 
Interest. 

3.  Maximum  Amount 
07  Obligations. 

4.  Amount  or 
Jnterest. 

5.  Maxt^ium  Amount 

0?  OSLIOATIONS. 

(a)  Lib#-rty  Loan  con ^rted  into  Second  I.fpan  and  Second^Llbertj 

* 

$ 

$ 



$ 

1 $45,000 
USeeNoto.) 

30,000 

30,000 

0 

In  addition 
anexemption 
ot  $5,000  may 
be  claimed  as 
to  any  one  o( 
these  classes 
or  may  bo 
divined 
among  them. 

(^)  First  and  .Second  Liberty  Leans  converted  into  Third 
Loan  and  Third  Liberty  Loan 

{e)  First  Liberty  Loan  converfed  into  Fourth  T.oan.  

(<f»  Fourth  Liberty  Lo.'in  

(c)  Other  obligations  issued  since  September  1,  1917 

U)  Totals 

Note..— This  exemption  (maximum  $45,000)  is  limib  d to  one  and  one-half  times  the  amount  of  bonds  of  the  Fourth  Liberty  Loan  originally  subscribed  for 

and  still  held.  State  here  amount  of  bonds  of  the  Fourth  Liberty  Loan  originally  subscri’oed  for  and  still  held $. 


6.  Enter  in  the  table  below  Incorne  from  partnerships,  personal  service  corporations,  and  other  estates  and  trusts: 


\.  Name  or  Fartkership,  Personal  5?r.BvicE  ConpoRxTioN,  Estate,  or  Trust. 
(Ir  EsTATii  OR  Trust,  Give  also  Name  or  Fiuucury.) 

2 Period  (Enter 
1918  on  Date  on 
Which  Fiscal 
Year  Enped). 

3.  Cash 
Dividends. 

4.  Stock 
Dividends. 

6.  Interest  on 
Tax-Free  Bonus 
( From  Estates 

ANDTRUSTSONf.Y). 

6.  Intere.st  on 
Liberty  Bonds, 
ETC.,  Issued 
Since  Sept.  l.m?. 

7.  Other 
Income. 

8.  ToiaL. 

$ 

$.  . 

$ 

$ 

$ 

$ 

i^iudruTj  t»)  p4s«*2 

IncIudcV^TuT^'^ 

n r-- 

— ”•  3^ — 

L-L- •■•7-- 

(o)  Totals  taxable  at  1918  rafen  (nee  instrurtienia,  2,  under  B)  

$ 

$ 

Inslraetlon*!, 
pag«2,  uader  J (b). 

$.: 

? 

X X X X 

(t)  Totale  taxable  at  1917  rate.s  (eoo  instructions,  page  2,  under  B) 

. 

1 

X X X X 

(c)  Amount  of  stock  dividends  (column  4)  taxable  at  1916  rates,  $ (if)  Amount  of  stock  dividends  taxable  at  1913-16  rales,  $ . 


DISTRIBUTION  OF  INCOME. 

(See  fnstnictlons  V,  page  I.) 


7.  Entt'r  In  the  table  below  the  name  and  address  of  each  beneficiary  and  show  the  share  of  each  in  the  income  of  the  estate  or  trust  (whether  received  or  not),  and  his  shSre  c(  income, 
war-profits,  and  excess-profits  taxes  paid  by  the  estate  or  trust  to  a possewiion  of  the  United  .States  or  to  a foreign  country. 


1.  Kame  ant»  Addrexs  or  Each  BESEncuRT. 

(D«»icoaic  oonresidoDl  all«us.) 

Note.— SUtd  whptbsf  rstum  was  fliad  by  or  for  bmcfichry,  and,  if  so,  In  what 
dUlrict.  . 

1 Tax-Free  Bowds 
Reported  in 
Block  E. 

3.  Cash  Dividends. 

4.  Stock  Dividends. 

Liberty  Bonds, 
ETC.,  Issued  Sinci 
September  1, 1917. 

6.  Other  Income. 

7.  INCOMK,  War- 
Prouts,  and  Excrs.v 
Propits  Taxes  Pa  in 
OK  Accrued  to  a 
POSSES.SION  or  TRC 

Fobeion  Country. 

1 

1$ 

t 

1 

! 

1 

$ 1 

j _ 

ZZZIII’Z’I  

! 

1 

Totais 

1 

IZIZZ 

1$ 1 

$— 



FIDUCIARY’S  MEMORANDA 


Income  "lax 
Siifiplernuntary  Pat^e  61 


Pat'c  3 of  Form  1041 


Page  2 of  Wofk  Sheet 


TAXPAYER’S  WORK  SHEET  FOR  FIDUCIARY  INCOME  TAX  RETURN 


A.  INCOME  FROM  BUSINESS. 


1.  Rind  of  business 

3.  Total  sales  and  income  from  business... 
COST  OF  GOODS  SOLD 


4.  Labor 

5.  Matenal  and  supplies... 


2.  Business  address.. 


Merchandise  bought  for  sale 

Other  cost?  (submit  schedule  of  principal  items 
at  foot  of  page  or  on  separate  sheet) 


Plus  inventories  at  beginning  of  year.. 
Total 


10.  Lees  inventories  at  end  of  year. 

11.  Net  Cost  OF  Goods  Sold 


OTHER  BUSINESS  DEDUCTIONS: 

12.  Salaries  and  wages  not  reported  as  "Labor”  under 
“Cost  of  Goods  Sold” 


14.  Interest  on  business  indebtedness.. 


1 5.  Taxes  on  business  and  business  property 

16.  Repairs,  wear  and  tear,  obsolescence,  depletion,  and 

property  losses  (explain  in  table  below) 

17.  Bad  debts  arising  from  sales 

18.  Other  expenses  (submit  schedule  of  principal  items 

at  foot  of  page  or  on  separate  sheet). 

19.  Total  Other  Busihess  Deductions.. 


20_  Net  Cost  of  Goods  Sold  Plus  Other  Business  Deductions.. 
21.  Net  Tnco,ue  from  Busine.s.s 


B.  INCOME  FROM  PARTNERSHIPS,  PERSONAL  SERVICE  CORPORATIONS,  AND  OTHER  ESTATES  AND  TRUSTS  (not  Inclnding  interest  oa  tsi  tre.  corenant  toad,  recel.ed  threngh 

other  fldneiariee,  which  eboold  he  iaclnded  ia  item  £i  djTidea  ie,  which  ohoald  be  iacladed  la  Item  J (a);  interest  oa  obligations  of  tho  U.  6.,  issaed  since  September  1, 1917,  which  ehoiUd  be  incladed 


C.  PROFIT  FROM  SALE  OF  LAND,  BUILDINGS,  STOCKS,  BONDS,  A>JD  OTHER  PROPERTY. 


1.  Kind  or  Pbopemt.  a^„u,ed. 


3.  Nun  AX1>  ADDEES^  or  rURCIUSEB  OE  Brokeb. 


Net  Profit  from  Sale.s  (total  of  columns  4 and  7 miTius  total  of  columns  5 and  6) $ 


5.  ORiGxifAL  Cost  6.  Cost  or  Subse-  7.  Depbeciation 
oa  VlAEEXT  Value  quent  Iuprovz.  Subsequently 


D.  INCOME  FROM  RENTS  AND  ROYALTIES. 


. Kind  or  rROPERir. 


» Address  or  Tenant,  Le^^see,  Etc, 


3.  Amount  oi 
Rent  and 
Royalties. 


(Explain  Belov) 


L INTEREST  ON  CORPORATION  BONDS  CONTAINING  TAX-FREE  COVENANT,  ON  WHICH  A TAX  OF  2%  WAS  PAID  BY  DEBTOR  CORPORATION 

(jinclnding  .surh  intorn.^At  rccpi  vod  through  nl  hor  fi  luciarics'^ . 


F.  OTHER  INCOME  (not  iricluding  dividends,  or  interest  on  obligations  of  the  United  States). 


1.  Oaoaa  Income. 


1.  Intereet  on  bonds,  mortgages,  and  other  obligations  of  domestic  and  resident  corporations  except  as  reported  in  Item 

2.  Interest  on  bonds  of  foreign  countries  and  corporations  and  dividends  on  stock  of  foreign  corporations ... 

3.  Interest  on  bank  deposits,  mortgages,  etc 


Net  Total  (total  of  column  \ minus  total  of  column  2).. 


G.  TOTAL  NET  INCOME  FROM  ABOVE  SOURCES 


H.  DEDUCTIONS  NOT  INCLUDED  ABOVE. 


1.  Interest  paid  or  accrued.. 

2.  Taxes  paid  or  accrued 


3.  Loa-ws  by  fire,  storm,  etc.  (explain 

in  tabic  below) $ 

4.  Total  contributions  (explain  below). 


5.  Amounts  paid  or  set  aside  for  U.  S., 

any  State,  etc.. 

6.  Other  deductions,  if  any  (explain 

below) 


I.  NET  INCOME 

J (a).  Divideods  es  stock  of  corporations  organized  or  doing  business  in  the  United  Stales  (not  including  income  from  personal  service  corporations  earned  since  Jan.  1,  1918): 

Received  directly,  $ ; received  through  partnerships,  personal  service  corporations,  and  other  fiduciaries,  $ Total 

J (b).  Total  amount  of  interest  on  bonds  and  other  obligations  of  the  United  States  issued  after  September  1,  1917  (see  instructions,  page  2) 

K.  Total  net  income.  (If  Item  I shows  minus  quantity,  deduct  exre8.s) 


$ 

ENTER  IN  THIS  TABLE  DETAILS  CONCERNING  REPAIRS,  WEAR  AND  TEAR,  PROPERTY  LOSSES,  ETC.,  CLAIMED  AS  DEDUCTIONS  IN  SCHEDULES  A,  D,  AND  H ABOVE 


r.^B 
■D”  OR 

“H.” 

2.  Kind  of  Pbopebty  (ty  Buildings,  State  also  Material  or 
wuicH  Constructed). 

Acquired. 

4.  Co.^T  OF  Prop- 
erty (OR  Market 
Value 

March  1, 1913), 
Kxclusive  Of  Land. 

5.  Repatrs  (not 
Offset  BY  Claims 

1 Wear  and  Tear,  0 bsolescence,  and 

Depleiion  Charged  off. 

Losses  not  Compensated  for  rt 
Insurance. 

FOR  Wear  and 
Tear  AND  Losses). 

6. 

Rate. 

7.  Amoiw  Pre- 

8.  Amount  this 
Year. 

9.  Cause  of  Loss. 

10.  Amount  or 
Loss. 

$ 

S 

$ 

J 

$ 

EXPLANATION  OF  DEDUCTIONS  claimed  in  .Schedule  A,  lines  7 and  18;  Schedule  D,  column  7;  Schedule  F,  column  2;  and  Schedule  H,  Items  4,  5,  and  6. 


Income  Tax 
Supplementary  Page  62 


Page  4]^of_Form  1041 


Pctge  1 of  Instructions. 


I.  RETURNS  BY  FIDUCIARIES. 

1.  Returns  on  Form  1041  for  estates  and  trusts. — Every  fiduciary,  or  at  least  one  of 
joint  fiduciaries,  must  make  a return  on  this  form  (Form  1041)  for  the  estate  or  trust  for  which 
he  acts,  if  the  income  of  such  estate  or  trust  is  distributable  periodically,  or  the  tax  is  pay- 
able by  the  beneficiaries,  provided  (o)  the  net  income  of  such  estate  or  trust  for  the  taxable 
year  was  $1,000  or  over  or  (i)  any  beneficiary  of  such  estate  or  trust  is  amonresident  alien. 

If  the  sole  beneficiary  of  tbe  estate  or  trust  is  a nonresident  alien  Form  1041  may  be  omitted. 

2.  Returns  on  Form  1040  for  estates  and  trusts. — In  the  case  of  (o)  estates  of  decedents 
before  final  settlement  and  of  (6)  trusts,  whether  created  by  will  or  deed,  for  unascertained 
persons  or  persons  with  contingent  interests  or  income  hold  for  future  distribution  under' 
the  terms  of  the  will  or  trust,  the  income  is  taxed  to  the  fiduciary  as  a single  person,  except 
that  from  the  income  of  a decedent's  estate  there  may  first  be  deducted  any  amount  prop- 
erly paid  or  credited  to  a beneficiary.  Under  those  conditions  a fiduciary  should  make  a 
return  for  the  estate  or  trust  on  Form  1040  or  1040A.  (See  section  200  of  the  statute  and 
Articles  1521  and  1522  of  Regulations  45.)  As  an  intestate's  real  estate  does  not  pass  to 
his  administrator,  upon  a sale  by  the  heirs,  whether  before  or  after  the  settlement  of  the 
estate,  each  heir  is  taxed  individually  on  any  profit  derived. 

3.  Returns  on  Form  1040  for  beneficiaries. — A return  on  Form  1040  or  1040A  should 
be  rendered  by  the  fiduciary  in  the  case  of  (a)  income  distributable  to  a nonresident  alien,, 
(t)  an  orrlinary  guardianship  of  a minor,  and  (c)  an  estate  of  a decedent  before  final  settle- 
ment. As  to  any.  income  properly  paid  or  credited  to  a beneficiary,  the  income  is  taxable 
directly  to  the  beneficiary.  ’The  fiduciary  must  make  a return  on  Form  1040  or  1040.\  lor 
each  individual  whose  income  is  in  his  charge,  if  such  individual — 

(а)  Received  a net  income  for.  the  taxable  year  of  $2,000  or  over,  if  married  and 

living  with  wife  or  husband; 

(б)  Received  a net  income  for  the  taxable  year  of  $1,000  or  over,  if  not  married 

or  not  living  with  wife  or  husband,  or 

(c)  Is  a nonresident  alien  (regardless  of  the  amount  of  his  income). 

(d)  If  part  of  the  income  of  a trust  estate  is  distributed  to  beneficiaries  and 

part  is  retained  for  the  benefit  of  tlie  trust  estate,  a return  should  be  made 
on  Form  1041  lor  tbe  entire  income  of  the  trust  estate  and  on  Form  1040 
for  the  retained  portion  of  the  income. 

4 . Return  for  decedent. — If  the  net  income  of  a decedent  from  the  beginning  of  the 
taxable  year  to  the  date  of  his  death  was  $1,000,  if  unmarried,  or  $2,000,  if  married  and 
living  with  wife  or  husband,  the  executor  or  administrator  shall  make  a return  on  Form 

1040  or  1040A  for  such  decedent. 

5 Returns  for  two  trusts. — If  two  or  more  trusts,  the  income  of  which  is  taxable  to  the 
beneficiaries,  were  created  by  the  same  person  and  are  in  charge  of  the  same  trustee,  the 
trustee  shall  make  a single  return  on  Form  1041  (revised)  for  all  such  trusts,  notwithstanding 
that  they  may  arise  from  different  instruments.  If,  however,  a trustee  holds  trusts  created 
by  different  persons  for  the  benefit  of  the  same  beneficiary,  he  shall  make  a return  on  Form 

1041  (revised)  for  each  trust  separately. 

6.  For  definition  of  a fiduciary  and  further  instructions  as  to  returns  and  tax  liability 
see  Articles  1521  and  1522,  341  to  346,  and  421  to  425  of  Regulations  45. 

II.  RECEIPTS  EXEMPT  FROM  TAX. 

'I’hc  following  classes  of  receipts  are  exempt  from  income  tax,  and  need  not  be  reported 
on  page  2 of  the  return.  However,  nontaxable  income  of  tbe  classes  described  in  para- 
graphs 1,  3,  4,  5,  and  6 should  be  reported  in  Table  3,  page  1 of  tbe  return. 

1.  Pay  not  exceeding  $3,,500,  for  active  services  in  the  military  and  mival  forces  of  the 
Unit/  d States. 

2.  Gifts  (not  made  as  a consideration  for  service  rendered)  and  money  and  property 
acquired  under  a will  or  by  inheritance  (but  the  income  derived  from  money  or  property 
received  by  gift,  will,  or  inheritance  is  taxable  and  must  be  reported). 

3.  Interest  on  bonds  and  other  obligations  of  the  United  States  issued  before  September 
1,  1917,  and  on  such  bonds  and  other  obligations  issued  since  that  date,  provided  the 
holdings  of  the  estate  or  trust  do  not  exceed  the  exemptions  allowed  by  law.  (Sec  page  2 
of  Instructions,  Item  J (b)). 

4.  Interest  on  bonds  and  o^cr  obligations  of  United  States  poesesmons  (Philippines, 
Porto  Rico,  etc.). 

5.  Interest  on  bonds  and  other  obligations  of  States,  territories,  political  subdivisions 
thereof  (such  as  cities,  counties,  and  townships),  and  the  District  of  Columbia. 

6.  Income  from  securities  issued  under  the  provisions  of  the  Federal  Farm  Loan  Act 
of  July  17,  1916. 

7.  Dividends  upon  stock  of  Federal  Re-serve  Banks.  However,  dividends  paid  by 
member  banks  arc  treate-d  like  diridends  of  ordinary  corporations. 

8.  Interrst  on  bonds  issued  by  the  V7ar  Finance  Corporation  only  if  and  to  the  extenf 
provided  in  the  acts  authorizing  the  issue  thereof. 

9.  Proceeds  of  life  insurance  policies  paid  to  individual  beneficiaries  on  tbe  death  of 
the  insured,  or  to  the  eotate  of  the  insure.d. 

10.  Amounts  received  by  the  insured  under  life  insurance,  endowment,  and  annuity 
contracts,  provid' d such  payments  do  not  exceed  the  premiums  paid  in.  The  amount 
by  which  the  total  payments  that  have  been  received  exceed  the  total  premiums  paid  in 
is  income  and  must  be  reporU-d  in  Schedule  F. 

11.  Amounts  received  from  accident  and  health  insurance  and  under  workman's 
compensation  acts  plus  the  amount  of  any  damages  received  b^  suit  or  agreement  on 
account  of  injuries  or  sickness. 

III.  FARM  INCOME 

If  sny  of  the  incomo  of  the  estate  or  trust  is  derived  frrim  farming,  a "Schedule  of  ' 
Form  Incomo  and  Expenses”  (Form  1040F)  should  be  filled  out  and  filed  with  this  return. 
'Die  net  Iona  income,  as  nhown  by  the  Schedule,  should  be  included  in  Item  21  of  Schedule 
A o(  this  return. 


IV.  PERIOD  TO  BE  COVERED. 

The  return  of  a taxpayer  is  made  and  his  income  computed  for  his  taxable  year,  which 
means  his  fiscal  year,  or  the  calendar  year  if  he  has  not  ostablishod  a fiscal  year.  The 
term  "fiscal  year”  means  an  accounting  period  of  twelve  months  ending  on  tho  last  day 
of  any  month  other  than  December.  No  fiscal  year  will,  however,  bo  recognized  unless 
before  its  close  it  was  definitely  established. as  an  accounting  period  by  the  taxpayer  and 
the  books  of  such  taxpayer  were  kept  in  accordance  therewith.  The  taxable  year  1918  is 
the  calendar  year  1918  or  any  fiscal  year  ending  during  the  calendar  year  1918.  See  sec- 
tion 200  of  the  statute.  A taxpayer  having  an  existing  accounting  period  which  is  a fiscal 
year  within  the  meaning  of  the  statute  not  only  needs  no  permission  to  make  his  return  on 
the  basis  of  such  a taxable  year,  but  is  required  to  do  so,  regardless  of  the  former  basis  of 
rendering  returns.  A person  having  no  such  fiscal  year  must  make  return  on  the  basis  of 
the  calendaryear.  The  first  return  under  the  present  statute  of  a taxpayer  who  has  here- 
tofore made  return  on  a basis  different  from  his  accounting  period  will  necessarily  overlap 
his  next  previous  return.  For  the  method  of  adj\isting  the  tax  in  such  a case  see  section 
205  of  the  statute  and  articles  1G21-1C24.  Section  22C  has  no  application  to  this  situation. 
Except  in  the  cases  of  a return  for  the  taxable  year  1918  and  of  a first  return  for  income  tax 
a taxpayer  shall  make  his  return  on  the  basis  (fiscal  or  calendar  year)  upon  which  he  made 
his  return  for  tho  taxable  year  immediately  preceding  unless,  with  the  approval  of  the 
Commieeioner,  he  has  changed  the  basis  of  computing  his  net  incomo. 

If  a taxpayer  changes  bis  accounting  period,  and  not  merely  his  taxable  year  to  con- 
- form  with  his  existing  accounting  period,  he  shall  as  soon  as  possible  give  to  the  collector 
for  transmission  to  the  Commissioner  written  notice  of  such  change  and  of  his  reasons  thcro- 
for.  The  Commissioner  will  not  approve  a change  of  the  basis  of  computing  net  income 
unless  such  notice  is  given  at  a time  which  is  both  (a)  at  least  thirty  days  before  the  due 
date  of  the  taxpayer’s  return  on  the  basis  of  his  existing  taxable  year  and  (5)  at  least  thirty 
days  before  tho  due  date  of  his  return  on  the  basis  of  the  proposed  taxable  year.  If  tho 
change  in  the  basis  of  computing  the  net  income  of  tho  taxpayer  is  approved  by  the  Com- 
missioner, the  taxpayer  shall  thereafter  make  his  returns  upon  the  basis  of  the  new  account- 
ing period  in  accordance  with  tho  requirements  of  section  226  of  tho  statute  and  his  net 
income  shall  be  computed  as  therein  provided.  See  article  431. 

V.  SEPARATION  OF  INCOME  ASSIGNABLE  TO  DIFFERENT  YEARS. 

In  showing  the  distribution  of  income  among  beneficiaries  in  Table  7,  enter  separately 
the  share  of  each  beneficiary  in  incomo  assignable  to  1913-1915,  1916,  1917,  and  1918  (all 
other  income). 

VI.  TIME  AND  PLACE  FOR  FILING. 

The  return  for  tho  taxable  year  1918  must  be  sent  to  the  collector  of  internal  revenue 
for  the  district  in  which  the  fiduciary  resides  or  has  his  principal  place  of  business  so  as  lo 
reach  the  collector’s  office  'on  or  before  Juno  15,  1919,  an  extension  of  time  having  been 
granted.  If  vhe  fiduciary  has  no  legal  residence  or  principal  place  of  business  in  tho  United 
States  the  return  should  be  forwarded  to  the  Collector  of  Internal  Revenue,  Baltimore,  Ud. 
(See  Articles  441  to  445,  Regulations  45.) 

VI 1.  AFFIDAVIT. 

1.  The  affidavit  must  be  executed  by  tbe  individual  or  organization  receiving,  or 
having  custody  or  control  and  maeagement  of,  tbe  income  of  tbe  estate  or  trdst.  If  two 
or  more  individuals  act  jointly  as  n fiduciary,  the  affidavit  tnay  be  executed  by  any  ono 

: of  them.  • ■ „ ' ■ ' 

2.  The  oath  will  be  administered  without  cbaigc  by  any  collector  or  deputy  collector 
of  internal  revenue.  If  an  internal  revenue  officer  is  not  available,  the  return  should  bo 
sworn  to  before  a Dolar)- public,  justice  of  the  peace,  or  other  person  authorized  to  administer 
oaths. 

3.  It  is  not  necessary  to  show  the  statement  of  net  incomo  to  the  officer  who  adnunisicrs 
the  oath. 

vm.  PENALTY  FOR  FAILING  TO  MAKE  REPORT  ON  TIME. 

A penalty  of  not  more  than  $1,000  attaches  for  failure  to  file  the  return  within  tho 
time  required  by  law.  If  the  failure  is  willful  or  an  attempt  is  made  to  defeat  or  evade 
the  tax,  the  penally  is  $10,000  or  imprisonment  for  not  more  than  one  year,  or  both,  together 
with  cost  of  prosecution. 

IX.  WITHHOLDING  AND  INFORMATION  AT  THE  SOURCE 

If  the  fiduciary  . has  the  control,  receipt,  custody,  disposal,  or  payment  of  fixed  cr 
determinable  annual  or  periodical  gains,  profits,  and  income  (other  than  income  received 
as  dividends  from  a corporation  whose  income  is  subject  to  income  tax)  of  any  nonresident 
alien  individual,  ho  is  required  to  deduct  and  withhold  incomo  tax  at  the  rale  of  8 per  cent 
from  such  incomo  paid  on  and  after  February  25,  1919,  and  make  return  thereof  on  I’orm 
1042,  aocompauled  by  Form  1098.  Income  tax  in  such  cases  was  required  to  be  wiUiheld 
at  the  rale  of  2 ])or  cent  during  the  year  1918  and  up  to  February  24,  1919.  The  fiduciary 
in  executing  Form  1010  for  a nonresident  alien  should  lake  credit  tlienmn  for  any  lax  so 
withheld.  Every  fiduciary  who,  during  1918,  paid  to  any  person  salary,  wages,  commis- 
sions, rentals,  etc.,  of  $1,000  or  more  is  requireil  lo  make  a true  and  accurate  return  to  tho 
Commissioner  of  Internal  Revenue  showing  the  nature  and  source  of  such  paymenUs  and 
tho  name  and  address  of  the  jR-r.-on  reiuiviiig  them.  Forms  1090  and  1099,  lo'  reporting 
such  information,  will  be  furni.  hc<l  by  any  collector  of  internal  revenue.  ' 

In  addition  to  tho  above  the  fiduciary  is  required  to  execute  Form  1099  si  owing  dis- 
trilmlivo  share  of  each  beneficiary 'k  income  ns  reported  on  Form  1041,  and  atfiich  them  R) 
the.  return  when  forwarding  it  to  tho  colloclor.  «-•!»? 


Income  Tax 

Supplementary  Page  63. 


Page  5 oflForm  1041 


p*,e2cfiBstrHcdott  INSTRUCTIONS  FOR  FILLING  IN  TAXABLE  INCOME  n 1 Hfvalt  sW  tf  ptt^  ui  utacb  ft  Hcani/ 


A,  INCOME  FR 

Income  to  be  entered  In  Schedule  A. — Report  here  income  from — 

(a)  Sale  of  merchandise,  or  of  products  of  manufacturing,  construction,  raining,  and 
agriculture.  (For  farm  income  see  lustruction  III  on  the  other  side  of  this  sheet.) 

(b)  Business  service,  such  as  transportation,  storage,  laundering,  hotel  and  restaurant 
8er\  ice,  livery  and  garage  service,  etc. 

In  general,  report  in  Schedule  A any  income  in  the  eamiog  of  which  exposes  for 
labor,  rent,  etc.,  were  incurred.  Do  not  report  here  partnership  profits  or  profits  of  personal 
service  corporations,  wliich  should  be  entered  under  B,  or  dividends  from  other  corpora- 
tions, whicii  should  be  entered  under  J. 

If  the  estate  or  trust  derives  income  from  farming,  enter  on  line  21  the  net  income 
from  farming,  as  shown  by  the  “ Schedule  of  Farm  Income  and  Expenses”  (Form  1040F). 

Income  received  from  safe  of  lands,  buildings,  equipment,  stocks,  bonds,  and  other 
property  not  dealt  in  as  a business  should  be  reported  under  C, 

. If  a complete  profit  and  loss  statement  is  made,  showing  all  the  information  called  for 
under  “Cost  of  goods  sold”  and  “Other  business  deductions,”  attach  it  to  the  return  and 
enter  the  amount  of  net  income  on  line  21,  Schedule  A. 

Kind  of  business.— State  kind  of  goods  dealt  in  or  kind  of  services  rendered,  and 
whether  manufacturer,  jobber,  wholesaler,  retailer,  importer,  broker,  etc. 

Total  sales  and  income  from  business  or  profession. — Report  the  total  amount  derived 
from  sales  or  from  services,  less  any  discounts  or  allowances  from  the  sale  price  or  service 
charge. 

Inventories.— If  inventories  were  taken  at  cost,  write  _“C”  on  line  8,  immediately 
before  the  amount  column;  if  at  cost  or  market,  whichever  is  lower,  write  "C  or  M.” 

Other  business  deductions.— Do  not  include  cost  of  business  equipment  or  furniture, 
expendititres  for  pennanent  improvements  to  property,  or  litdng  and  family  expenses  of 
any  beneficiary. 

Rent.— Report  here  rent  for  business  property  (not  including  rent  for  dwelling  occupied 
by  any  benellciary). 

Interest. — Report  here  interest  on  business  indebtedness,  including  indebtedness 
incurred  to  purchase  or  carry  business  property.  Do  not  include  interest  on  indebted- 
iicsa  incurred  for  tlic  purchaFe  of  bonds  and  other  obligations,  tlie  interest  on  which  is 
exempt  f''o;n  lax,  except  intcro-t  on  indebtedness  incurred  to  purchase  or  carry  obliga- 
tions of  the  United  States.  See  Inslniction  II,  page  1,  for  a list  of  oblig^tiops  the  interest 
on  which  is  exempt. 

Tares.— Report  hero  only  taxes  on  business  property  or  for  carrying  on  business. 
Do  not  iiiclude  laxea  a.s:>e&5ed  against  local  benefits  of  a kind  lending  to  increase  the  value 
of  the  property  asdf'ssod,  ae  f<<r  leaving,  eewers,  etc.,  nor  Federal  income  Uxes.  State 
inheritance  taxes  and  I'cderal  estate  taxes  are  not  deductible. 

Repairs,  wear  and  tear,  obsolescence,  and  property  losses.— Report  liere  (o)  ordinary 
repairs  required  to  keep  property  in  usable  condition;  (6)  depreciation  during  the  year 
Uiicluding  a reasonable  ueduction  for  obsolescence)  if  the  terms  of  the  will  or  trust  or 
the  (icfTfc  of  a court  of  competent  jurisdiction  or  the  general  law  require  the  corpus  of  the 
estate  to  be  kept  intact,  and  physical  jiroperty  forming  a part  of  the  corpus  of  such  estate 
is  subject  to  depreciation  through  its  employment  in  business,  provided  the  amount  of 

OM  BUSINESS. 

the  deduction  is  applied  or  held  by  the  fiduciary  for  making  good  such  depreciation; 

(c)  losses  of  business  properly  by  fire,  storm,  or  other  casualty,  or  theft,  not  compensated 
lor  by  insuraace  or  otherwise  and  not  made  good  by  repairs  or  replacements  claimed  as 
deductions.  Explain  these  deductions  in  table  at  foot  of  page  2 of  return.  .\lso  set  forth 
the  provision  of  the  law,  trust,  or  decree  requiring  a depreciation  deduction  and  show 
that  the  amount  deducted  has  been  or  will  be  preserved  and  applied  to  making  good 
the  depreciation.  , , , , , . . , 

The  amount  claimed  for  wear  and  tear  or  depreciation  should  not  exceed  the  qngiiial 
cost  of  the  property  (or  its  value  March  1,  1913,  if  acquired  before  that  date)  divided  by 
its  total  estimated  life  in  years.  When  the  amount  of  depreciation  allowed  equals  the  cost 
of  the  property  (or  (Is  value  March  1,  1913),  no  further  claim  should  be  made. 

Do  not  claim  any  deduction  for  depreciation  in  ilie  value  of  a building  occupied  by 
any  beneficiary  as  his  dwelling,  or  of  other  property  held  for  personal  use.  Do  not  claim 
any  deduction  for  depreciation  of  real  estate  (oxelusive  of  improvements  thereon),  nor 
for  depredation  of  stocks,  bonds,  and  other  securities,  unless  the  estate  is  a recogtuzed 
dealer  in  securities. 

Do  not  claim  depreciation  or  losses  of  articles  that  have  been  taken  into  your  inventory 
at  a figure  reflecting  the  reduction  in  value. 

Depreciation  of  patents,  copyrights,  etc.,  and  depletion  of  mines,  etc. — If  you  wish 
to  claim  a deduction  on  account  of  depreciation  in  the  -value  of  patents,  copyrights,  fran- 
chises, and  other  legal  privileges,  or  on  account  of  depletion  of  mmes  and  oil  and  gas  wells, 
see  Regulations  45,  Articles  163,  ICS,  and  201  to  223. 

Bad  debts. — Report  only  debts  which  you  have  ascertained  to  be  worthless  aud  have 
charged  off  during  the  year. 

A bad  debt  offsetting  income  accrued  since  March  1,  1913,  will  not  be  allowed  as  a 
deduction  unless  the  amount  was  reflected  in  the  income  reported  lor  the  year  in  which 
the  debt  was  created.  In  the  cased  debts  existing  prior  to  March  1, 1913,  only  tlicir  value 
on  that  date  may  be  deducted  upon  subsequently  ascertaining  tliem  to  be  vvorthlcfs. 

State  under  " Explanation  of  deductions,”  at  the  foot  of  the  page,  how  the  debts  were 
ascertained  to  bo  worthless,  or  if  the  deduction  is  based  on  a reserve,  state  specifically 
the  basis  on  which  such  reserve  lias  been  computed.  Insolvency  of  the  debtor,  inabilitv 
to  collect  by  legal  proceedings,  or  inability  of  debtor  to  pay,  ascertained  by  a mercju,(;i6 
agency,  would  be  a sulficieut  indication  of  worthlessness. 

If  at  any  future  time  a debt  charged  off  as  worthless  and  allowc-d  as  a d^uctien  is 
collected,  the  amount  collected  must  be  returned  as  income. 

Unpaid  debts  are  not  deductible  if  made  good  by  recovery  of  piop^irty  aoid  or  retention 

^ Bad  Jc^ts  arising  out  of  loans  not  connected  with  business  should  be  reported  in 
Schedule  II. 

Other  expenses. — Do  not  include  personal  exemption  here.  This  is  to  be  reported 
as  Item  26  on  Form  1040  or  aa  ItemiN-on  Form  1040A.  Expenses  of  administration  of  an 
estate,  such  aa  court  costs,  attorney's  fees,  executor’s  commissions,  etc.,  are  chargeable 
against  the  corpus  of  the  estate  and  are  not  deductible.  Expenses  of  man.agemeut  of  a 
trust  estate  are  deductible. 

Net  Ipss. — If  the  net  cost  of  goods  sold  plus  other  business  deductions  iq  in  exetas 
of  the  total  amount  of  sales  and  income  from  business,  report  the  diffpteace  ia  a ioss  by 
using  red  ink  or  a minus  sign. 

B.  INCOME  FROM  PARTNERSHIPS,  PERSONAL  SERVICE 

Report  the  share  of  the  estate  or  trust  (whether  distributed  or  not)  in  tlie  profits  of 
a partnership  or  personal  service  corporation  or  in  the  income  of  an  estate  or  trust  (if  placed 
to  the  credit  of  the  estate  or  trust  tor  which  this  return  is  made),  not  including  the  part 
of  nicli  share  that  consisted  of  di\  idends  on  stock  of  ordinary  corporations  (to  be  included 
in  IlemJ(a)),  interest  on  obligations  of  the  L'nited  States  (to  beincluded  in  Item  J (bl).  or 
(in  tlie  caso  of  estates  and  trusts)  iutercst  on  corporation  bonds  containing  a tax-free 

• CORPORATIONS,  AND  OTHER  ESTATES  AND  TRUSTS. 

covenant,  upon  which  a tax  of  2 per  ceul  was  paid  (or  will  be  paid)  by  the  debtor  corpora- 
tion (to  be  included  in  Item  K). 

If  income  was  received  from  a partnership,  a personal  service  corporation,  or  another 
fiduciary,  enter  such  income  in  Table  C,  page  1,  apportioning  the  income  between  1^17 
and  1918,  when  necessary  as  shown  on  tlie  parlncrehip  return. 

C.  PROFIT  FROM  SALE  OF  LAND,  BUILDING 

TTso  this  schedule  for  all  sales  of  real  estate,  and  for  sales  of  other  properly  that  was 
not  dealt  in  as  a buf^iuess. 

If  the  profits  or  losses  on  pales  made  through  any  one  broker  a;^egated  $1,000  or  more, 
report  the  transactions  on  a separate  line  with  the  name  and  adaress  of  the  broker. 

Kind  of  OTooerty.— Describe  the  property  as  doSnitely  as  you  can  in  a word  or  two, 
aa ‘‘farm,"  “bouse,"  “lot,”  “stocks,”  bonds." 

Sale  price.— State  the  actual  consideration  or  price,  or,  in  c^e  of  an  exchange,  the 
fair  market  value  of  tho  property  received. 

S,  STOCKS,  BONDS,  AND  OTHER  PROPERTY. 

Cost.— Enter  the  original  cost  of  the  property  or,  if  it  was  acquired  before  March  1, 
1913,  its  fair  market  value  on  that  date.  Expenses  inciclcntal  to  the  purtha.se  may  be 
included  in  the  cost  if  never  claimed  in  income-tax  returns  as  deductions  from  income. 
Enter  in  column  7 the  amount  of  wear  and  tear,  ob.solescence,  or  depletion  sustained  since 
March  1,  1913  (or  since  date  of  acquisition  if  subsequent  to  March  I,  1913).  (This  is  a 
deduction  from  cost,  though  licatcd  for  co'nvenieuce'  as  an  additiop  tq  the  sale  pii'co!) 

Losses. — If  the  total  of  columiis  5 and  C is  in  pxfess  of  the  total  of  columns  4 aud  7, 
report  the  dillercuce  as  a loss  by  u^ng  red  ink  oir  a minus  sigu. 

D.  INCOME  FROM  REl 

Kind  of  properly. — Describe  briefly,  as  in  C. 

Amount  of  rent. — Renta  received  in  crop  shares  shall  bo  returned  as  of  the  year  in 
■which  the  crop  shares  are  reduced  to  money  or  a money  equivalent. 

Repairs,  wear  and  tear,  obsolescence,  depletion,  and  property  losses. — See  instruc- 
tions for  Schedule  A,  above.  Explain  in  table  at  foot  of  p-age  2 of  the  return. 

NTS  AND  ROYALTIES. 

Other  expenses  and  losses. — Report  taxes  on  rented  or  leased  property  and  interest 
on  indebtedness  incurred  or  continued  to  purchase  or  carry  it.  Do  not  include  taxes 
assessed  against  local,  benefits  of  a kind  tending  to  increase  tlie  value  of  the  property 
assessed. 

E.  INTEREST  ON  CORPORATION  BONDS  CONTAINING  TAX-FREE  COVENANT,  ON  WHICH  TAX  OF  2%  WAS  PAID  BY  DEBl  OR 

CORPORATION. 

This  item  should  include  all  interest  received  directly  or  through  other  fiduciaries  I for  ta.xea,  provided  exemption  from  withholding  was  not  claimed  by  the  owner  of  the 
on  bonds  of  corporations  organized  or  doing  business  in  the  United  States,  coiilaiiimg  a bonds.  If  exemption  was  claimed,  the  interest  received  must  be  reported  in  F. 
clause  by  which  the  debtor  corporation  agrees  to  pay  the  interest  without  any  deduction 

F.  OTHER  INCOME  (NOT  INCLUDING  DIVIDENDS,  OR 

Report  in  this  schedule  interest  on  bank  deposits,  notes,  mortgages,  etc.,  and  all  other 
income  not  reported  in  Schedules  A to  E,  except  (a)  dividends  from  corporations  organized 
or  doing  business  in  the  United  States,  which  should  be  reported  as  Item  J (a)'  (b)  taxable 
interest  on  obligations  of  the  United  Slates,  which  should  be  reported  as  Item  J (b);  (c)  re- 
ceipts exempt  from  tax,  as  stated  in  Instruction  II  on  the  other  side  of  this  sheet. 

State  separately  income  from  each  source. 

INTEREST  ON  OBLIGATIONS  OF  THE  UNITED  STATES). 

If  any  interest  on  bonds  of  foreign  countries  or  corporations,  or  any  dividends  onatock 
of  foreign  corporations  were  received,  submit  w ilh  the  return  a schedule  show  ing  (a)  name 
of  country;  (o)  kind  of  obiigatiops  (w-licther  national^  stale,  or  municipal  obligations,  or 
bonds  or  stocks  of  corporations);  (c)  amount  of  principal;  and  (</)  amount  of  interest  or 
dividends. 

Deductions. — Explain  deddetioua  in  the  space  at  the  foot  of  page  2 of  the  return. 

H.  GENERAL  DEDUCTION 

Interest,  taxes,  losses. — See  instructions  for  Schedule  A,  under  the  same. 

Contributions.— Report  here  any  part  of  the  gross  income  which,  pursuant  to  the  terms 
of  the  will  or  deed  creating  the  trust,  was  during  the  taxable  year  paid  to  or  permanently 
set  aside  for  the  United  States,  any  State,  Territory,  or  any  political  subdivision  lliercof, 
or  the  District  of  Columbia,  or  any  corporation  organized  and  operated  exclusively  for 
religious,  charitable,  scientific,  or  educational  purposes,  or  for  the  prevention  of  cmclly  to 
children  or  animals,  no  part  of  the  net  earnings  of  which  inures  to  the  benefit  of  any  private 
stockholder  or  individual. 

S NOT  INCLUDED  ABOVE. 

Enter  under  “ Explanation  of  Deductions”  at  the  (oot  of  page  2 of  the  return,  the  name 
and  address  of  each  organization  falling  within  the  classes  named  above  and  the  amount 
paid  to  each. 

Other  deductions. — Bad  debts  arising  out  of  loans  not  connected  with  business  may  be 
reported  here.  (See  iustructiona  for  Schedule  A,  above.) 

J.  (a)  DIVIDENDS. 

Stock  dividends  wliich  'were  paid  out  of  profits  or  surplus  accumulated  by  the  dia-  I Profits  of  personal  service  corporations  should  bo  included  in  B (except  such  part 

tributing  corporation  prior  to  the  year  for  which  this  return  is  made  but  not  prior  to  March  1,  thereof  as  consisted  of  dividends  of  ordinary  corporations  and  interest  on  obligations  of 
1913,  should  not  be  included  in  Item  J (o),  but  should  be  reported  as  Item  4,  a,  b,  and  c,  the  United  States  issued  since  September  1,  1917).. 

Item  6 (J),  col.  4,  and  Items  6 (c)  and  6 (a)  on  page  1 of  the  return. 

J.  (b)  INTEREST  ON  OBLIGATIONS  OF  THE  UNITED  S 

1.  In  order  to  ascertain  the  amount  to  be  entered  under  J (6),  refer  brat  to  Table  5 
on  page  1 o.'  the  return. 

2.  If  any  amount  entered  in  column  6 of  that  table  exceeds  the  maximum  exemption 
for  the  same  class  of  obligations  (stated  in  column  7),  then  you  must  attach  to  the  return 
a schedule  showing  in  separate  columns  the  following  information  for  that  class  of  obliga- 
tions: 

(«)  Periods  during  which  your  holdings  of  that  class  of  obligations  remaincxl  unchanged 
(including  your  share  c»f  the  holdings  of  purtnervlii|)e,  |K*r8onal  service  corporations,  estates, 
and  trusts,  and  also  any  holdings  the  interest  on  winch  you  rei>orted  as  income  for  1917, 
and  on  which  you  claimed  exemplioD  in  your  1917  return). 

(6)  Amount  of  obligali<-DS  held  by  you  individually  during  each  such  period. 

(c)  Your  share  of  the  holdings  of  each  ])arluer»hi|),  jK^rsonal  service  cor|x>ration,  estate, 
and  trust  during  each  such  period. 

STATES  ISSUED  SINCE  SEPTEMBER  1,  1917. 

(d)  Totals  of  amouDta  In  columns  b and  c. 

(e)  Amount  by  which  each  amount  entered  in  column  dexcoedfl  tl»e  maximum  excmi>* 
tion  for  that  clais  of  obligations. 

(J)  Interest  derived  from  each  amount  of  principal  stated  in  column 

3.  If  any  part  of  the  interest  reported  in  Table  5 waa  received  tliMuph  a partnereliip 
having  a fiscal  year  falling  partly  in  the  calendar  year  1917,  IIjc  taxable  iatori>*t  n ceived 
through  such  partnership  should  be  calculated  in  a eeparute  column  <7  of  the  w hedule. 
Enter  in  this  column,  for  each  period  specified  in  ctduinn  a,  oillier  ( 1 ) the  amount  entered 
in  column / or  (2)  the  interest  on  your  sitareuf  the  partnership's  holdings  (shown  in  column 
c),  whichever  is  the  smaller. 

4.  Enter  as  Item  J (6),  on  page  2 of  the  return,  tho  tola!  of  column / fiir  all  classen  of 
obligations,  less  as  many  twelfths  of  the  total  of  column  g (if  any)  as  the  number  of  niMt.ihs 
of  the  fiurtncrship’s  fisi  ul  year  tlial  fell  in  1917.  Kotor  the  amount  dedL('U\l  as  1 lent  U(6) 
(column  C)  on  page  1 of  Uto  return. 

Income  Tax 

Supplementary  Page  64. 


Page  6 of  Form  1041 


Form  lild— UOTtED  BtitES  Intebnax  Revekite  Sebvice. 


CLAIM  FOR  CREDIT  ON  INDIVIDUAL  INCOME  TAX  RETURN  FOR  TAXES  PAID  OR  ACCRUED 
TO  FOREIGN  COUNTRIES  OR  TO  POSSESSIONS  OF  THE  UNITED  STATES 


Name  of  Claimant. 


Address 


(Street  and  number  or  rural  route.) 


(City  or  totvn.) 


(State.) 


Ou  behalf  of  the  above-named  claimant,  who  ia  a citizen  or  subject  of ^ and  ia  a resident 

• (Name  olcouatry.) 

of  - .credit  ia  hei-eby  claimed,  on  hia  attached  income-tax  return,  which  ia  based  on  income 

(Name  of  country.) 

* during  the  taxable  year for  taxes  paid  or  accrued'  as  follows; 

(Uccelved  oraccrued.)  (If  calendar  year  give  year— if  fiscal  year  give  months.) 

SCHEDULE  Al. 

^Tax  Paid  or  Accrued'  to  a Possession  of  the  United  States  on  Behalf  of  Claimant  Individually. 

Name  of  possession  of  U.  S Character  of  tax. 

Statute  imposing  tax 


(Incomo,  war-prolits,  or  e.xcess-prolits.) 


(To  bo  named  fully  and  clearly  so  a.s  to  bo  easily  identified.) 

Date  of  accrual- Date  of  payment  (if  paid) 

(To  bo  given  even  if  claim  Is  based  ou  payment.)  (To  be  given  oven  if  claim  is  bas^’ on  accruai.) ' 

1.  Amount  of  tax®  (evidenced  by  attached  receipt  or  return)  •*,  which  (converted  at  an  exchange 

(la  foreign  nirney.) 

rate  of ®)  equals  in  dollars  $ 


SCHEDULE  A2. 

® Tax  Paid  or  Accrued'  to  a Possession  of  the  United  States  on  Behalf  of  Claimant  Individually. 


Name  of  possession  of  U.  S. . 
Statute  imposing  tax.._ 


Character  of  tax. 


(Income,  war-profits,  or  excess-profiCs. ) 


(To  be  named  fully  and  clearly  so  as  to  be  easily  identified.) 

Date  of  accrual — Date  of  payment  (if  paid)... 

(To  be  given  evenif  cMm-ls  baaed  on  payment.)  (To  l>e  given  even  if  claim  i*  baaed  on  aocrual.) 

1.  Amount  of  tax®  (evidenced  by  attached  receiptor  return) which  (converted  at  an  exchange 

. (In  foreign  money.) 

rate  of ®)  equals  in  dollars , $ 

SCHEDULE  Bl. 

“Tax  Paid  or  Accrued  ' to  a Foreign  Country  on  Behaif  of  Claimant  Individually. 


Name  of  foreign  country , 

Statute  imposing  tax 


Chai-actcT  of  tax. 


(Income,  war-profits,  or  excess-protits.) 


(To  be  named  fully  and  clearly  so  as  to  be  easily  identified.) 

Date  of  accrual Date  of  payment  (if  paid) 

(To  bo  given  even  if  claim  ia  based  on  payment.)  (To  bo  given  oven  if  clajm  Is  based  on  accrual.) 


1.  Total  net  income  on  which  this  tax  was  based 


2.  That  amount  of  such  total  net  income  which  was  derived  from  sources  in  that  foreign  country' * 

3.  Ratio  of  total  net  income  derived  from  sources  in  that  foreign  country-  to  total  net  income  on  which  this  tax  was 

based  (item  2 divided  by  item  1) 

4.  Totp.l  amount  of  this  tax  ® payment  or  accrual  to  that  foreign  country  (evidenced  by  attached  receipt  or  return) * 

5.  That  amoimt  of  this  tax  which  was  based  on  income  derived  from  source.s  in  that  foreign  country  (item  3 multi- 


plied by  item  4) which  (converted  at  an  exchange  rate  of ®)  equa’.s  in  dollars.. 

(In  forel.ga  money.) 

SCHEDULE  B2. 

“Tax  Paid  or  Accrued  ' to  a Foreign  Country  on  Behalf  of  Claimant  Individually. 


Name  of  foreign  country  Character  of  tax. 

Statute  imposing  tax — 


(Inc'.iuio,  wiir-prolits,  or  excxvjS-prulits.) 


(To  bu  Liutucd  fully  and  clearly  so  us  to  be  easily  iilc’iuficd.) 


Date  of  accrual Date  of  payment  (ii  jiaiii) 

(To  bo  given  even  If  claim  is  bMOxl  on  payment.)  ('i'o  bo  given  even  if  claim  is  l>as<xl  ou  ac-crual.) 

1.  Total  net  incomo  on  which  thia  tax  was  Kased  — * 

2.  That  amount  of  such  total  net  income  which  wae  derived  from  eources  in  that  foirdgn  country  ' ■* 

3.  Itatioof  total  net  income  derived  from  sources  in  that  foreign  country  to  total  ii<  t income  on  whit  li  this  tax  was 

based  (item  2 divided  by  item  1) 


4.  Total  amount  of  this  tax®  payment  or  accrual  to  that  foieign  country  (evidenced  by  att.icbed  receipt  or  return)  

5.  That  amount  of  this  tax  which  was  brnsod  on  income  derived  from  trjurccs  in  that  loieign  country  (item  3 multi- 

plied by  item  4) which  (converb.ul  at  an  exchange  rate  of “)  equals  in  dollars...  $ 

(lu  foreic'ii  riiouoy.) 


I noU)  1,  pa"*)  3.  > Kce  nots  2,  [>ug(j .'!. 


llbu  lUiUi  .3,  jiagu  3. 


.Soo  IiuLo  1,  iKign  3.  iT.i:*!  liCilu  5,  pa^o  o.  i>  SuO  UutO  C,  pHtii  3. 


1 iicome  Tax 

Siiifplcmeiitary  I'^agic  fi.S. 


__  . — SCHEDULE  Cl.  . 

•TaxPaid  or  Accnied'  to«  Possossion  of  the  United  States  on  Behalf  of  a Partnership,  Estate,  or  Trust,  in  Which  Claimant  Has  as  Interest. 

Partnership,  estate,  or  trust 

(Name.)  (Address) 

Fiduciary  (if  estate  or  trust) ..... 

(Name.)  (Address ) 

Character  and  extent  of  claimant’s  interest  in  partnership,  estate,  or  tnist 


Name  of  possession  of  U.  S Charartcr  of  (ax.. 

(Income,  war-proDls,  or  exccss-pronts.) 

Statute  imposing  tax 

(To  be  named  fuJ)y  acd  rlearlv  so  as  to  be  easily  identified.) 

Date  of  accrual Date  of  paxTuent  (if  paid)..... 

(To  be  given  even  if  claim  is  based  on  payment.)  (To  be  given  even  if  claim  is  based  on  accrual. ) 

1.  Total  net  income  on  which  this  tax  was  ba-sod  « 

2.  That  amount  of  such  total  net  income  to  which  claimant  'vould  have  been  entitled  as  partner  or  beneficiary  had 

nosuch  tax  of  the  partnership,  estate,  or  trust  accrued  or  been  paid  to  that  possession  (claimant’s  share  of  item  1)  * 

3.  Ratio  of  that  amount  of  total  net  income  to  tvhich  claim.anl  would  have  been  entitled,  to  total  net  income  on 

which  this  tax  xcas  based  (item  2 divided  by  item  1) 

4.  Total  amount  of  this  tax  ® payment  or  accrual  to  that  poasessiou  (evidenced  by  attached  receipt  or  return) * 

5.  That  amount  of  this  tax  which  was  based  on  claimant's  eliare  of  tnc  income  faxed  (item  3 multiplied  by  item  4) 

which  (converted  at  an  exchange  rate  of *)  equals  in  dollars $ 

(In  foreign  money.) 

SCHEDULE  C2. 

®Tax  Paid  or  Accrued’  to  a Possession  of  the  United  States  on  Behalf  of  a Partnership,  Estate,  or  Trust,  in  Which  Claimant  Has  an  Interest. 


(Name.) 


Partnership,  estate,  or  trust 

Fiduciary,  (if  estate  or  trust) 

(Name.) 

Character  and  extent  of  claitaant’s  interest  in  partnerebip,  estate,  or  trust 


(Address.) 

(Address.) 


Name  of  possession  of  U.  S.  Character  of  tax 

(Income,  ■>var-proQts,  or  eicoss-proflts.) 

Statute  imposing  tax - 

(To  be  named  fully  and  clearly  so  as  to  be  easily  identified.) 

Date  of  accrual — - — Date  of  payment  (if  paid) 

(To  b9  given  even  if  claim  is  based  on  payment.)  (To  be  given  even  it  claim  is  based  on  accrual.) 

1.  Total  net  income  on  which  this  tax  was  based * 

2.  That  amount  of  such  total  net  income  to  which  claimant  would  have  been  entitled  as  partner  or  beneficiary  had 

no  such  tax  of  the  partnership,  e.state,  or  trust  accrued  or  been  paid  to  that  possession  (claimant’s  share  of  item  1)  .* 

3.  Ratio  of  that  amount  of  total  net  income  to  which  claimant  would  have  been  entitled,  to  total  net  income  on 

which  this  tax  w.aa  based  (item  2 divided  by  item  1) 

4.  Total  amount  of  this  tax’  payment  or  accrual  to  that  possession  (evidenced  by  attached  receipt  or  return) ‘ 

5.  That  amount  of  this  tax  which  was  based  on  claimant’s  share  of  the  income  taxed  (item  3 multiplied  by  item  4) 

■♦,  which  (converted  at  an  exchange  rate  of ®)  equals  in  dollars $ 

(In  foreign  raccay.) ^ 

SCHEDULE  Dl.  . 

®Tax  Paid  or  Accrued’  to  a Foreign  Covmtry  on  Behalf  of  a Partnership,  Estate, .or  Trust  in  Which  Claimant  Has  an  Interest. 


(Name.) 


Partnership,  estate,  or  trust 

Fiduciary  (if  estate  or  trust) 

(Name.) 

Character  and  extent  of  claimant’s  interest  in  partnership,  estate,  or  trust 


(.Address.) 


(.Vddross.) 


Name  of  foreign  country i...  Character  of  tax 

(Income,  war-prolits,  or  excess-profits.) 

Statute  imposing  tax 

(To  bo  named  fully  and  clearly  so  as  to  be  easily  identified.) 

Date  of  accrual — Date  of  payment  (if  paid) : 

(To  be  given  even  if  claim  is  based  on  payment.)  (To  be  given  even  if  claim  is  ba>?4  on  accrual.') 

1.  Total  net  income  on  which  this  tax  was  based ^ ' 

2.  That  amount  of  such  total  net  income  which  was  derived  from  sources  in  that  foreign  country  ’... ‘ 

S.  Ratio  of  total  net  income  from  sources  in  that  foreign  country  to  total  net  incorrie  on  which  this  ta.x  was 

based  (item  2 divided  by  item  1) 

4.  Total  amount  of  this  tax  ’ payment  or  accruaj  to  that  foreign  country  (evidenced  by  attached  receipt  or  return) 

5.  That  amountof  this  tax  which  was  based  on  income  derived  from  sources  in  that  forei^  country  (item  3 multiplied 

6.  That  amount  of  such  total  net  income  derived  from  sources  in  that  foreign  country  to  which  claimant  wouhl 

have  been  entitled  as  partner  or  beneficiary  had  no  such  tax  accrued  or  been  paid  to  that  foreign  country 

(claimant’s  share  of  item  2) 

7.  Ratio  of  that  amountof  such  total  net  income  derived  from  sources  in  that  foreign  country'  to  which  claimant 

would  have  been  entitled,  to  such  total  net  income  derived  from  sources  in  th.at  foreign  coimtiy  (item  f> 

divided  by  item  2) 

8.  That  amount  of  this  tax  which  was  baaed  on  claimant’s  share  of  income  derived  from  sources  in  that  foreign 

country  (item  5 multiplied  by  item  7) ‘’i  which  (converted  at  ap  exchange  rate  of 

(In  foreign  money.) 

:®)  equals  in  dollars^ $ 

' See  note  1,  page  3.  ’See  note  2,  page  3.  • See  note  3 .page  3.  ‘ See  note  4,  page  3.  ‘See  note  5,  page  3.  ‘ Sco  note  «,  page  3.  ’ See nole  7,  page  3, 

•8— SS09  " 


Page^2^of  Formal  1 16. 


Income /Fax 

Supplementary  Page  66. 


SCHEDULE  D2. 

•Tax  Paid  or  Accrued  * to  a Foreign  Country  on  Behalf  of  a Partnership,  Estate,  or  Trust  in  Which  Claimant  Has  an  Interest. 


Partnership,  estate,  or  trust 

Fiduciary  (if  estate  or  trust) 


(Name.) 


(Name.) 

Character  and  extent  of  claimant’s  interest  in  partnership,  estate,  or  trust 


(-■VdcLrcss.) 


(Address.; 


Name  of  foreign  country Character  of  tax 

{Income,  wai-proAts,  or  cxoess-profits.' 

Statute  imposing  tax 

(To  be  named  fully  and  clearly  so  as  to  be  easily  identilied.) 

Date  of  accrual  Date  cf  payment  (if  paid) 

(To  be  given  even  il  claim  is  based  on  payment.)  (To  bo  given  even  if  claim  is  based  on  accrue:.; 

1.  Total  net  income  on  which  this  tax  was  based * 

2.  'That  amount  of  such  total  net  income  which  was  derived  from  sources  in  that  foreign  country^ * 

3.  Ratio  of  total  net  income  from  sources  in  that  foreign  country  to  total  net  income  on  which  this  tax  was  based 

(item  2 divided  by  item  1) — 

4.  Total  amount  of  this  tax  ^payment  or  accrual  to  that  foreign  country  (evidenced  by  attached  receipt  cr  return)  * 

5.  That  amount  of  this  tax  which  was  based  on  income  derived  from  sources  in-that  foreign  country  (item  3 multiplied 

by  item  4)  * 

6.  That  amount  of  such  total  net  income  derived  from  sources  in  that  foreign  country  to  which  claimant  would 

have  been  entitled  as  partner  or  beneficiary  had  no  such  tax  accrued  or  been  paid  to  that  foreign  country 

(claimant’s  share  of  item  2)  ♦ 

7.  Ratio  of  that  amount  of  such  total  net  income  derived  from  sources  in  that  foreign  country  to  which  claimant 

would  have  been  entitled,  to  such  total  net  income  derived  from  sources  in  that  foreign  countrj^  (item  6 

divided  by  item  2) 

8.  That  amount  of  this  tax  which  was  baaed  on  claimant’s  chare  of  income  derived  from  sources  in  that  foreign 

country  (item  5 multiplied  by  item  7) ■*,  which  (converted  at  am  exchange  rate  of 

(In  foreign  money.) 

*)  equals  in  dollars.. ? 


SUMMARY  OF  CREDITS  CLAIMED 
For  Taxes  Paid  or  Accrued  ‘ on  Behalf  of  Claimant  Individually. 

To  possessions  of  the  U.  S.:  Item  1 of  Schedule  Al,  $. ; Item  1 of  Schedule  .Ail,  $ ; Total,  $ 

To  foreign  coimtries:  Item  5 of  Schedule  Bl,  $.... ; Item  5 of  Schedule  B2,  $ ; Total,  $ 

For  Taxes  Paid  or  Accrued ' on  Behalf  of  Partnership,  Estate,  or  Trust  in  Which  Claimant  Has  an  Interest. 

To  jw.ssessions  of  the  U.  S.:  Item  5 of  Scheduled,  $... ; Item  5 of  Schedule  C2,  $ ; Total,  $ 

To  foreign  countries:  Item  8 of  Schedule  Dl,  $ ; Item  8 of  Schedule  D2,  $ ...;  Total,  $. 

Total  credit  claimed  (to  be  inserted  in  the  attached  income-tax  return  on  Form  1040  as  item  40)  $ 


I swear  (or  affirm)  that  the  above  is  to  the  best  of  my  knowledge  and  belief  a true  and  complete  statement  of  facts  in.  connection 
with  the  credit  for  income,  war-profits,  and  excess-profits  taxes  above  claimed. 


(If  claim  is  made  by  agent,  the  reason  therefor  must  be  stated  on  this  line.) 
Sworn  to  (or  affirmed)  and  Bubecribed  before  me  this day  of 


(Signature  ol individual  or  agent.) 


(.Address  of  individual  or  agent.) 


(OflQcial  capacity.) 


• ir  attached  inoomo-tax  retnm  is  based  on  income  "received,”  then  "paid  or  accnied”  wherever  it  appears  in  this  form  means  “paid,”  if  based  on  income 
"accrued,”  then  "paid  or  accrued”  means  "accrued.”  (See  Section  200  of  the  Revenue  Act  of  1918.) 

» To  secure  endit  for  taxes  paid  or  accrued  to  possessions  of  the  United  States,  claimant  must  be  a citizen  or  resident  of  the  United  States.  (Seo  Section  222  (o) 
on  next  page.) 

*"  Amount  of  tax”  means  tax  proper,  excluding  any  amount  that  represents  interest  or  penalties.  (Seo  Article  382  on  next  page.)  If  the  tax  has  been  actually 
paid  in  full,  the  amount  of  the  tax  (excluding  interest  and  pomlties)  so  paid  is  the  amount  to  bo  entered  in  this  blank,  even  though  tho  claim  be  based  on  tho  accrual 

cl  the  tax. 


‘ State  this  item  in  terms  of  tho  currency  used  In  fnaldng  the  return  on  which  this  tax  was  based  (o.  g.,  pounds,  francs,  marks). 

* Claimant  mnst  here  state  the  rate  of  exchango  used  and  must  also  attach  a statement  describing  In  reasonable  detail  why  and  how  he  determined  upon  this 
particular  rate. 


• To  secure  credit  for  taxes  paid  or  accrued  to  a foreim  country,  claimant  must  bo  a citizen  or  resident  of  tho  United  States-.  Moreover,  if  he  is  an  alien  resident,  he 
mnst  be  a citizen  or  subject  of  such  foreign  country,  and  such  foreign  couutry  must  allow  "a  similar  credit  to  citizens  of  the  United  States  residing  in  such  country." ' 
(Bee  Section  222  (a)  on  next  page.) 

’ The  person  making  Uils  claim  must  attach  to  it  a sHtnment,  describing  in  rc-wonablo  detail  tho  method  by  which  he  determined  the  amount  of  Item  2 ("Tliat 
et  income  which  was  derived  from  sources  in  that  foreign  country"). 

(OVER) 


amount  of  such  total  net 


Page  3 of  Form  1116. 


Income  Tax 

Supplementary  Page  67, 


PROVISIONS  OF  STATUTE  AND  REGUUTIONS  GOVERNING  USE  OF  THIS  FORM 

SECTIOir  222  OF  EEVEBTJE  ACT  OF  1918. 


Seo.  222.  (a)  That  the  tax  computed  under  Part  II  of  this  title  shall  be  credited  with: 

(1)  In  the  case  of  a citizen  of  the  United  States,  the  amount  of  any  income,  war-profits,  and  excess-profit 

taxes  paid  during  the  taxable  year  to  any  foreign  country,  upon  income  derived  from  sources  therem, 
or  to  any  possession  of  tho  United  States;  and 

(2)  In  the  case  of  a resident  of  the  United  States,  the  amount  of  any  such  taxes  paid  during  the  taxable  year 

to  any  possession  of  the  United  States;  and 

(3)  In  the  case  of  an  alien  resident  of  tho  United  States  who  is  a citizen  or  subject  of  a foreign  country,  the 

amount  of  any  such  taxes  paid  during  the  taxable  year  to  such  country,  upon  income  derived  from 
sources  therein,  if  such  country,  in  imposing  such  taxes,  allows  a similar  credit  to  citizens  of  the  United 
States  residing  in  such  country;  and 

(4)  In  the  case  of  any  such  individual  who  is  a member  of  a partnership  or  a beneficiary  of  an  estate  or  trust, 

his  proportionate  share  of  such  taxes  of  the  partnership  or  the  estate  or  trust  paid  during  the  taxable 
year  to  a foreign  country  or  to  any  possession  of  the  United  States,  as  the  case  may  be. 

(h)  If  accrued  taxes  when  paid  differ  from  the  amounts  claimed  ?.s  credits  by  tho  taxpa5’-er,  or  if  any 
tax  paid  is  refunded  in  whole  or  in  part,  the  taxpayer  shall  notify  the  Commissioner,  who  shall  redetermine 
tho  amount  of  the  tax  due  under  Part  II  of  this  title  for  the  year  or  years  affected,  and  the  amount  of  tax 
duo  upon  such  redetermination,  if  any,  shall  be  paid  by  the  taxpayer  upon  notice  and  demand  by  the  collector, 
or  the  amount  of  tax  overpaid,  if  any,  shall  be  credited  or  refunded  to  the  taxpayer  in  accordance  with  the 
provisions  of  section  252.  In  the  case  of  such  a tax  accrued  but  not  paid,  the  Commissioner  as  a condition 
precedent  to  the  allowance  of  this  credit  may  require  the  taxpayer  to  give  a bond  with  sureties  satisfactory 
to  and  to  be  approved  by  the  Commissioner  in  such  penal  sura  as  the  Commissioner  may  require,  conditioned 
for  the  payment  by  the  taxpayer  of  any  amoimt  of  tax  found  due  upon  any  such  redetermination;  and  the 
bond  herein  prescribed  shall  contain  such  further  conditions  as  tho  Commissioner  may  require. 

(c)  These  credits  shall  be  allowed  only  if  the  taxpayer  furnishes  evidence  satisfactory  to  the  Commis- 
sioner showing  the  amount  of  income  derived  from  sources  within  such  foreign  country  or  such  possession  of 
the  United  States,  and  all  other  information  necessary  for  the  computation  of  such  credits. 

ARTICLES  382  AND  383  OF  REGULATIONS  45. 

Art.  382.  Meaniag  of  terms. — ‘‘Amount  of  * * * taxes  paid  during  the  taxable  yearl..'  means  taxes 
proper  (no  credit  being  given  for  amounts  represen,,ting  interest  or  penalties)  paid,  or  accrued  during  the 
taxable  year  on  behalf  of  the  individual  claiming  credit.  “Foreign  country''  includes  within  its  meaning  any 
foreign  sovereign  state  or  self-governing  colony  (for  example,  the  Dominion  of  Canada),  but  does  not  include 
a foreign  mtmicipality  (for  example,  Montreal)  unless  itself  a sovereign  State  (for  example,  Hamburg).  “Any 
possession  of  the  United  States''  includes,  among  others,  Porto  Rico,  the  Philippines  and  the  Virgin  Islands. 
As  to  the  meaning  of  “sources”  see  articles  91-93.  See  also  section  1 of  the  statute. 

Art.  383.  Conditions  of  Allowance  of  Credit. — (a)  When  credit  is  sought  for  income,  war-profits,  or  excess- 
profits  taxes  paid  other  than  to  the  United  States,  the  income-tax  return  of  the  individual  must  be  accom- 
panied by  this  form,  carefully  filled  out  with  all  the  information  called  for  and  with  the  calculations  of 
credits  indicated,  and  duly  signed  and  sworn  to  or  affirmed.  WTien  credit  is  sought  for  taxes  already 
paid  the  form  must  have  attached  to  it  the  receipt  for  each  such  tax  payment.  When  credit  is  sought  for 
taxes  accrued  the  form  must  have  attached  to  it  the  return  on  which  each  such  accrued  tax  was  based.  This 
receipt  or  return  so  attached  must  be  either  the  original,  a duplicate  original,  a duly  certified  or  authenticated 
copy,  or  a sworn  copy.  In  case  only  a sworn  copy  of  a receipt  or  return  is  attached,  there  must  be  kept 
readily  available  for  comparison  on  request  the  original,  a duplicate  original,  or  a duly  certified  or  authenti- 
cated copy.  (6)  In  the  case  of  a credit  sought  for  rf'tax  accrued  but  not  paid,  the  Commissioner  may  require, 
as  a condition  precedent  to  the  allowance  of  credit,  a bond  from  the  taxpayer  in  addition  to  this  form.  If 
such  a bond  is  required.  Form  1117  shall  be  used  for  it.  It  shall  be  in  such  penal  sum  as  the  Commissioner 
may  prescribe,  and  shall  be  conditioned  for  the  payment  by  the  taxpayer  of  any  amount  of  tax  found  duo 
upon  any  redetermination  of  the  tax  made  necessary  by  such  credit  proving  incorrect,  with  such  further 
conditions  as  the  Commissioner  may  requhe.  This  bond  shall  be  executed  by  the  taxpayer,  his  agent  or 
representative,  as  principal,  and  by  sureties  satisfactory  to  and  approved  hy  the  Commissioner.  Seo  also 
•section  1320  of  the  statute. 


Rage  4 of  Form  1116. 


Income  'I’ax 

Supplementary  Page  68. 


DELIVER  OR  SEND  THIS 
RETURN  SO  AS  TO 
REACH  COLLEaOR  OF 
INTERNAL  REVENUE  ON 
OR  BEFORE  THE  15™ 
DAY  OF  THE  THIRD 
MONTH  AFTER  THE 
CLOSE  OF  THE  PERIOD 


IF  EXTENSION  OF 
TIME  FOR  FIUNG  RETURN 
HAS  BEEN  GRANTED 
THE  AUTHORIZAHON 
MUST  BE  ATTACHED  TO 
THIS  RETURN 


Pago  1— Summary 

Form  1120-A— UNITED  STATES  INTERNAL  REVENUE  SERVICE 

CORPORATION  INCOME  AND  PROFITS  TAX  RETURN 

FOR 

, and  ended.... , 1919 


Fiscal  Period  begun 

II  Ika  Mr"’'* 


bum  Ik  lb* 
■aul  U remklaj 


(Print  plainly  corporation’s  name  and  principal  placa  of  buainais) 


SCHEDULE  I— NET  INCOME. 


Audited  by 


CASH 

dtECK* 

KLO. 

’cEaTrToFTND.’ 


(Caahiar’a  Stamp) 


Item.  | 

1 1911 

1012 

1913 

1.  Net  Income  for  Each  Prewar  Year  (as  finally  determined  oi 

2.  Plus  amount  of  corporation  excise  or  income  tax  paid  in  each  yea 

3.  Totals  fob  1911,  1912,  and  1913  (If  in  any  of  theso  years 

1 

r 

1 

there  was  a los8,'enter  zero 

s 

1 

1 

3 

1 

3. 

4.  Leas  dividends  received  in  1913 . ... , _ 

S.  Net  Total  FOB  1913 ..  

$ 

6.  Average  Net  I.scome  fob  Prewar  Period  (sum  of  items  on  line  3 for  1911  and  1912  and  Item  5 for  1913,  divided  by  nunfber  of  years) 

3 

7.  Net  Income  for  Taxable  Year  (Item  27,  Schedule  A,  page  2) _.l 

3 

SCHEDULE  II— INVESTED  CAPITAL. 

Item. 

1911 

1912 

1913 

Taxable  Year. 

- 1.  CkplUl.MQrplai^nii  nn^iliTjilM  proflUatcl(»eoftbeprecfrtiDy^yi*a^Raiih^i^lij 

$ 

i' 

$ 

$ 

2.  Plus  adjustments  by  wav  of  additions  (from  Schedule  F). ... 

3.  Totai 

3 

$ 

$ 

3 

4.  Lees  adjustments  by  way  of  deductions  (from  Schedule  G) 

5.  RiMAIVnER...  . 

3 

1 

3._......l 

$ 

$ 

6.  Plus  or  minus  changes  in  invested  capital  during  year  (from 
Schedules  J and  I!) 

7.  Total  (or  REM.tiNnEB) 

$ 

1 

% 

$ 

8.  Less  deduction  on  account  of  in^missible  assets  (from 
Schedule  L) 

9.  Invested  Capital  for  Each  Year 

3 

s 1 



s 

3- 

10.  Average  Invested  Capital  for  Prewar  Period  (suln  of  items  on  line  9 for  1911, 1912,  and  1913,  divided  by  number  of  years) 

Jl.  Increase  or  Decrease  IN  Invested  Capital  FOR  Taxable  Year  AS  Compared  WITH  Average  Prewar  Invested  Capital  (indicate  decreas^by  “D”)... 

$ 

— 

Excess-profits  credit. 

1.  Eight'  per  ctnt  of  invested  capital  for  taxable  year  (Item  9, 
last  column,  Schedule  II)  

$ 

WAR-PROFITS  CREDIT. 

4.  Average  net  income  for  prewar  period  (Item  6,  Schedule  D ... 

5.  Plus  10%  of  increase  or  minus  10%  of  decrca.s?  shown  by 

Item  11,  Schedule  II 

? 



2.  Exemption,  except  for  foreign  corporations  (33,000) 

6.  (a)  Total  op  (or  Difference  Between)  Items  -1  and 
or  (b)  10%  of  invested  capital  for  taxable  year  (Item 
9,  last  column,  Schedule  11),  whichever  is  larger. 

$ 

3.  Excess-Profits  Cbedit  (Item  1-pIua  Item  2) 

1 

1 

7,  Exemption,  except  for  foreign  corporations  ($3,000) 

1 8.  WAR-PROFire  Credit  (Item  6 plus  Item  7) 

3 

SCHEDULE' IV— COMPUTATION  OF  TAXES. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  (Braekata  one  and  two), 
an  a full  year  the  invested  capital  must  he  reduced  ae  provided  in  p 


1.  nurxtTS. 

2.  Amount  or  Nxt  Income  (Item 
7.  Schedule  I)  m Each  Braceet. 

3.  ExcE.^PRonT3  Credit 
(Itf:m  3.  SCHEDUT.E  III). 

4.  Reuaikdcr  Sfb/ecttoTax. 

.5.  Rate 

1919  RATES. 

6.  Amount  or  Tax. 

7.  Rate.l 

30% 

ir.a  RATES. 

I S.  Amount  or  Tax. 

1.  Not  over  20%  of  in- 
vroicd  capital 

5 

$ 

$ 

20% 

■10% 

2.  Over  20%  of  invested 
capital 

05% 

3.  Totals 

$.. 

1 

1 

1 

1 

i...'.... 

1 

■'  1 

r 

4.  Net  income  for  taxable  year  (Item  7,  Schedule  I) 

$ 

1 

7.  Fighty  per  cent  of  Item  6 , . 

^ 

6.  Lea  amount  of  war-profits  credit  (Item  8,  Schedule  III) 

8,  Less  Item  3 column  8 (if 
smaller  than  Item  7) 

6-  Remainder.- . 

3 

1 

9.  Tax  in  Bracket  three  (Ilcia  7 minus  Item  8— if 

Item  8 is  the  larger,  make  no  entry) 

10.  Total  at  1918  Rates  for  W'ar  Profits  and  Excess  PROFrrs  as  Comfuted  under  Section  301  (a)  (Item 3,  columns,  plus  Item  9) 

$ 

1 

1 

1 

11.  Total  at  1918  Rates  fob  War  Profits  and  Excess  Profits,  ip  Computed  under  Section  302  (see  Instructions,  page  1.  paragraphs  6 and  7) 

$ 

1 

1 

1 

12.  Total  at  1919  Rates  for  War  Profits  and  Excess  Profits,  if  Computed  under  Sections  301  (cl  and  302 

1$ 

1 

I- 

1 

TET  proportluo  u(  1 tcm  10  or  II,  or  that  pnjportion  uf  (lif  tax  coinpiitod  under  Section  303,  304, or  337  (se*  Instructions,  pa^c  TTpHra^jraphs  B and  7),  which 

the  Dumber  o(  m'mtlie  in  1918  is  of  the  number  of  mmlhs  in  the  period , 1 

That  proportion  of  Item  3,  column  6,  or  Item  12,  or  of  the  tax  computed  under  Section  303,  301,  or  337,  which  the  number  of  months  in  1019  is  of  the 
numbed  of  months  in  the  period 

Total  war-profits  and  exroy-profits  lax  (Item  13  plus  Item  14) 


16.  Net  income  for  taxable  year  (Item  7.  Schedule  11 

t 

17.  In UrMt  on  obi int  font  frf  V.  8.  j 

ftottuinpl(lUfn4,Urh#%luJ*  1 
A,  pofo  2) 

IS.  Wof'pronii  nnd  ricrs»-proflU 

Ux  (Itoin  13) 

19.  Ki«iBptlon,firrp'  forRirHicn 

corporotioiif  |2,ono  uo«m 
rtiurn  li  for  than  t year 

fMO  pormxraph  1,  par*  1,  of 
ImUucUoiu) 

incomsTTaX. 


21.  Income  tax,  1918  rates,  12%,  Item  20..:„ 


22.  Income  tax.  1919  rales,  10%,  Item  20 

23.  That  proportion  of  Item  21  which  the  number  of  inonths 

in  1918  u of  the  number  of  months  in  the  period 

2f.  That  proportion  of  Item  22  which  the  number  of  months 
in  1019  is  of  Iho  number  of  months  in  the  period, 


Total  income  tax  (Item  23  plus  Item  2-1) $. 


War  and  excero-profiU  tax  (Item  1.)).. 
Income  tax  (Item  25) 


Total  of  Itema  26  and  27 

I allowable  credit  for  income,  war-profits,  and  i 


80,  Total  Tax  (ToUl  of  Items  28,  27,  28,  and  29) 

31.  Tax.pe^d:  Onaubmiaeloo  of  tentative  return  (1031T),  > . 


uicb  mutt  be  filled  out  and  attached  if  audi  credit  is  sought).. 

by  r»miltan(o  ncroimianvine  tlii»  reliini  8 , 


Income  H’ax 

Supplementary  I’agc  69. 


Page  1 of  Form  1120A 


Page  2— Ineomo  Schedules 


SCHEDULE  A— TAXABLE  NET  INCOME. 


Note.— RaiUoad  corponUjons,  Ranks,  uigumnce  compands,  and  other  corporaliona  required  to  submit  statements  of  earnings  and  expenses  to  any  national,  stale  munirinal  or  other 
mihtic  officer  mav  stibrnit  instead  of  Schedule  A,  a statement  of  eamingsand  expenses  in  the  form  in  which  submitted  to  such  officer.  In  sue  h cases  the  lixal.le  net  earnings  will  be  rcconcil^ 
by  means  of  Schedule  B with  the  not  prolit  shown  hy  the  earimiigs  and  expense  statement  submitted,  and  should  ho  entered  as  Item  7,  .gebetlule  I paen  | “ ™ 


CROSS  INCOME. 

Gross  sales,  less  returns  and  allowances.....—. —...  ....  

Less  cost  of  goods  sold,  exclusive  of  expenses,  repairs,  and  other  items  called  for  sepamtcly 
below  (from  Schedule  A2) — 

Gross  income  from  operations  other  than  trading  or  manufacturing,  less  allowances  (from  Schedule  .'.3)., 

Interest  on  obligations  of  the  United  .SlaAes  or  its  possessions  not  exempt  (from  Schedule  Al) 

Interest  from  other  sources  (from  Schedule  A5) 

, Rentals 

Rovallios- * 


Share  of  net  income  carried  during  period  by  personal  service  corporations  (whether  received  or  not) 

Dividends  on  stock  of  foreign  corporations  (from  Schedule  A9),  ; dividends  on  stock  of  domestic 

corporations  other  than  personal  service  corporations,  $.. .;  total 

Grose  inroine  from  all  other  sources  except  dividends  (not  including  any  amount  in  respect  of  sales  i 
cellaneous  investmculs— see  Item  22,  below)  (from  Schedule  AlO) 


capital  assets  or  mis* 


Total  or  Items  1 to  10  ... 

DEDUemONS. 

Ordinary  and  necessary  expenses  (except  amounts  reported  in  Item  2 above  or  called  for  separately  below,  and  not  includ- 
ing cost  or  \aluc  of  capital  assets  or  miscellatieous  in  vestments  sold  during  taxable  year — sec  Item  22)  (from  fchodule  .^12). 

Compensation  of  officers  (including  salaries,  commissions,  and  other  compensation  in  whatever  form  paid)  (from  Schedule 
A13) - 

Repairs  (including  labor,  supplies,  overhead,  and  other  items  properly  chargeable  to  repairs)  (from  Schedule  AH) 

Interest  (except  on  indehtediivsa  incurred  or  coiilimicd  to  purchase  or  carry  obligations  or  sccurilics,  other  than  obligations 
of  the  United  States  iR-utd  after  Scptoiuher  21,  1917,  the  interest  on  whic  h is  wholly  e.xempt  from  income  tax) 

Taxes  (exc-ept  Federal  income,  war-protits,  and  cxccas-proUts  taxes,  taxes  vchn  h are  a credit  under  heetton  23o,  and  laxee 
assessed  against  local  heuelits  of  a kind  tending  to  increase  the  value  of  the  property  astessed) 

Debts  ascertained  to  he  worthless  and  charged  off  w ithin  the  taxable  year. 

Exhaustion,  wear  and  tear  (including  obsolescence)  (from  iSchcduIe  AlSl 

Depletion.  If  depletion  is  claimed  hy  a mining  comjxiuy,  the  information  tailed  for  by  Form  .K  (recisedl.or  if  hy  an  oil 
or  gas  company.  Form  N (which  forms  can  he  obtained  from  the  Collector),  must  he  submitted  with  this  return 


Total  or  Items  12  to  19 

Difference  Between  Items  11  and  20  . 


Profit  or  loss  on  sales  of  capital  assets  and  muscellaneous  invoitmentsffrom  Schedule  A22). 

Losses su.sticmed  during  the  ta.xiiUa  year,  and  deducted  under  Section  234  (a)  (4)  (from  Sch^ule  A22)  (extend  in  laslcolun 
net  total  of  Items  22  and  23) 


I cxlcndcdl.  5. 

I i 


Net  income  for  taxable  year  exclusive  of  deduclioas  for  dividends  and  amortization  (total  of  ordifioroncc  between  Items  21  and  id,  ikc  latte 

Dividends  received  from  domestic  corporatioue,  not  personal  eeryice  corporations 

Amortization  of  war  facilities  (from  Schedule  A26)  (extend  total  of  Items  25  and  20) ^ - ..■I I I 

Net  Income  for  Taxable  Year  (Difference  between  Items  24  and  26,  the  latter  as  extended)  (to  W entoretl  as  Item  7,  SchHule  I.  pn^o  

SCHEDULE  B— RECONCILIATION  OF  NET  PROFIT  PER  BOOKS  WITH  TAXABLE  NET  INCOME. 


1.  Net  profit  for  year  per  books,  before  any  adjustments  arc  ' 

Di:idelheji.in 

2.  ViiidJowable  di*diiction5: 

(a)  Donations,  j^ratuiiies,  and  contributions 

(^)  lueoia^  ^vtr•proflu,  and  esc^nt-iirodta  taiei  (&id  or  ^ccraed  U I 

thr  i'nitrd  Statrif.  ild  pjshe^oioiii.  ui'  a luru^'u  coualrjr 

(c)  Special  improvement  ta.xea  lending  to  increase  the  I 

value  of  lUe  property  aissessed |... 

(<I)  Furniture  and  fixtures,  addidotiS,  or  betterments  i 

treated  as  expenses  on  the  books. L., 

L 


(€)  Replacements  covered  by  depreciation 

(j)  Imiiirdijcu  prtmiunu#  paid  on  the  iil'e  of  any  ofticer  or  I 
employ  ce  fort  lie  beiieiitoflhecorixjrationorbiXjiHL^s.! 
(y)  l&lercsl  on  iudeb!.«rduit9t<  lucurrt'd  or  cuiiiiuuud  U purcliaso  or  i 
carl  jf  obligaOi'Dsor  perunuea  (ctlirr  itan  oi»hgat»'  n-i  of  thi' 
Lajled  SiaLfS  i&.vucd  aftrr  Biptciubtr  i:4.  15j7j  the  | 

(A)  Additions  torei'civosloi  bad  debts,  contingencies,  etc.  | 
(to  be  detailed) I 


0.  Xontaxidde  inconie: 

(а)  Interest  on  obli>;ations  of  the  United  Stat«c3‘and  its  | 

pewesioas,  wholly  o.\(  nj]>t $ 

(б)  Iiuorf5i  tn  obligations  of  Slates,  Territories,  and  I 

^>o!iticaI  snbdivivion.i  (liereof *. 

(c)  loleresi  on  Kaim  Loan  lloi.dts  igMied  under  Federal  | 


I I 


r'-irui  Luiin  .4.cl- 


(wi)  Otlier  unallowable  (ictiuclionT  (to  he  detailed). 


'3.  Diatribulive  ahareol  net  incviLe.i  amed  dm  iiig  petiuil  liy  per- 
sonal  service  cor po rations  not  leceii  cdoracci  uedoii  books... 
4.  Auoant  necee-ary  to  a.ljU'«t  Look  prort  or  lo-s  vif  h Ibo  araoncto  reported 
ia  Ucias  esaua  22.  SLLedulc  A (uuleoB  ou’.ry  taloiijs  on  line  7) 


(dj  Diviuoiida  on  slock  of  domestic  corporations 

(<■)  Dividends  on  slcK'k  of  per.sonal  service  corporations 
dvo-laredoutut  prolilsoviruod  jwior  to  laxahic  period 

if)  Other  items  of  nontaxahie  income  (!•  l)«  detailed).. 

iy)  

W - 

(i 


7.  t'liai'ges  auninst  i 
(to  hodut  ulcd  i 


VO'S  lot  had  del.'ts,  i 


euciea,  etc. 


0.  Taxable  net  iiieomc  (Item  27,  Sdiedule  A) 

10.  Total 


SCHEDULE  C— BALANCE  SHEETS. 

oAttach  hereto  balance  sheets  as  of  the  beginning  and  end  of  the  taxable  year  (preferably  in  parallel  columns i,  showing  a*  nc;uly  as  practicable  the  details  callcsl  for  below.  (These 
balance  bhecia  should  be  pr<*]iarcd  from  tlie  books  and  should  be  in  agreement  therewith,  or  any  differences  should  be  reconciled.) 


ASSETS. 

Oak  (Lncludicg  caiih  tu  bauk  ucd  ou  band,  certifi- 
cates uf  dcpiLwl  etr.). 

T/t^e  account*  and  tK>t«»  teccWibtc  (before  deducting 


Kaw  malrriali. 
>Vork  m progress. 

F lOisbt'd  products. 


JtvjtK  af  corporaiiuB^- 


ASSETS  fContinued). 

If  at* — C out  inued— Bonds— 

(luumcipel,  state,  etc.). 


Loud. 

Iluillinss. 


ASSETS  (Continued). 

Fixed  Amcu— Continued. 

Less  reserve  fur  dcurcciation. 

Net  V.\lle. 

Pateat*.  lov'd  «iUJ,  and  other  intiBithle  a«scts: 
r&id  for  in  cash  or  otlur  tangible  iirnperly. 
Paid  for  iu  slock  (other  llKin  thvidoiiAl 
Created  by  stock  di  . idcud  Oi  olhe.-^MiR'. 

Ou  bonds. 

On  stock. 

Total. 


LLVBILITIES. 

N.<ei.  pajjMe: 

To  oiliccrs  and  stoeVhoMors. 

To  others  (including  bank  loahs). 
Account*  payable: 


Accrued  e>priue»  anJ  fe*er*c».  IhC  charjp'S  Cffalinp  which  or# 
jilouabic  doduciiuu-i  from  income  (lo  be  dciailcd). 

Kcaer'ct  for  cooilnjeociet.  etc.,  tho  viiargvs rrtaiinc  ubkh  aro  nn| 
uMuwablO  dcc'uttioiis  from  iucouie  (tc  be  detailed). 

CaiMiil  slock  ouutafldlol  (lo  bc  cla:..'idcd). 

Surplaa  and  uodbidrd  probis. 


A corporation  having  a net  income  of  $3,000  or  more,  which  waj  in  exiatence  during  at  least  one  full  prewar  year,  should  also  attach  to  tliia  i 
I parallel  columnu)  aj  of  the  beginning  of.iis  first  full  prewar  year  and  as  of  December  31,  1913. 


iiilar  balance  shceta  (preferably 


SCHEDULE  D— ANALYSIS  OF  SURPLUS  ACCOUNT. 

Attach  hereto  an  analysis  ol  the  corporation’s  surplus  account,  showing  the  details  ^f  all  adjustments  of  surplus  for  the  taxable  year,  as  iivarly  a.s  practicable  in  the  following  form: 

1.  Surplus  at  beginning  of  year  pir  hooka,  I Deduct:  5.  Dividends  (state  date  pa'yable  and  amount  of  each,  and  whether  in  ca-h 

Add:  2.  'I'utal  net  prolit  per  books  and  per  Sehedule  B (Item  1).  or  m stix  kV 

3.  Other  credits  to  surplus  (to  be  detailed).  G.  Other  debits  lo  surplus  (to  he  dct-ailed). 

4.  Total  of  Items  1,  2,  and  3.  | 7,  Surplus  At  cud.  of  year  per  Ixiolm. 

A corporation  having  a net  ioixime  of  $3,000  or  more,  which  was  in  existence  during  at  least  one  full  p war  year,  slemld  als-Aallaclt  lo  tins  return  a simHar analysis  of  its  surplus 
account  (or  its  first  lull  prewar  year  and  for  eat  h subeequeut  year  dow  u to  the  begmuinj  of  tfia  taxable  year.  ’ ‘ »-«•* 


Page  2 of  Form  1 120A 


IncoiiK*  'I'ax 

Siipploinenrary  Paire  70. 


Page  3 — Income  Schedules — Conciuo.wii 
SCHEDULES  SUPPORTING  SCHEDULE  A 

The  •chedule*  called  for  below  should  be  prepared  and  firmly  stapled  to  ibis  return.  Deeimate  each  schedule  with  the  number  of  the  item  in 
Schedule  A which  it  explains.  Make  schedules  on  paper  of  uniform  size  so  far  ns  practicable.  In  the  space  proTided  for  the  purpose  on  page  6 list 
all  schedules  attached  to  this  return,  giving  the  title  and  schedule  number  of  each.  Keferenc.es  to  Kegulations  45  are  to  revised  edition. 


SCHEDULE  A2:  COST  OF  GOODS  SOLD.  EXCLUSIVE  OF  EXPENSES, 

REPAIRS,  AND  OTHER  ITEMS  CALLED  FOR  SEPARATELY. 

In  mpport  of  Item  2,  Schedule  A,  curpontioni  engaged  in  manufacturing  or  trading 
cperationt  should  submit  an  analj-aia,  in  reaaonable  detail,  of  the  coat  of  goods  K)ld.  This 
sutemeut  should  ordinarily  include  the  following  items  but  should  not  include  any  ex- 
}>*uae  items  called  fur  s<>parately  in  Schedule  A. 

1.  Inventories  at  beginning  of  period  (to  be  reconciled  with  balance  sheet). 

2.  Purchaaea  during  period. 

3.  Lsbor  and  wsgee'ordinarily  charged  to  manufacturing  coet  on  the  corporation'e 

boohs,  showing  the  principal  items  separately. 

4.  Other  expenses  ordinarily  charged  to  manufacturing  coet  on  the  corporatioa’a 

• books.  (.State  separately  large  or  unusual  items.) 

5.  Total. 

Deduct: 

6.  Inventories  at  close  of  period  (to  be  reconciled  with  balance  sheet). 

7.  Coet  of  goods  sold  (Item  6 lees  Item  «). 

Note. — Inventories  should  be  valued  at  (o)  coet  or  (o)  coet  or  market,  whichever  is 
lower,  provided  that  whichever  basis  is  used  must  be  applied  to  each  item  in  the  inventory 
and  not  to  a part  only.  Inventories  should  be  recorded  in  a legible  manner,  properly 
computed  and  summariaed,  and  should  be  preserved  as  a part  of  the  accounting  records 
of  the  taxpayer.  (See  Artklee  1581  to  1585  of  Regulations  No.  45.) 

If  claims  for  losses  on  Inventories  or  rebates  on  sales  made  under  Sectiou  214  (a)  12 
of  the  .\ct  have  been  allowed,  the  opening  inventory  must  be  correspondingly  adjusted. 
(Sse  Article  266  of  Regulations  45.) 

Stale  here  which  of  the  abovo-mentioDed  bases  for  valuing  inventories  is  used  in  this 


Submit  a schedule  showing  the  nature  and  amount  of  the  principal  items  included 
in  Item  3,  Schedule  .4. 

Life  inaurance  companiee  should  enter  as  Item  3,  Schedule  A,  the  total  premiums 
received  from  policyholders  less  such  portion  thereof  as  has  been  paid  back  or  credited  to, 
or  treated  as  an  abatement  of  premiums  of.  such  policyholders  within  the  taxable  year. 
(See  Articlee  548  and  549  of  RegulaUons  45.) 

Mutual  marine  iusuraufce  companies  should  report  as  Item  3,  Schedule  A,  the  gross 
premiums  collected  and  received  by  them  less  amounts  paid  for  reinsurance. 


For  exemptions  on  interest  on  Liberty  Bonds  or  other  obligations  of  the  United  States, 
sec  .Vrticles  77  to  82,  Regulations  45. 

.4ttach  hereto  schedule  showing  in  separate  columns  the  following  information  with 
re.-.pect  to  obligations  of  the  United  Slates  issued  rince  September  24, 1917: 

(1)  Close  of  obligations  (list  each  issue  separately). 

(2)  First  and  lust  dates  of  each  period  during  which  the  corporation's  holdings  of  that 
ebsss  of  ohligaliuiui  remained  unchanged. 

(3)  Amount  of  obligations  of  that  class  held  by  the  corporation  during  each  such 
period. 

(4)  Amount  by  which  each  amount  entered  in  column  (.3)  exceeds  the  ma.^imum 
exemption  for  that  class  of  obligations. 

(5)  Rate  of  interest. 

(6)  Interest  derived  from  each  ainount  of  principal  staled  in  column  (4). 

Enter  as  Item  4,  Schedule  A,  the  total  of  column  (6)  for  all  clasees  of  obligations. 
Submit  also  a lUtement  showing  the  amount  of  interest  derived  from  bonds  and  other 
obligationa  of  the  United  Sutes  and  its  poeseesiona,  exclusive  of  thoae  described  in  the 
table  above. 

SCHEDULE  AS. INTEREST  FROM  OTHER  SOURCES. 

Submit  a schedule  showing  the  euiuce,  nature,  and  amount  of  the  principai  items 
included  herein,  the  minor  items  being  grouped  in  one  figure.  The  total  of  tho  schedule 
should  be  entered  as  Item  5,  Schedule  A. 

For  interest  on  foreign  bonds  submit  a schedule  showing  (a)  name  of  country;  (5)  kind 
of  obligations  ( wlietber  national,  state,  municipal,  or  corporate  obligations);  (c)  amount 
of  principal;  and  (i)  amount  of  interest. 

SCHEDULE  A9:  DIVIDENDS  ON  STOCK  OF  FOREIGN  CORPORATIONS. 

Submit  a schedule  showing  (o)  name  of  corporation;  (6)  country  in  which  organued; 
(c>  total  jiar  value  of  slock  held,  and  (</)  amount  ot  dividemL. 

INCOME  FROM  ALL  OTHER  SOURCES  EXCEPT 
DIVIDENDS  (not  including  any  ainount  In  rcspoct  of  capital  aasete  or 
mi9celUn»ous  investment*). 

Submit  a schedule  showing  the  source,  nature,  and  amount  of  the  principal  item-s 
included  herein,  the  minor  items  being  grouped  in  one  figure.  Tho  total  of  tho  schedule 
sb<rul<J  Ut  eiiUtred  m Iteai  10,  Fcbc*dule  A. 

SCHEDULE  A12:  ORDINARY  AND  NECESSARY  EXPENSES  (oaept  amount, 
called  for  aeparatcly  in  Schadul.  A and  not  including  coat  or  value  of 
capital  aeaata  or  miacallanooua  inveatnwita  sold  during  taxabla  year). 
Submit  a auiemenl  showing  charai  ter  and  amount  of  the  nrincipai  items  included 
ill  Item  12,  Schedule  A. 

lusuram  c comi*ni«  ahould  stale  separately  in  Schedule  A12  (a)  the  net  addition 
required  by  law  lo  be  made  within  the  taxable  year  to  reserve  funds  (imduding  in  tho 
I we  of  loerwment  insuiance  comjianies  the  actual  deposit  of  sums  with  sUlo  or  terri- 
loiial  oflii  ere  pureuant  to  law  as  additions  to  guarantee  or  rwervo  lunds;  and  (5)  tlio  total 
ol  aiiiiia  other  than  dividends  paid  within  tho  year  on  poliry  and  annuity  contmc  ta. 

C'-rporetions  ireuing  policim  covering  Ule,  health,  and  a<  > .dent  insurance  combined 
iti  one  jsrli.y  iwued  on  the  weekly  premium  payment  p'an  continuing  f»r  Ills  and  n..l 
•uhjer  I to  cancellation  ahould  reirort  in  Sc  hedule  A12  such  part  of  the  net  addition  (unt 
requuc-d  by  law)  made  within  the  Uxablu  year  to  roarvo  funds  as  tho  CommiaAiom.r 
fimla  U)  he  lequirr'd  for  tlie  protection  of  tho  holdere  of  such  irolicica. 

iluiual  marine  insurance  comi^ni.a  should  rejairt  in  Schcdulo  AI2  amounts  leiai.l 
lo  fad i.  > holder,  on  aceoiitil  of  |.r,-iirimna  previously  paid  by  them  aiel  interest  laid  uiaoi 
• uih  soeuinia  between  the  s»' • -fsiiiinenl  sn<!  the  i.ayment  tliercol. 


Mutual  insurance  companies  (other  than  mutual  life  and  mutual  marine  insurance 
companies)  that  require  their  members  to  make  premium  deposits  to  provide  for  losses 
and  expenses  should  report  in  Schedule  A12  the  amount  of  premium  deposits  returned 
to  their  policyboldera  and  the  amount  of  premium  deposits  retaiued  for  the  payment  of 
lossee,  expenses,  and  reiBsurance  reserves  (unless  deducted  elsewhere  in  Schedule  A). 

SCHEDULE  A13:  COMPENSATION  OF  OFFICERS. 

Submit  a scdiedule  showing  fur  each  oSker  (1)  name;  (2)  duties;  (3)  time  devoted  to 
such  duties;  (4)  shares  of  stock  owmed,  (a)  common,  (6)  preferred;  (5)  total  annual  com- 
pensation for  the  taxable  years  1917,  1918,  and  1919;  and  (6)  reasons  for  increases. 

schedule  AI4:  REPAIRS  (including.  labor,  tupplias,  overhead,  and  other 
items  properly  chargeable  to  repairs). 

Submit  a schedule  showing  the  nature  and  amount  of  the  princi^ul  items  included 
in  Item  14,  Schedule  A. 

Incidental  repairs,  which  do  not  add  to  the  value  or  appreciably  prolong  the  Ufa  ot 
property,  are  deductible  as  expenses.  Exfienditures  for  new  buildings  or  for  permanent 
improvements  or  betterments  which  increase  the  value  of  the  property  ore  chargeable 
to  capital  account.  Expenditure*  for  restoring  or  replacing  property  are  not  deductible 
under  this  or  any  other  item  of  the  return.  Such  expenditures  are  chargeable  to  capital 
account  or  to  depreciation  reserves,  depending  on  the  treatment  ot  depreciation  on  the 
booku  of  the  taxpayer. 

SCHEDULE  Al8i  EXHAUSTION,  WEAR  AND  TEAR  (including  oboolescencs). 

Submit  a columnar  schedule  containing,  in  the  .most  practicable  form,  substantially 
the  following  information: 

1.  A claasiCcation  of  depreciable  assets  subdii  ided  on  the  bases  ot  (a)  character,  (i) 
term  of  useful  Ule. 

2.  The  year  of  acquisition  of  such  assets  if  prior  to  tax  year.  If  acquired  during  tax 
year,  give  actual  date. 

3.  Nature  an<i  amount  of  consideration  given  in  payment. 

4.  The  fair  market  value  of  such  assets  Jfarch  1,  1913,  if  acquired  before  that  date. 

5.  The  estimated  life  or  term  of  reasonable  usefulness  of  such  assets  from  date  acquired 
or  from  March  1,  1913,  if  acquired  prior  thereto.  Give  reasons  for  your  conclusions. 

6.  For  each  class  of  assets  state — 

(n)  The  total  jirovision  for  depreciation  made  on  the  hooks  of  the  corporation 
from  date  of  acquisition  to  the  beginning  of  the  taxable  year. 

(6)  The  total  amount  of  depreciation  (exhaustion,  wear  and  tear,  including  bbso- 
leecence)  claimed  for  tlic  taxable  year. 

7.  A reconciliation  of  all  figures  iu  this  schedule  with  correspondiag  figures  ^fleeted 
in  thc'balance  sheets. 

8.  If  any  plan  of  depreciation  otlier  than  the  “etraightline”  method  contemplated  by 
the  above  instructions  is  used,  a full  explanation  thereof,  with  justification,  should  be  given. 

SCHEDULES  A22  and  A23:  PROFIT  OR  LOSS  ON  SALES  OF  CAPITAL  ASSETS 
and  miscellaneous  investments,  and  losses  sustained  during  the  taxable 
year  from  fire,  storm,  or  other  casualty,  or  from  theft,  not  compensated  for 
by  insurance  or  otherwise. 

Submit  a culiimuar  schiidule  selling  forth  for  each  sale  of  capital  assets  or  of  mhicella- 
neous  investments  and  lor  each  loss  during  the  taxable  year  the  information  called  for  below: 

1.  Description  of  i>roi>erty  sold  or  of  property  in  rwpect  of  which  a lo«a  Is  claimed. 

2.  Dale  acquired. 

3.  Fair  market  price  or  value  on  March  l,  1913,  if  acquired  before  that  date,  or  cost 
if  aciiuired  after  February  28,  1913. 

4.  Cost  of  improvements,  if  any,  since  February  28.  1913,  or  since  dale  of  acquLiilion, 
if  acquired  after  February  28, 1913. 

5.  Total  of  Items  3 and  4. 

Less — 

6.  Depreciation  or  depletion  of  property  subject  thereto — 

(u)  Per  books. 

(5)  -Accrued  but  not  on  books. 

7.  Salvage  value,  if  auy,  of  property  on  which  a loss  u claimed. 

8.  Amount  of  iusurauce  or  other  recovery  ou  property,  if  any, 

9.  Procoeds  of  sale  or  c;uh  value  of  property  received  i;i  exchange  (for  traasaclionx 
falling  in  Item  22,  Schedule  .\)  (see  Note  below). 

10.  Total  of  Items  G to  9,  inclusive. 

11.  Profit  or  loss. 

12.  Cause  of  loss  (fur  losses  falling  iu  Item  23,  Scbcdulo  A). 

Note.— Submit  evidence  substantiating  the  basis  used  by  you  iu  arriving  at  the  cash 
value  of  property  received  iu  exchange  f u other  property. 

SCHEDULE  A26:  AMORTIZATION  OF  WAR  FACILITIES. 

Taxpayers  making  claim  for  amortisation  should  spread  tho  umortisaliou  allowance 
in  accordance  with  the  i>ro6ts  of  the  business  over  the  entire  amortization  periorl  in 
monthly  estimates,  and  should  enter  as  their  amortization  duduciiou  iu  this  return  the 
aggregate  amount  assigned  to  those  months  of  the  amortization  period  which  arc  included 
in  the  fiscal  year  of  the  taxpayer.  Taxpayers  m.ikiiig  return  for  a fi.Hcal  year  eliding  iu 
1919  should  interpret -Uticlc  185  of  Regulations  45  as  above  m t lonli.  Taxpayers  will 
also  submit  a aehedule  eontainiug  iiifomialioii  called  for  in  .Uliele  188,  Regulations  15. 

COMPENSATION  AT  RATE  OF  J3,000  OR  MORE  PER  ANNUM. 

Submit  a schedule  showing  for  each  employee  (if  a slockhohler  of  the  eoriwratioiil, 
whose  eoiupeiiration  is  at  Uic  rale  of  t:i,(K)0  or  more  per  amiuin,  fads  rimilar  to  llioru  called 
for  iu  Schedule  ,\13. 

WORKING  PAPERS. 

Fverr  corporation  should  preserve,  available  lor  jnspeclion  by  a ravemie  ofTiccr, 
Working  pairers  ■bowing— 

1.  The  Ijalaneo  in  each  account  ou  tho  corporation  x bool'.s  that  was  us'd  in 

pre|mring  Sel.edulo  A. 

2.  Tho  amount  deducted  from  each  such  balance  on  amount  of  »ai  h class  of  nun- 

taxable  iiieouie,  unallowable  dedin  lious,  and  oilier  adjualnieiiUs  iiidicalad 
in  Sehfriulii  II,  with  a reference  lo  iho  miinbcr  of  the  ileiii  in  Schedule  H 
in  which  each  auioiint  so  dedueled  was  inelnded. 

3.  Thu  leinainJcr  of  eai  li  am  h balain  e,  analyzed  lo  tdiow  the  amount  im  ludeil 

in  on.  b ileni  of  Silndulo  A,  with  a leleienie  to  the  nninber  ot  the  item  in 
2i  liedid*  A in  whi..li  exi  h .m  b ainoiinl  was  iniluJi  d a iwi 


Page  3 of  Form  I 120A 


lucotnc  'Tax 

Siippleiiieiitary  Piigc  71. 


Page  4 — Invested  Capital  Schedules 

SCHEDULE  E— CAPITA^  SURPLUs7aND  UNDIVIDED  PROFITS  AS  SHOWN  BY  BOOKS  BEFORE  ANY  ADJUSTMENTS  ARE  MADE  THEREIN. 


E4.  Stock  actually  outstanding  at  the  end  of  the  preceding  taxable  year  should  bo 
entered  in  tliis  schedule  to  the  extent  that  it  is  paid  up.  If  stock  or  shares  were  issued  at 
a nominal  value  or  without  par  value,  the  entries  should  reflect  the  amounts  on  the  books 
ic  rc-spoct  thereof  at  the  close  of  the  preceding  taxable  year. 

ES.  This  item  should  include  paid-in  su^lus  per  books  at  the  end  of  the  preceding 
year.  It  any  amount  is  claimed  under  Section  326(a)  f2)  of  the  Kevenue  Act  of  1918  or 
under  Article  837  of  Regulations  45  the  amount  claimed  should  be  entered  under  Item  1, 
Schedule  F,  and  not  in  this  schedule.  ^ 


E7.  Keaerves  which  represent  allocations  of  surplus  and  were  not  accumulated  through 
deductions  made  in  computing  net  income  as  returned  in  previous  yea.eB  may^  it  prop<  rly 
explained,  be  entered  on  line  7.  Such  entries  should  he  identified  and  if  ncccasary 
reconciled  with  balance-sheet  reserves. 

E9.  The  cost  (or  book  value  if  different  from  cost)  of  treasury  stock  held  at  the  end  of 
the  preceding  taxable  year  should  be  deducted  on  line  9,  if  the  par  value  of  such  stock  is 
included  in  the  amount  entered  on  line  4.  Treasury  stock  includes  all  stock  rcac<iuircd  Ity 
the  corporation  and  not  canceled,  regardless  of  the  reason  for  the  acquisition. 


Item. 

mi 

1012 

Taiablz  Yea*. 

Capital  Btock  paid  up  and  actually  outeUnding  at  the  cloee  of  the 
preceding  year: 

1 

t 

2.  Second  preferred - 

III 

3.  Common — 

;:"ij 

1 

4 Total 

$ 

5 

Surplus  and  undivided  proSto: 

fj.  Paid-in  aurpliiR  . . 

1 

1 

1 

7.  Reserves,  additions  to  which  are  not  deductible  in  comput- 

ing net  income  (to  be  reconciled  with  balance-sheet  items). 

8.  Grand  totals  op  Items  4,  5,  6,  and  7 

1 

$ 

$_ 

1 

$ 

It ' 

1 

9.  Deduct  cost  of  tr^sury  stock  (or  book  value  if  different  from 
cost),  if  any  is  included  above  as  oubtanding 

'■'n 

1 

1 ■ 

1 

10.  N ET  TOTAL  (Item  8 minus  Item  9)  

$- 

It 

1 

li 

1 

SCHEDULE  F— ADJUSTMENTS  BY  WAY  OF  ADDITIONS. 


Fl.  If  an  addition  to  invested  capital  is  claimed  in  Item  1,  Schedule  F,  submit  a state- 
ment showing  (a)  the  kind  of  property,  (6)  the  year  in  which  it  was  paid  in,  (c)  from  whom 
acquired,  explaining  his  relationship  to  the  corporation,  id)  the  actual  cash  value  of  such 
property  at  the  date  when  paid  in,  («)  the  par  value  of  stock  or  shares  issued  therefor  and 
the  amount  at  which  such  property  is  entered  in  the  accounts,  {f)  the  basis  upon  which  the 
actual  cash  value  of  the  property  was  determined  and  the  date  when  such  determination 
was  made,  and  (g)  the  amount  of  depreciation  sustained  on  such  property  from  the  date 
of  acquisition  to  the  beginning  of  the  taxable  year. 

F2.  If  an  addition  to  invested  capital  is  claimed  in  Item  2,  Schedule  F,  submit  a 
statement  showing  (a)  the  kind  of  prope^,  (ft)  the  year  in  which  it  was  acquired,  (c)  its 
cost,  (d)  the  amount  of  depreciation  sustained  on  such  property  from  the  date  of  acquisition 
to  the  beginning  of  the  taxable  year.  State  also  whether  each  item  sought  to  be  restored 
was  actually  us^  or  usable  at  the  beginning  of  the  taxable  year.  Were  these  expenditures, 

when  made,  written  off  in  lieu  of  depreciation? If  so,  explain  what  adjustments 


have  been  made  to  provide  for  depreciation,  in  view  of  the  proposed  restoration  to  surplus. 
Additions  in  this  item  aie  cumulative  to  the  beginning  of  the  respective  taxable  years. 
For  all  additions  hereunder,  provision  must  be  made  for  depreciation  to  the  beginning  of 
the  respective  taxable  years. 

F3.  If  any  addition  to  invested  capital  is  claimed  in  Item  3,  Schedule  F,  state  specifi- 
cally the  amount  of  depreciation  written  off  each  year  in  the  books  of  Ae  company,  and  the 
amount  allowed  so  a deduction  in  computing  net  income.  Additions  in  this  item  are 
cumulative  to  the  beginning  of  the  respective  taxable  years. 

F4.  If  anyjisseta  of  the  trade  or  business  in  existence  during  both  the  taxable  year 
and  any  prewar  year  are  included  in  the  invested  capital  for  the  taxable  year  but  not  for 
such  prewar  year,  or  are  valued  on  a different  basis  in  computiiig  the  invested  capital  for 
the  taxable  year  and  such  prewar  year,  entries  should  be  made  in  this  schedule  adjusting 
the  invested  capital  for  each  prewar  year  affected  so  as  to  value  such  assets  upon  the  same 
basis  in  the  prewar  period  as  in  the  taxable  year. 


Item. 

1911 

1912 

1913 

Taxable  Yeah, 

1.  Actual  cash  valus  of  tangible  propertj  clearly  and  anbstantially  in  excess  of 
par  raloe  of  stock  issued  therefor  or  of  the  cash  or  other  consideration  paid 

fharwrnr  ^irtiAl»a  R5U>  and  9X7'^ 

$ 

K 

$. 

$ 

9 Additirtna  tn  niirpliin  ( Arfirl#».q  ^14(1  tn  R43\ 

3.  Depreciation  cWged  in  the  accounts  of  the  corporation  but  not 
nllowRhlA  ftfl  a dftdiirtion  on  income  tax  retiima . . 

4.  Adjustment  of  valuation  of  assets  in  existence  both  during  tax- 
nhlft  jrARr  and  in  prewar  period  f Art, irlft  934)  . ... 

XXX 

XXX 

XXX 

X X 

r 

8.  Total 

$ 

* 

$ 

1 

5- 

J 

SCHEDULE  G— ADJUSTMENTS 

Cl.  Is  any  patent,  copyright,  secret  process,  or  formula,  good  will,  trade-mark,  trade 
brand,  franchise,  or  other  similar  intangible  property,  paid  in  for  stock,  carried  as  an  asset 

by  the  corporation? It  so,  is  it  entered  on  the  books  at  a value  in  excess  of  its 

actual  cash  value  when  paid  in? In  excess  of  the  par  value  of  the  stock  issued 

therefor? Is  the  aggregate  of  such  assets  acquired  prior  to  March  3,  1917, 

entered  on  the  books  at  a value  in  excess  of  25  per  cent  of  the  par  value  of  the  stock  out- 
standing on  March  3,  1917? Is  the  aggregate  of  such  assets  entered  on  the 

boob  at  a value  in  excess  of  25  per  cent  of  the  par  value  of  the  stock  outstanding  at  the 
beginning  of  the  taxable  year? 

If  the  answer  to  any  of  the  foregoing  questions  is  “yes,”  submit  a statement  showing 
separately  with  respect  to  such  assets  acquired  (1)  before  March  3,  1917,  and  (2)  on  or 
after  that  date:  (a)  Date  of  acquisition;  (ft)  cash  value  at  that  date,  with  a complete  ex- 
planation of  the  basis  upon  which  such  cash  value  was  determined;  (c)  par  value  of  the 
stock  issued  therefor;  (^  par  value  of  total  stock  outstanding  March  3,  1917 ; (e)  par  value 
of  total  stock  outstanding  at  the  beginning  of  the  taxable  year;  (/)  the  value  at  which 
such  assets  are  entered  on  the  books  of  the  corporation. 

It  all  the  intangibles  were  acquired  before  March  3, 1917,  the  amount  by  which  (J)  ex- 
ceeds (ft),  (c),  25  per  cent  of  (d),  or  25  per  cent  of  (<),  whichever  is  lowest,  must  be  entered  as 
Item  1,  ^edule  G,  for  the  taxable  year  and  for  each  year  of  the  prewar  period  that  is 
affected. 

If  the  intangibles  were  ^quired  on  or  after  March  3,  1917,  the  amount  by  which  the 
entry  in  (/)  relating  to  such  intangibles  exceeds  (ft)  or  (c)  relating  thereto,  or  25  per  cent  of 
(e),  whichever  is  lowest,  must  be  included  in  Item  1,  Schedule  G,  for  the  taxable  year: 
Provided,  that  if  intangibles  were  acquired  before  March  3, 1917,  and  also  on  or  after  that 
date,  deduction  shall  be  made  so  that  the  amount  included  in  invested  capital  for  the  aggre- 
gate of  intangibles  shall  not  exceed  25  per  cent  of  the  par  value  of  the  total  stock  outstand- 
ing at  the  beginning  of  the  taxable  year. 

Note. — If  the  stock  of  the  corporation  was  issued  at  a nominal  value  or  without  par 
value,  for  the  purpose  of  the  computation  under  Item  1 the  par  value  shall  be  deemed  to  be 
the  fair  market  value  as  of  the  date  or  dates  of  issue.  The  a^egate  value  so  determined 
of  stock  outstanding  on  March  3,  1917,  or  at  the  beginning  of  the  taxable  year,  shall  be  the 
basis  for  the  computation. 

C2.  Is  any  tangible  property,  paid  in  for  stock,  carried  as  an  asset  by  the  corporation? 

If  so,  b it  entered  on  the  bqoks  at  a value  in  excess  of  its  actual  cash  value  when 

received? In  excess  of  the  par  value  of  the  stock  paiitherefor? 

If  the  answer  to  either  of  the  foregoing  questions  b “yea,”  submit  a statement  showing 
(a)  land  of  property;  (ft)  when  acquired;  Cc)  par  value  of  the  stock  paid  therefor;  (d)  actual 
cash  value  of  the  property  when  paid  in ; («)  the  basb  on  which  that  value  was  determined ; 

(/)  value  at  which  the  property  is  entered  on  the  corporation’s  books;  and  (g)  amount  by 
which  such  value  exceeds  the  allowable  value  under  section  326  (o)  (2)  of  the  Revenue 
Act  of  1918.  Enter  thb  amount  as  Item  2,  Schedule  G,  for  the  taxable  year  and  for  each 
year  of  the  prewar  period  that  b affected. 

C3.  (a)  Was  any  stock  issued  by  the  corporation  ever  returned  as  a gift  or  for  a consider- 
ation substantially  leas  than  its  par  value? (ft)  If  so,  what  was  the  total  par 

value  of  such  stock?  t (c)  What  was  the  consideration  paid  for  the  return 


BY  WAY  OF  DEDUCTIONS. 


thereof?  $ (d)  What  amount  of  cash  or  its  equivalent  was  derived  from  the 

resale  of  such  stock?  I (e)  What  entries  were  made  in  the  accounts  to  evi- 


dence the  return  and  the  resale  of  such  stock? 

The  excess  of  (ft)  over  (d)  must  be  entered  as  Item  3,  Schedule  G,  for  the  taxable  year 
and  for  each  year  of  the  prewar  period  that  is  affected.  However,  no  deduction  b neces- 
sary if  adequate  adjustment  has  Veen  made  under  Item  2 of  thb  schedule. 

G4.  Was  the  business  reorganized  or  consolidated  or  was  its  ownership  changed  or 

was  there  a change  in  ownership  of  property  after  March  3,  1917? If  so,  answer 

the  following  questions: 

(o)  Did  an  interest  of  50  per  cent  or  more  in.  the  business  or  in  the  property  which 
changed  ownership  remain  in  the  control  of  the  same  peiscms,  corporations,  associations,  or 
partnerships,  or  of  any  of  them? 

(ft)  Were  any  of  the  asseb  entered  on  the  books  of  the  corporation  making  thb  return 
at  a higher  value  than  on  the  bookrof  ita  predecessor? 

(c)  If  such  previous  owner  was  not  a corporation  attach  a statement  showing  (1)  the 
cost  of  acqubition  to  the  previous  owner  of  any  asset  so  transferred  or  received ; (2)  expendi- 
tures subsequent  to  that  date  for  betterment  or  development,  not  deducted  as  expense  or 
otherwise  since  March  1, 1913,  by  such  previous  owner;  (3)  the  allowance  for  depreebtion, 
depletion,  or  impairment  since  the  date  of  acqubition  by  such  previous  owner. 

(d)  If  all,  or  substantially  all,  of  the  property  was  acquired  from  a corporation  during 
the  taxable  year  attach  hereto  balance  sheets  of  such  predecessor  corporation  as  of  the  begin- 
ning of  the  taxable  year  and  as  of  the  date  immediately  prior  to  the  transfer  of  the  propcu-ty 
to  the  corporation  making  this  return,  and  also  a balance  sheet  or  statement  of  the  coiqwra- 
tion  making  thb  return  showing  the  values  at  which  such  property  received  or  transferred 
was  entered  on  the  books. 

The  increase  in  book  value  of  any  property  acquired  by  reorganization,  consolidation, 
or  change  of  ownership,  over  the  amount  allowable  to  the  predecessor  corporation  or  over 
the  amount  as  computed  under  (c),  if  the  previous  owner  was  not  a corporation,  must 
be  deducted  from  the  invested  capital  for  the  taxable  year  as  Item  4,  Schedule  G. 

G5.  Is  any  property  (including  physical  property,  securities,  and  intangible  property) 
paid  for  with  cash  or  with  other  tangible  property  entered  on  the  books  of  the  corporation 
at  a value  in  excess  of  the  amount  of  cash  paid  therefor  or  the  actual  cash  value  of  the 

tangible  propert)'  paid  therefor? If  so,  submit  a statement  showing  (o)  kind  of 

property;  (ft)  amount  of  cash  paid  therefor;  (c)  actual  cash  value  of  other  tangible  properly 
paid  therefor;  (d)  how  that  value  was  determined;  («)  value  at  which  the  property  b 
entered  on  the  books  of  the  corporation;  and  (/)  excess  of  («)  over  (ft)  or  (c).  'Thb  excess 
must  be  entered  as  Item  5,  Schedule  G,  for  the  taxable  year  and  for  each  year  of  the  prewar 
period  that  b affected. 

06.  Has  adequate  provision  been  made  in  the  expense  accounb  of  the  company  for 

(a)  losses  of  every  kind? ; (ft)  depreciation? ; (c)  obsolescence? 

((f)  depletion  of  mineral  deposib,  timber  supplies,  and  the  like? 

If  adequate  charge  has  not  been  made  for  depreciation,  depletion,  obsolescence,  and 
other  losses,  and  the  value  of  the  property  has  not  been  maintained  by  replacements  that 
have  been  chafed  to  expense,  proper  additional  charges  therefor  must  be  computed  for 
all  years  in  which  they  were  not  mime  on  the  books,  and  the  total  amount  of  such  charges 
must  be  entered  as  Item  6,  Schedule  G,  for  the  taxable  year  (and  fur  each  yw  of  the  pre- 
war period  that  waa  affected)  and  deducted  in  arriving  at  the  surplus  and  undivided  profits. 


Page  4 of  Form  1 120A 


Income  Tax 

Supplementary  Page  72. 


Pago  6— Invcstod  Capital  Schedules— Continuod 
SCHEDULE  G— ADJUSTMENTS  BY  WAY  OF  DEDUCTIONS  (Concluded), 


Item. 

1911 

1912 

1913 

Txixblx  Ylit. 

ValuatlsB  of  patfols^  copyrights,^  swret  procosws,  or  Jormul.c,  good’  will. 

1 

$ 

1 

^ 

s 

i 

1 

(9pjytV»]0  prAp^rfy  pair!  in  for  Htnrk  . . 

r ■■ 

1 

1 

returned  to  tho  corporation  as  a gift,  etc..  



Vlili'tttien  of  in  renrganizationfl  

1 

1 : 

1 

j,  . 

T)«pr«M*iikHcin  And  Heplfition  . . 

1 

1 -- 

I- 

Total  Deductions. — 

». 1 

f- 1 

1 

1 

.1 1 

» 

more  of  the  following  ways 

(«)  AddfrfoiB  by  T9ta<m  of  (tie  of  capital  stock  or  th«  Issue  of  capital  stock  for  tangible  or  other  assets, 

(ft)  Liquldalk>Q  of  part  of  the  capital  by  retiremeot  of  stock  or  purchase  of  treasury  stock  not  out  of  current 


SCHEDULE  H— CHANGES  IN  INVESTED  CAPITAL  DURING  TAXABLE  YEAR. 

(6)  If  capital  stock  of  the  corporation  is  reacquired  but  not  paid  for  out  of  current  prodts,  the  cost  of  such 
stock  should  be  deduct^  from  Invoatcu  capital. 

(c)  Report  dividends  paid  out  of  profits  ol  prior  years  but  not  dividends  paid  ou'  >f  pro.lls  qt  tha  taxable 
year.  Any  distribution  mode  durinp  the  ftrst  60  days  oi  the  taxable  year  shai  i Ire  deemert  to  have  been 
made  from  oarninjts  or  profits  accumulated  duririx  preceding  taxable  yean;  but  any  dLstrlbutlon 
rnado  during  tho  remainder  of  tho  taxable  year  shall  1»  deemed  to  have  been  made  from  the  profits 
for  that  year  to  the  extent  that  such  profits  are  sufficlont.  (ftee  Article  1642.) 
id)  The  amount  of  Federal  income  and  excess-profits  taxes  payable  should  he  deducted  as  of  the  date  whea 
duo  and  paya'oto  whether  reserves  have  peon  set  up  ou  the  books  or  not.  (See  Article  646.) 

3.  The  data  called  for  in  eolrimna  1 to  5 should  t)o  given  for  all  transactions,  oxcept 
that  columud  3 and  4 are  applicable  only  to  the  issue  or  reacquisition  of  the  corporation's 


(r)  Payment  of  cash  dividends  out  ofcamJngs  of  prior  years, 

(d)  D^uetkm  of  the  amount  of  Federal  income  and  excess-profits  taxes  for  the  previous  year. 

it)  Payment  of  assessments  by  stockholders,  or  creation  of  paid-in  surplirs  by  contribution  of  stockholders. 

The  chan^  irith  respect  to  taxes  probably  will  occur  in  every  case,  and  with  ro.spnct 
to  dividends  in  moat  cases.  Should  no  changes  respecting  these  be  noted,  the  reasons  for 
their  omission  should  be  stated. 

2.  The  foUowing  instructions  should  be  followed  in  making  the  above  adjiintmcnts. 
Each  item  shonld  be  designated  aa  an  addition  or  distribution,  dislribuLiona  being  desig- 
nated by  red  ink  or  otherwise. 

(a)  U stock  fa  issued  for  cash,  the  actual  cash  reocivcrl  (hut  not  the  amount  of  discount)  should  be  entered 
InthbactMdule.  Assets  (other  than  cash)  paid  in  for  stock  must  be  valued  in  accordance  n'ilh  .Sectiou 

t»  (s)  (H  of  the  Revenue  Act  of  1*18. 


stock. 

4.  In  Column  0 cuter  the  number  of  days  remaining  in  the  taxable  year  (inclndiuj; 
the  date  of  change). 

5.  The  net  changes,  if  not  in  accordance  with  tho  increases  or  decreases  reflected  in 
the  balance  sheets,  should  bo  fully  reconciled  therewith. 


1.  Kattrac  or  AnDmOKS  arm  DisTarauTioxs. 

2.  Date. 

3.  Number  or 
Sharks  Solo 

Peacqutreo. 

4.  IrroaCiBH, 
State  Pnira 
rER  Share. 

6.  Amocht  or  Cash  or  Ca.vh 
Valoe  Actcailt  Receitid 
OE  FAin  OOT. 

fl.  Number 

7.  Adjusted  Avf.raob. 

/ Column  5 X Column  0 \ 

^Number  ol  days  in  la\abi©  year./ 

$ 

, 



1 

1 



S 

1 

1 

1 

R 

1 

1 

fl. 

1 

7. 

1 

1 

9.  ...: , 

1 

SCHEDULE  J— CHANGES  IN  INVESTED  CAPITAL  DURING  PREWAR  YEARS. 

(Compute  the  net  addition  or  reduction  separately  for  each  ye.ar.  See  instructions  under  Schedule  H.) 


1.  Natuii  or  ADomoHS  a.vd  Di.sTRiBirnovs. 

2.  Pate. 

X Number  or 

PEACgf/IRED. 

4.  IrroRCASH, 
state  Price 
PER  Share. 

5.  Amoi'nt  or  Cash  or  Cato 
Value  Actuaixt  Received 
or  Pajo  Out. 

6.  No.  or 
Bats 

ErTEcrrvE. 

7.  Adjusted  Avieaoe. 

/ Colomn  ft  X oohiran  «\ 

y Nuffl  bar  of  dfty 9 la  y aar.  / 

1. 

$ 

$ . 

1 

2. 

3.  

1 

i.  

6.  

1 

6.  

1 

1 

7 

I 

1 

R.  .. 

1 

1 

9.  

1 

i 

10 . 

i 

1 

1 

1 ■ 

1 

11 

J 

1 

1 

13.  



1 

r" 

11  . 

, 

i . , 

1 

1 . 

SaiEDULE  K— CHANGES  IN  INVESTED  CAPITAL  FROM  END  OF  PREWAR  PERIOD  TO  BEGINNING  OF  TAXABLE  YEAR,  NOT  SHOWN  IN  SCHEDULE  D 

(See  infltnjrtiona  umlcr  aSi-he<lulo  11,  ao  fur  da  applicable.) 


Siippleniriitary  7.'^. 


6— InTested  Capital  Schedules  (Concluded)  and  Questions 

SCHEDULE  L— INADMISSIBLE  ASSETS. 


Hu  th*  corpontion  aay  uuulmunbl«  aawta  (i.  , (tocVi,  bonds,  and  other  obligations, 

•xcept  obligations  of  tho  United  States,  the  income  from  which  is  not  taxable)? 

It  so,  attach  hereto  a statement  showing  for  1911,  1912,  1913,  and  the  taxable  year, 
separately,  the  facts  called  for  in  Items  (a)  to  (j)  of  this  schedule. 

If  the  income  from  such  assets  consists  in  part  of  or  profit  from  the  sale  or  other 
disposition  thereof,  or  if  all  or  part  of  the  interest  derived  from  such  assets  is  in  effect 
included  in  the  net  income  because  of  the  limitation  on  the  deduction  of  interest  under 
Section  234  (o)  (2)  of  the  Revenue  Act  of  1918,  then  a corresponding  part  of  the  capital 
invested  in  su^  assets  is  deemed  an  admissible  asset.  In  such  case,  set  forth  in  detail — 

(a)  The  various  kinds  of  income  derived  from  such  asseteo  ud  the  computation  of  the 
part  of  the  capital  invested  therein  which  is  deemed  an  admirsfCle  asset. 

For  the  purpose  of  this  schedule,  inadmissible  assets  shall  bo  valued  at  cost  of  acquisi- 
tion except  that  if  the  taxpayer  has  in  pre^dous  years  been  allowed  a deduction  on  account 
of  the  fall  in  the  market  value  ot  securities,  such  assets  shall  be  I’alued  at  cost  les  the  deduc- 
tion allowed.  Admissible  assets  shall  be  valued  as  provided  in  Sections  326,  330,  and  331 
of  the  Avenue  Act  1918  and  Articles  831-869,  931-934,  and  941  of  Regulations  45.  The 
average  amount  of  assets  of  each  kind  held  during  any  year  may  ordinarily  be  determined 
by  dividing  by  2 the  sum  of  the  amount  of  such  assets  held  at  the  beginning  of  the  year 


i at  the  end  of  the  year.  In  such  case  the  amount  of  admissible  assets 
may  bert  be  determined  from  (1)  the  balance  sheet  as  of  the  beginning  ol  the  year 
adjutUd  with  reepec^^to  the  items  in  Schedules  F and  G,  and  (2)  the  balance  sheet  u of 
the  end  of  the  year  correspondingly  adjusted.  But  if  at  any  time  during  the  year  a sub- 
stantial change  has  taken  place  in  the  amount  of  such  assets,  the  average  amount  must  be 
determined  as  provided  in  Article  852  o£  R^ulations  45.  In  such  case,  show  in  detail— 
(5)  The  computation  of  such  amount. 

State  also— 

Amount  of  inadmissible  assets  held  at  beginning  of  (he  year; 

Amount  of  imidmiasihle  assets  held  at  end  of  year; 

Average  amount  of  inadmissible  assets  held  during  year, 

Amount  of  admissible  assets  held  at  beginning  of  the  year; 

Amount  of  admissible  assets  held  at  end  of  year; 

A.verage  amount  of  admissiblti  assets  held  during  year; 

Bum  of  (r)  plus  (A); 

1 Percentage  which  (r)  is  of  (i). 

I percents^  (i)  for  each  year  should  bo  applied  to  the  figures  for  that  year  appearing 
on  line  7,  Schedule  II,  in  order  to  obtain  the  dMuction  on  account  of  insd  misaibie  ssseit 
which  should  be  entered  on  line  8,  Schedule  II. 


QUESTIONS. 


KIND  OF  BUSINESS. 


1.  Explain  below  the  nature  of  the  corporatiou’s  busineas  in  sufficient  detail  to  show 
in  which  of  the  following  general  classes  of  activities  it  falls; 

(I)  Agriculture  and  related  industries,  including  fishing;  (2)  mining,  quarrying,  and 
related  industries;  (3)  manufacturing;  (4)  construction;  (6)  trading;  (6)  trausiwrtation; 
(7)  storage;  (8)  other  services;  (9)  banJdng  and  insurance. 

2.  If  the  business  falls  in  any  of  the  classes  from  1 to  5,  state  the  special  product  or 
products  handled;  if  in  class  5,  state  whether  wholesale  or  retail,  or  both;  if  in  class  6,  suto 
whether  rail,  water,  or  other,  whether  general  or  local,  and  the  specif  commodities  (if 
any)  transported;  if  in  class  7,  state  the  special  commodities  stored  (if  any)  or  the  special 
kind  of  storage;  if  in  class  8,  state  in  detail  the  kind  of  service  rendeied;  if  in  class  9,  state 
the  branch  of  banking  or  insurance  engaged  in. 

3.  In  all  casee  state  whether  the  corporation  acts  as  principal  (using  its  own  capital) 
or  as  agent  or  broker  (on  commission)  or  as  both. 

(«)  Main  business ■. 


(6)  Collateral  businesses,  if  any. 


OTHER  CONCERNS  IN  S.AME  BUSINESS. 

4.  Enter  on  the  following  lines  (he  names  and  addressee  of  five  representative  con- 
cerns in  your  locality  or  section  of  the  country  engaged  in  the  same  kina  oi  busiuees: 

JNCORPORATION. 

5.  Date  of  incorporation 

6.  Under  the  laws  of  what  State  or  country? 

PREDECESSOR  BUSINESSES. 

7.  If  the  corporation  was  not  in  OKistence  during  the  whole  of  any  one  of  the  calendar 
years  1911-1913,  is  it  in  any  way  an  outgrow  th,  result,  continuation,  or  reorganization  of 

a business  which  was  in  existence  d uring  tlie  w hole  of  any  one  of  thece  years? 

If  the  answer  to  preceding  question  is  ''  Ves,”  give  name  under  which,  and  address  at 


which,  the  busineas  of  the  predecessor  was  then  carried  ( 


Is  the  present  organization  substantially  a continuation  of  th©  predecessor?.. 
Give  reasons  for  your  last  conclusion 


Have  you  used  the  prewar  data  of  (he  predecessor  organization  in  the  preparation  of  tliis 
return? 

REORGANIZATION  AND  ACQUISITION  OF  MIXED  AGGREGATES  OF  ASSETS. 

8.  Has  the  corporation,  or  any  of  its  jrredtetssuTS,  ever  beon  reorgaaizod,  or  has  it, 
or  a prtdtctssor,  ever  taken  over  a going  business  or  acauired  a mixed  aggregate  of  tangible 
property,  patents,  and  copj-rights,  and  good  will  ana  other  ^imilar  intangiDlo  property, 

and  paid  lor  such  property  in  whole  or  in  part  w ith  stock  or  other  securitieo?  


9,  If  BO,  furnish  a brief  narrative  history  of  the  business  and  submit  a ilatemeut 
abowiug — 

(a)  The  came  of  the  concern  taken  over  (or  from  which  the  properly  was 

acquired); 

(b)  The  nature  of  the  assets  and  liabilitiee  bo  acquired; 

(c)  The  total  per  value  of  the  stock  issued  therefor; 

(d)  The  value  at.  which  each  class  of  assets  was  carried  on  the  hooka  of  the  con 

corn  from  which  acquired  (if  obtainable,  submit  a balance  sheet  of  lbs 
predecessor  concern  as  of  the  date  of  acquiaitiun  or  as  of  the  close  of  its 
last  accounting  period  prior  thereto); 

(e)  The  value  at  wMch  each  item  was  entered  i 
making  this  return. 


the  books  of  the  corporation 


10.  It  patents,  copmghto,  secret  processes  or  formulae,  good  will,  trade-marks,  trade 
brands,  franchisee,  or  other  intangible  property  were  acquired,  state  ali  the  basis  on  which 
their  value  was  determined  and  how  they  were  paid  for. 

11.  If,  at  the  time  of  any  purchase  or  reorganization  as  contemplated  in  question  8, 
any  property  was  entered  on  the  books  of  the  reorganized  concern  or  any  vendee  prsd- 
ecesor  at  a value  in  excess  of  that  at  which  it  was  carried  on  the  books  of  the  vendor  con- 
cern, state  the  basis  on  which  the  revaluation  was  made. 

AFFILUTIONS  WITH  OTHER  CORPORATIONS  (TO  BE  ANSWERED  BY  EVERY  CORPORATION). 

12.  Do  you  own  directly  or  control  through  closely  affiliated  iutereels  or  by  a ouiuince 
or  nominees  over  60  per  cent  of  the  outstanding  capital  stock  of  another  corporation  or  of 

other  coiporationa? 

13.  Is  over  50  per  cent  of  your  capital  stock  owned  by  another  corporation  or  by  two 

or  more  corporations  that  are  affiliated? 

14.  Is  over  50  per  cent  of  your  capital  stock  as  well  as  over  50  per  cent  ot  the  capital 

stock  of  another  corporation  or  of  other  corporations  owned  or  controlled  by  the  same  indi- 
vidual or  partnenihip  or  by  the  same  individuals  or  partnerebipe? 

15.  Is  this  return  a consolidated  return  within  the  meaning  of  Articlee  631  to  638,  in- 
clusive, of  Regulations  45?. 

16.  AfliUated  corporations  as  indicated  in  12,  13,  or  14  above  must  comply  with  the 
following  requirements; 

17.  If  the  answer  to  question  12is  "yes,”  submit  a statement  showing  for  each  of  the 
corporations  over  ■60  per  cent  of  whose  stock  is  owned  or  controlled  by  you,  either  directly 
CT  through  closely  alliliated  ioteceets  or  by  a nominee  or  uumiuees — 

(a)  Tbe  name  and  address; 

ti)  The  total  par  value  of  the  outstanding  capital  stock  at  the  beginning  of  the 
' ' ' j -I  ' ■ each  change,  maasifytng  this 


ek; 


taxable  year,  and  the  dale  and  amount  i . 

data  as  to  common  and  preferred,  voting  and  nonvoting  si 

(c)  The  total  par  value  of  such  outstanaing  capital  stoc  k owned  or  lentiolled  by 
you  at  the  beginning  ol  the  taxable  year,  or  at  the  data  of  acquisition  if 
acquired  during  the  taxable  year,  and  the  date  and  amount  of  each  change 
therein.  ^ 

18.  If  tbe  answer  to  question  13  is  “yes,”  state — 

(а)  The  n;uue  and  address  of  such  corporation  or  corporations; 

(б)  The  par  value  and  percentage  of  your  stock  held  by  each,  classified  as  to 

common  and  preferred,  voting  and  nonvoting. 

19.  If  the  answer  to  question  14  is  “yes,”  submit  a statement  showing — 

(а)  The  names  and  addresses  of  such  corporations; 

(б)  Tbe  name  or  names  and  address  or  addresses  of  the  owning  or  controlling 

interest  or  interests; 

(c)  The  total  par  value  of  the  outstanding  capital  stock  of  each  corporation  at 

the  beginning  of  the  taxable  year,  and  the  date  and  amount  of  each  change 
therein,  classifying  this  data  as  to  common  and  preferred,  voting  and  non- 
voting  stock; 

(d)  The  total  par  value  of  each  class  of  the  outstanding  capital  stock  of  each 

corporation  owned  or  controlled  by  each  one  ol  the  several  indiviauals  or 
partnerships  at  tbe  beginning  of  the  taxable  year,  and  the  date  and  amount 
of  each  change  therein. 

20.  If  the  answer  to  question  15  is  “yea,”  the  informationluniished  under  17  and  19 
should  identify  tbe  corporations  included  in  the  consolidation. 

21.  H one  corporation  owns  95  per  cent  or  more  ol  the  outstanding  voting  stock  of 
another,  or  if  95  per  cent  or  more  of  the  outstanding  voting  stock  of  two  or  more  corpora- 
tiuud  is  owned  by  the  same  individual  or  indiWduals  in  substantially  tbe  same  propor- 
tion, a consolidated  return  must  be  filed,  except  that  the  limitations  as  to  cuusoUdation 
under  Article  035  must  be  observed.  If  the  ownership  is  less  than  95  pet  cent  ol  the  out- 
standing voting  stock,  but  exceeds  50  per  cent,  the  pa/eul  curporatiun  or  principal  cor- 
poration of  any  group  of  affiliated  corporations  must  furnish  the  information  cslled  for 
above  and  in  adaition  must  file  a statement  fully  disclosing  the  details  of  affiliation  other 
than  stock  ownership  and  all  other  information  which  will  be  helpful  in  detenuining 
whether  or  not  a consolidated  return  should  he  filed. 

VALUATION  OF  CAPITAL  STOCK. 

22.  IVliat  was  the  fair  value  of  the  total  capital  stock  of  the  corporation  as  determined 

in  the  last  asoesoment  of  the  capital  stock  tax  (if  any)?  I Date  of  (bat 


LIST  OF  ATTACHED  SCHEDULES. 


We,  the  umlersigued,  president  and  treasurer  of  the  corpoiation  for  tvhich  this  return  is  made,  being  severally  duly  aworn,  each  for  hiuisrlf 
deposes  and  says  that  this  return,  including  the  uccooipunying  schedules  and  statements,  iiA-s  been  e.xamined  by  him  and  is,  to  the  best  of  hn 
knowledge  and  belief,  a true  and  complot#  return  made  in  good  faith  pursuant  to  the  Kevenue.\ct  of  191S  and  the  Kegulatious  issued  thereunder. 


Sworn  to  and  siib-l 
■crihed  before  me  / 


day  of  , 


f'rtslJrnl. 

'J'retisurrr. 


Page  6 of  Form  il20A 


Income  'lUi 

Siipplrmcatiiiy  Psnjc  7A. 


Page  1 of  Instructions 

INSTRUCTIONS  REGARDING  DETERMINATION  OF  CREDITS,  COMPUTATION  OF  TAX,' ETC. 


PROVISIONS  AFFECTING  INVESTED  CAPITAL  AND  CREDITS. 

RETURNS  FOR  PART  OF  A YEAR. 

1.  If  this  return  is  for  a period  leas  than  a full  year,  Items  3 and  .3,  Schedule  III; 
Items  1 and  2,  column  2,  Schedule  IV;  and  Item  19,  Schedule  IV,  aball  be  reduced  to  rs 
many  twelfths  of  the  %area  for  a full  year  as  there  are  months  in  the  period  for  which  the 
return  is  made. 

If  the  period  for  which  the  return  is  made  includee  fractions  of  months,  there  shall  be 
added  to  the  number  of  complete  months  as  many  thirtieths  of  a month  as  there  are  days 
in  the  fractional  parts  of  months. 

CORPORATIONS  NOT  IN  EXISTENCE  DURING  PREWAR  PERIOD. 

2.  If  a corporation  was  not  In  existence  during  the  whole  of  at  ka-st  one  calendar  year 
in  the  prewar  period,  provided  a majority  of  its  capital  stock  was  not  owned  or  controlled, 
directly  or  indirectly,  at  any  time  during  the  ta.xable  year  by  a corporation  in  existence 
during  the  whole  of  at  least  oae  calendar  year  in  the  prewar  period,  and  provided  its  gross 
income  does  not  include  50  per  cent  or  mure  of  gains,  profiLs,  commissions,  or  other  income 
derived  from  a Government  contract  or  contracts  made  after  April  5,  1917,  and  before 
Xovember  12,  1918,  the  war-prohts  credit  shall  be  (a)  the  sum  of  $3,000  plus  (6)  the  same 
perceatage  of  the  invested  capital  for  the  taxable  year  (not  less  than  10  per  cent,  however) 
as  the  average  per  cent  of  net  income  to  invested  capital  for  the  prewar  period  of  corpora- 
tions engaged  in  a trade  o'  businea)  of  the  same  general  class  as  the  taxpayer. 

3.  Pending  a determination  of  the  deduction  by  tho  Commisrioner,  such  corporation 
shall  deduct  10  per  cent  of  the  invested  capital  for  the  taxable  year.  (See  Section  311 
(f,  d)  of  the  Revenue  Act  of  1918  and  Articles  783  and  784  of  Regulations  45.) 

CREDIT  FOR  INCOME.  WAR-PROFITS,  AND  EXCESS-PROFITS  TAXES 
PAID  OR  ACCRUED  TO  FOREIGN  COUNTRY  OR  POSSESSION  OF  THE 
UNITED  STATES. 

4.  If  a credit  is  riaimetl  in  Item  29,  .Schedule  IV,  a copy  of  Form  1118,  completely 
filled  out  and  swum  to  or  attirmed,  must  be  submitted  with  this  return.  If  credit  is  sought 
for  U.xes  already  paid  the  form  must  have  atta<  hed  to  it  the  receipt  for  each  such  lax  pay- 
ment. If  credit  is  sougfit  for  taxes  accrued  the  form  must  have  attached  to  it  the  return 
on  which  each  such  accrued  tax  was  based.  (See  Article  611  of  Regulations  45.) 

6.  WTien  a credit  is  claimed  for  accrued  taxes,  the  Commissioner  may,  as  a condition 
precedent  to  the  allowance  of  this  credit,  require  the  corporation  to  give  a bond  (Form 
1119),  with  sureties  satisfactory  to  and  to  be  approved  by  him,  in  such  penal  sum  as  he 
may  require,  rondilioned  for  the  payment  by  the  taxpayer  of  any  amount  of  taxes  found 
due  if  the  taxes  when  paid  differ  from  the  amount  claimed  in  respect  thereof. 

PROVISIONS  AFFECTING  COMPUTATION  OF  WAR-PROFITS 
AND  EXCESS-PROFITS  TAX. 

6.  In  most  instances  the  amount  of  the  tax  will  be  found  as  followa: 

(A)  By  finding  the  amount  of  war  and  excess-proCts  tax  at  the  rates  for  1918  and  fur 
1919. 

(B)  By  boding  the  proportion  of  the  amount  of  war  and  excess- probts  tax  computed  for 
1918  which  the  number  of  months  in  1918  bears  to  the  total  number  of  montlisiu  the  period. 

(C)  By  boding  the  proportion  of  the  amount  of  war  and  cxceas-profits  tax  competed 
at  the  rates  for  1919  which  tlie  aumber  of  montlis  in  1919  bears  to  the  total  number  of 
mouths  in  the  period. 

(U)  By  adding  the  amounts  found  under  (B)  and  ((')  above. 

(K)  By  budiug  tlie  amount  of  the  income  tax  at  the  rates  for  1918  and  fur  1919. 

(F;  By  boding  such  proportion  of  the  income  tax  computed  at  the  1918  rates  as  the 
total  of  mouths  in  1918  heats  to  the  total  of  montlis  in  the  period. 

(G)  By  budiug  such  proportion  of  the  income  tax  computed  at  the  1019  rates  as  the 
total  of  montlis  in  1919  bears  to  the  total  of  months  in  the  inriod. 

(II)  By  adding  (F)  and  (G)  above. 

(I)  Total  tax  will  be  the  sum  of  (D)  and  (If)  above. 

Bbould  compulation  be  necessary  under  other  secliuns  than  301(a)  or  301(5),  the 
lollowiug  applies; 

(a)  Limitation  on  total  tax. — I'he  maximum  war-probts  and  excess-probts  tax 
imposed  for  1918  shall  in  no  case  be  more  than  30  per  cent  of  tho  net  income  in  excess  of 
$3,000  and  not  in  excess  of  $30,000  plus  80  per  cent  of  the  net  income  in  ex  cess  of  $20,000; 
fur  1919  the  amoiinla  shall  be  no  more  than  20  per  cent  of  the  net  iueome  in  excess  of 
$3,0IX)  and  nut  in  excess  of  $20,000,  plus  40 per  cent  of  the  net  income  in  excess  of  $20,000. 
(Sectiou  302.) 

If  the  computation  at  the  rates  specibed  in  .Section  301  as  for  1918  exceeds  the  limita- 
Gou  as  for  that  year,  then  the  limited  amount  fur  1918  rales  is  the  amount  computed  at  the 
ralee  fur  that  year,  if  the  computation  at  tlie  rates  specibed  in  Section  301  as  for  1919  ex- 
ceeds tlie  limitation  as  for  that  year,  then  the  limited  amount  fur  1919  rates  is  llio  amount 
computed  at  the  rates  fur  that  year. 

(5)  Government  contract. — II  net  income  has  been  derived  from  a Government 
tonlraet,  or  Government  conlraits,  mado  between  April  6,  1917,  and  November  11,  1918, 
both  datee  inclusive,  in  excess  of  $10,000,  the  compuUliuu  would  be  at  the  rales  for  eacli 
year  M under  Section  301,  rcgardleea  of  the  fact  that  the  contract  may  liave  been  concluded 
in  1918,  or  may  not  have  continued  throughout  the  fiscal  year.  (See  Articles  711  and  719 
of  Itegufations  45.) 

(c)  Tax  on  probts  from  aale  of  mineral  deposits. —In  tho  caso  of  a bona  bde 
sale  of  mines,  oil  or  gas  wells,  or  any  inter(.st  therein,  where  the  principal  value  of  tho 
j.ropi  rly  has  been  demonstrated  by  prospc-cting  or  exploration  and  discovery  work  done 
by  the  taxpayer,  the  portion  of  the  war-probts  and  <ixccs.s  prubl-i  tax  atiribiitable  to  such 
sale  shall  not  exceed  20  per  rent  of  the  selling  price  of  sin  h pro|>crty  or  interest.  (.See 
Articles  971  and  972  of  Kegulalions  45,  and  Section  337  of  tlio  Act.) 

The  brat  sU'p  is  to  bud  tlie  war  and  exceee  profits  tax  cuipiitcd  without  regard  to 
this  pn.visi.  u;  the  second  is  to  find  of  tho  tax  thus  compuUxl  siu  h jiurtion  as  the  nut  in- 
come from  llic  hIc  bears  lo  the  bilil  net  income.  If  Ibis  [mrlioii  equals  or  dixw  not  exceed 
20  per  iv-nt  of  the  Belling  prii  o then  no  adjuslment  is  peniiilt.  d.  ShoiiI  J siicli  portion 
exceed  20  per  cent  of  the  M-lliiig  price,  then,  I, nit,  f iid  such  jN.rli.iri  of  the  war  and  execss- 

(•r  ifls  isi  as  tl.e  uet  in not  attributable  t'l  the  salr  bi-ars  b>  the  total  nut  income;  and 

secondly,  add  to  this  20  pur  cent  ol  thu  wiling  price  of  Ihu  luiouial  Uupisdts. 

f'f)  Tax  of  corporation  ensaged  in  riitning  of  gold.  I f a eurpiratiori  was  cogugud 

in  the  mining  ol  gi.ld,  ifr.  war  and  prof.Li  tax  Kli;.ll  bo  that  proi«irtii,ii  of  Ituiii  J5, 

.Schedule  IV,  which  tin-  net  inr  ..me  n..l  d.  rived  from  tl.e  niining  nf  gold  bean  In  the  total 
net  income  (Artu  It'S  752  sud  7o3,  Itegulal  lon.x  .'■l  etiuii  :g)|  (c)  of  the  Ad.) 

(r)  Tax  of  cxirporalion  wlioss  income  is  derived  in  part  from  **  personal  serv- 
ice.’’—If  part  of  tlie  net  in.  oiuo  (nut  h•■vi  than  30  per  luiil)  w d.  rived  from  a cepatalo 
l::.ds  or  businesa  of  the  (diarai  ter  of  ''personal  sir'.iii*,'’  thu  lax  hhall  l.u  uoni(>ule.|  in 
aci  urdai.ee  with  the  proviioiis  ol  .Vrlickw  711  |.>  743,  Itegnlalioicx  15  (I'a-u.  of  the  Act). 


7.  Statement  of  basil  of  claima. — If  the  corporation  claims  the  benefit  of  one  or 
more  of  these  provisions,  it  should  attach  to  the  return  a complete  statement  of  the  basis 
for  such  claim  and  a computation  of  the  tax  payable  in  the  event  that  suchxclaint 
is  allowed.  'The  amount  of  lax  so  computed  should  be  entered  in  Schedule  IV, 
but,  except  in  cases  falling  under  (a)  above,  tlie  taxpayer  must  nevertheless  fUT  out  all 
tlio  schedules  of  this  form.  Submit  a schedule  respecting  each  Government  contract 
made  bet'ween  April  6,  1917,  and  November  11,  1918,  both  dates  incluaive,  from  which 
income  was  derived  during  the  taxable  year.  In  tho  case  of  affiliated  compani^,  this 
information  should  bo  shown  separately  for  each  company.  This  schedule  will  be  in  the 
form  of  Columns,  the  left-hand  column  specifying  the  following  information  as  respects 
each  contract: 

(а)  Amount  of  contract; 

(б)  Gross  income  from  contract  during  period; 

(c)  Expenses  directly  applicable  to  each  contract. 

Total  of  each  column  should  be  showii.  There  should  also  he  shown  in  the  inoSt 
practicable  form: 

(tf)  Total  gross  income  of  corporation; 

■(f)  Percentage  which  total  of  column  (6)  is  of  (<f); 

(/)  Total  general  expenses,  losses,  and  deductions  of  corporation: 

(y)  Amount  of  (J)  allocated  to  Government  contracts  (total); 

(A)  Percentage  which  (y)  is  of  (J). 

If  the  allocation  of  general  expenses,  losses,  and  deductions  differs  from  the  percentage 
which  the  gross  income  from  the  Government  contract  or  contracts  bears  to  tho  total  gross 
income,  there  shall  be  submitted  a statement  showing  what  items  and  the  amounts  thereof 
have  been  otherwise  allocated,  and  the  reasons  Ihereior.  If  a claim  is  made  under  Section 
327  of  the  Statute,  gains,  profits,  commissioas.  or  otlier  income,  derived  on  a cost-plus 
basis  from  a Government  contract  or  contracts  made  between  April  6,  1917,  and  November 

11,  1918,  both  dates  inclusive,  should  bo  ehoxvn  separately  from  income  from  Govenainent 
contracts  ol  different  character. 

SPECIAL  CASES. 

8.  Definition  of  special  cases.— Section  327  of  thu  Act  provides  that  in  tlie  following 
cases  the  tax'shall  be  determined  as  provided  in  Section  328; 

(а)  Where  the  Commissioner  is  unable  to  determine  the  invested  capital  hi  provided 
in  Section  326; 

(б)  In  the  case  of  a foreign  corporation; 

(c)  WTiere  a mixed  aggregate  of  tangible  jiropcrty  and  intangible  property  has  been 
paid  in  for  stock  or  for  stock  and  boud.s  and  the  Commissioner  is  unable  satisfactorily  to 
determine  the  respective  values  of  the  several  classes  of  property  at  the  time  of  payment,  or 
to  distinguish  the  cl.asscs  of  property  paid  in  for  stock  and  for  bonds,  respectively; 

(d)  Where,  upon  application  by  the  corporation,  the  Commissioner  finds  and  declares 
of  record  that  tho  tax  if  determined  without  benefit  of  this  section  would,  owing  to  abnor- 
mal conditions  affecting  the  capital  or  income  of  the  corporation,  work  upon  the  corpora- 
tion an  exceptional  hardship  evidenced  by  gross  disproportion  between  the  ta.x  computed 
without  benefit  of  this  section  and  the  tax  computed  by  reference  to  the  representative 
corporations  specified  in  Section  328.  This  subdivision  shall  not  apply  to  any  case  (I)  in 
which  the  tax  (computed  without  benefit  of  this  section)  is  high  merely  because  the  cor- 
poration earned  williin  the  taxable  year  a high  rale  of  profits  upon  a normal  invested  capital 
nor  (2)  in  which  50  per  centum  or  more  of  the  gross  income  of  the  corporation  for  the  taxable 
year  (computed  under  Section.  233  of  Title  11)  consists  of  gains,  profits,  commissions,  or 
otlier  income  derived  on  a cost-plus  basis  from  a Government  contract  or  contracts  mado 
between  April  C,  1917,  and  November  II,  1918,  both  dates  inclusive. 

9.  Treatment  of  special  cases.— In  the  cases  a|)<Tified  in  Section  327  tha  lax  will  bo 
Bfiecially  deteruiiued  under  the  provisions  of  Suclioii  328,  but  tho  tax  will  not  ordinarily 
lie  coinpuled  under  Section  328  merely  because  llie  cor|ioralioii's  form  or  manner  of  organi- 
zation, or  the  limitations  imposed  by  Section  32(i,  result  in  a gi eater  tax  than  would  other- 
wise be  jiayable.  A corporalion  which  comes  within  the  provisions  ut  subdivision  (d)  of 
Section  327  (paragraph  8,  above)  may  make  application  for  assiasment  under  the  provisions 
of  Section  328,  which  application  shall  be  attached  to  its  return  in  the  form  of  a statement 
retting  forth  in  full;  (a)  The  reasons  why  the  tax  should  be  so  determined;  (5)  the  facts 
upon  wliiih  such  reasons  are  based;  (<■)  an  exact  description  of  each  trade  or  businese  or 
important  branch  of  a trade  or  business  carried  on  by  it;  (d)  a statcinciil  of  tho  invested 
capital  and  net  income  fur  each  year  since  the  beginning  of  the  jirowar  period,  and  (c)  u 
sUitement  showing  the  amount  of  gains,  profits,  coinmLs.sions,  or  other  income  derived  on  a 
cost-plus  ba.^is  from  Government  contracts  made  after  .\pril  5,  1917,  and  before  November 

12,  1918,  and  showing  the  jier  cent  which  sin  h income  is  of  the  total  income  of  the  corpora- 
tion (See  Article  901.) 

10.  Determination  of  first  installment  of  tax  in  special  cases. — In  thei'usoof  any 
corporation,  otlier  than  a foreign  coriioration  where  absolutely  no  data  are  available  for 
Uie  determination  of  the  invested  capital  for  the  taxable  year,  tlio  installments  of  tho  lax 
shall,  in  the  fust  instance,  he  conqnited  and  (lie  first  installment  (.aid  iii»n  the  basis  of  a 
war  and  excess- profit.^  tax  equal  lo  50  jior  cent  of  llie  net  incoiiie,  pins  income  lax,  which 
latter  tax  shall  be  cnmpiitod  on  the  basis  of  a credit  to  net  iiicoiuo  of  this  amount  for  war 
and  excess-profits  lax.  In  tho  i‘aseof  a foreign  corporation  the  instullmenta  of  the  tax 
shall,  in  the  first  iiislancc.  ho  doleriiiiiied  ii|)on  the  ba.sis  |iiescril)cd  in  Article  913  oi 
Regulations  45.  In  any  other  ca-io  under  Sccli.ui  328,  iiieliidiug  a case  whore  the 
invested  capital  for  the  taxable  year  can  not  be  accurately  determiurxl,  but  where  a 
minimum  amount  of  invested  capital  xs  to  which  there  is  no  qnestiou  can  bo  determined, 
the  installmeiils  sliall  in  the  first  instance  be  compntisl  and  tho  first  iii.stallment  paid 
upon  the  bxsLs  of  a (ax  n|>oii  the  minimniu  amoiinl  of  invvsited  capital,  not,  however, 
exceeding  a tax  n|s.n  tho  hasis  of  .50  ].or  cent . i Iho  not  income.  In  any  of  tho  aliovc  c.isoi 
the  actual  ratio  when  asc.-Ttaiiie.l  by  the  ('.niii  li  ; i nor  will  he  used  in  delcriiiiuing  Iho 
correct  amonul  of  the  tax.  (.See  Article  912  of  Itcgnl  ilioi.s  15.) 

11.  Returns  in  special  cases.  Corporations  ol'.ior  llia'i  I ir.  i;.i  corporations  iiial.iug 
claim  for  xvie.isment  under  .Seclioii  323  of  the  .\cl  i.h  inld  answer  all  ipiesliuns  and  file  all 
ecliedulis)  as  far  as  [io,“.  iblu  aad  utlaelilT:  lalerne-it  cxjilalain';  why  it  i.r  iiiipraetieahiu  lo 
I II  out  Iho  oiilir..  rcinrn. 

UNDISTRIBUTED  PROFITS  TAXABLE  TO  STOCKHOLDERS. 

12.  If  any  eor|)or.itioii,  however  en-aled  or  organi/.  .1,  is  formed  or  availoil  of  f..r  (he 

jiiirpitic  ol  prcveiiliiig  ihe  iniposilioii  ol  iho  suilax  upon  il.s.  t.iel.liohlers  or  iiieiiil.oi  < ilii.mgli 
tho  ii.odinm  of  permillirig  il.s  gains  or  j.rolil.s  lo  ai  enniul.ilo  iivstoa.l  of  being  divi.li-d  or 
i!i.ilrilinled,  Ml.  h e..r|«.r.ilioii  i liall  not  I.e  snbj.  et  t.i  (he  lax  iinpo  . .1  hy  Seeliuii  2 '.0  of  the 
J’...\onne  Ai  t ol  I9IS,  hut  Ihe  utis  l.hold.'rs  or  iiioinhers  thon’ol ; hall  he  .snhjeel  to  l.ixali  i:i 
under  Tide  2 in  llin  same  manner  as  in  dm  oa  e of  stool. holdiTs  of  a per.sonal  serv  i>  .•  eer 
p'  rad  III,  0X1  opt  that  the  lax  ioi|HiM..|  by  Tide  3 of  the  Iti.vi  iine  Art  of  IhlS  shall  be  d.' 
<ln<  t<  .1  from  die  not  iiieoiiio  of  the  ri.rporalion  Imhire  the  proporlionale  . hare  of  ea.  h sloe:.- 
b .lder  or  iim  iiln  r is  eouipiiletl.  (Ceeliuii  2'-''»,  Ailii  le  351.)  ■ •«» 


Income  'I'a.x 

Supplcmenl  :n  y l*iig<-*  75. 


Page  7 of  Form  1120A 


Page  2 of  Instructions 

GENERAL  INSTRUCTIONS 

1.  For  complete  instructions  concerning  the  filling  in  of  the  schedules  in  this  return,  read  the  explanatory  notes  at  the  head  thereof,  and  Part  II  of 
Regulations  45,  revised,  relating  to  the  income  tax  and  war-profits  and  excess-profits  tax  on  corporations.  Copies  of-  the  regulations  can  be  ob- 
tsloed  from  any  collector  of  internal  revenue  or  any  bank.  , 


RETURNS. 

LIABILITY  FOR  FILING. 

2.  Corporations  generally. — Every  corporation,  joint-stock  com- 
pany, association,  and  insurance  company  not  specifically  exempted  by 
Section  231  of  the  revenue  act  of  1918,  and  having  a net  income  for  the 
taxable  year  of  $3,000  or  more,  is  subject  to  the  war-profits  and  excess- 
profits  tax  and  must  file  a complete  return  on  this  form. 

•3.  A corporation,  joint-stock  company,  association,  or  insurance 
company  (not  exempted  by  Section  231)  having  a net  income  less  than 
$3,000  must  also  file  a return  on  this  form,  filling  that  part  of  Schedule  IV 
under  the  headings  “Income  tax”  and  (if  necessary)  “Adjustment  of  tax 
for  fiscal  year  ended  in  1918,”  and  all  the  schedules  called  for  on  pages 
2 end  3;  and  answering  all  questions  on  page  6. 

4.  Foreign  corporations. — A foreign  corporation  subject  to  the 
law  is  required  to  make  return  to  the  collector  in  whose  district  is 
located  its  principal  office  or  agency  through  which  is  transacted  the 
business  in  the  United  States.  The  gross  income  to  bo  returned  includes 
only  the  gross  income  from  sources  within  the  United  States,  including 
interest  on  bonds,  notes,  or  other  interest-bearing  obligations  of  resi-' 
dents,  corporate  or  otherwise,  and  all  amounts  received  representing 
profits  on  the  manufacture  and  disposition  of  goods  within  the  United 
States.  (See  Articles  91,  92,  550,  and  625  of  Regulations  45.) 

5.  A foreign  corporation  should  fill  in  and  submit  all  the  schedules 
called  for  on  pages  2 and  3 of  the  return  with  respect  to  its  incoihe  from 
sources  within  the  United  States,  and  should  compute  its  income  tax 
(Schedule  IV),  claiming,  however,  no  specific  exemption  (Item  19).  Its 
war-profits  and  excess-profits  tax  should  be  com]nited  in  the  first  instance, 
as  provided  in  Article  913. 

6.  Partnerships  and  personal  service  corporations. — Partner- 
ships and  personal  service  corporations  must  make  a return  on  Form 
1065  A.  (.See  Article  624  of  Regulations  45.) 

CONSOLIDATED  RETURl^S. 

7.  Afiiliated  corporations,  as  defined  in  Section  240  of  tlia  Act  and 
Articles  632  and  633  of  the  Regulations,  must  file  a consolidated  return. 
As  provided  in  Article  632,  the  parent  or  principal  reporting  company 
must  file  the  consolidated  return  on  this  form  with  the  collector  of  the 
district  in  which  its  principal  office  is  located.  All  supplementary  and 
supporting  schedules  should  be  prepared  in  columnar  form,  one  column 
being  provided  for  each  corporation  included  in  the  consolidation,  so  that 
the  composition  of  consolidated  net  income  and  consolidated  invested 
capital  may  bo  readily  examined. 

8.  Subsidiary  corporations  and  other  affiliated  corporations  whose  net 
income  and  invested  capital  are  included  in  the  return  of  a parent  cor- 
poration or  a principal  reporting  corporation  must  fill  in  and  file  Form 
112^  with  the  collector  in  whose  district  their  principal  office  is  located. 

PERIOD  COVERED. 

9.  The  taxable  year  is  the  fiscal  period  ended  in  the  calendar  year 

1919. 

10.  A corporation  desiring  to  change  the  period  for  which  its  rctur.'i 
is  made  from  a calendar  year  to  a fiscal  year  or  vice  versa,  or  from  one 
fiscal  year  to  another,  must  give  written  notice  to  tho  collector  of  such 
change  and  the  reasons  therefor  at  least  30  days  beforp  tho  due  dale  of 
its  return  on  the  basis  of  its  existing  taxable  year  and  at  least  30  days 
before  tho  duo  date  of  the  return  on  the  basis  of  the  proposed  taxable 
year.  (See  Articles  26  and  431  of  Regulations  45  and  Section  220  of  tho 
revenue  act  of  1918.) 

TIME  AND  PLACE  FOR  FILING. 

11.  Returns  for  a fiscal  j)ei'io<l  cmhtig  in  1019  must  bo  sent  to  the 
collector  of  internal  revenue  for  the  district  in  which  the  corporation's 
principal  office  is  located  so  as  to  reach  the  collector’s  office  on  or 
before  the  fifteenth  day  of  the  third  month  following  the  close  of  the 
fiscal  period,  unless  an  extension  of  time  has  beeji  granted. 

12.  If  the  fi.scal  year  ended  prior  to  Ai)nl  1,  1919,  and  if  it  is  not 
possible  to  file  a coin|)letcd  return  on  this  form  on  or  before  the  date  the 
return  would  bo  due,  an  c.x.tension  of  lime  may  l)c  obtained  by  Cling,  on 
or  before  such  dale,  a tentative  rotura  and  estimate  of  taxes  assessable, 


in  duplicate,  on  Form  1031  T,  and  remitting  with  such  return  at  le^st  one- 
fourth  of  the  estimated  taxes  shown  thereon. 

13.  In  case  of  neglect  to  file  either  a completed  return  or  a tentative 
return  within  the  prescribed  time  the  collector  is  authorized  to  grant  an 
extension  of  not  more  than  30  days,  fromkd  such  neglect  vms  due  to 
absence  or  sickness,  and  provided  an  application  for  such  extension  is 
made  in  writing  prior  to  the  expiration  of  the  period  for  which  an  exten- 
sion may  be  granted.  In  meritorious. cases  the  Commissioner  is  author- 
ized to  grant  a further  extension;  but  no  such  further  extension  wilt 
be  granted  (except  on  account  of  absence  or  sickness),  unless  a tentative 
return  has  been  ffied  on  Form  1031  T and  at  least  one-fourth  of  the  esti- 
mated tax  has  been  paid.  (See  Articles  442  to  444  of  Regulations  45.) 

SIGNATURES  AND  VERIFICATION. 

14.  Returns  must  be  sworn  to  by  the  president,  vice  president,  or 
other  principal  office^  and  by  the  treasurer,  assistant  treasurer,  or  other 
principal  fiscal  officer.  The  return  of  a foreign  corporation  having  an  agent 
in  the  United  States  shall  be  sworn  to  by  such  agent.  If  receivers,  trustees 
in  bankruptcy,  or  assignees  are  operating  the  property  or  business  of 
tho  corporation,  such  receivers,  trustees,  or  assignees  shall  execute  the 
returns  for  such  corporations,  under  oath. 

PAYMENT  OF  TAXES. 

15.  The  tax  should  be  paid  by  sending  or  bringing  with  the  return 
a check  or  money  order  drawn  to  the  order  of  “Collector  of  Internal 
Revenue  at  [insert  name  of  city  and  State].” 

16.  Do  not  send  cash  through  the  mail  or  pay  it  in  person  except  at 
the  office  of  the  collector  or  a regularly  established  internal-revenue 
stamp  office. 

17.  At  least  one-fourth  of  the  tax  is  due  at  tho  same  time  that  the 
return  is  due. 

18.  An  additional  amount  sufficient  to  bring  tho  total  payments  up 
to  one-half  of  the  tax  must  bo  paid  on  or  before  the  fifteenth  day  of  the 
third  month  after  the  time  fixed  by  law  for  filing  the  return. 

19.  An  additional  amount  sufficient  to  bring  the  total  payments  up 
to  three-fourths  of  the  tax  must  bo  paid  on  or  before  the  fifteenth  day  of .. 
iho  sixth  month  after  the  time  fixed  by  law  for  filing  tho  return. 

20.  The  remainder  of  the  tax  must’ bo  paid  on  or  before  tbe 
fifteentn  day  of  the  ninth  month  after-  the  time  fixed  by  law  for  filing  the 
return. 

21.  If  any  payment  is  not  made  w'hen  due,  the  unpaid  balance 
of  the  tax  will  become  due  10,  days  after  demand  therefor  by  the  col- 
lector. 

22.  If  you  pay  in  cash,  do  not  fail  to  get  a receipt  at  the  time  of  pay- 
ment. If  you  pay  by  check  or  money  order,  j’our  canceled  check  or 
your  money-order  receipt  will  serve  as  a receipt. 

PENALTIES. 

UNDERSTATEMENT  OF  TAXES  DUE  TO  NEGLIGENCE  OR  FRAUD. 

23.  If  taxes  are  understated  tlirough  negligence  on  the  part  of  the 
taxpayer  and  without  attempt  to  defraud,  there  shall  be  added  as  part  of 
the  tax  6 per  cent  of  the  total  amount  of  the  deficiency  plus  interest  at 
the  rate  of  12  per  cent  per  annum  on  tho  amount  of  the  deficiency  of  each 
installment  from  tho  lime  the  installment  was  due.  If  an  understate- 
ment is  false  or  fraudulent  with  intent  to  evade  the  tax,  there  shall  be 
added  as  part  of  the  tax  50  per  cent  of  tho  amount  of  tho  deficiency. 

FOR  FAILING  TO  PAY  TAX  WHEN  DUE. 

24.  If  any  tax  remains  unpaid  after  tho  date  when  it  is  due  and  for  10 
days  after  notice  and  demand  by  the  collector  there  shall  be  mlded  as 
part  of  the  tax  the  sum  of  5 per  cent  of  the  amount  duo  but  unpaid,  plus 
interest  at  the  rate  of  12  per  cent  per  annum  on  such  ainonnt  from  tho 
time  it  became  due. 

FOR  FAILING  TO  MAKE  RETURN  ON  TIME. 

25.  A penalty  of  not  more  than  $1,000  attaches  for  failure  to  file  a 

rc'-urn  or  to  pay  Ihd  tax  within  the  lime  required  by  law.  If  the  failure 
is  willful  or  an  attempt  is  made  to  defeat  or  evade  tho  ta  v,  the  penalty  is 
$10,000  or  iinprisonmont  for  not  more  than  one  year,  or  both,  together 
with  cost  of  p'roscoulion.  »-*.« 

Page  8 of  Form  1120A 


Income  Tax 

Siif'plrmentary  Page  76. 


/ 


OGUVEX  OR  SEND  THIS  RETURN 
SO  AS  TO  REACH  THE 

COLLEaOR  OF  INTERNAL 

REVENUE  ON  OR  BEFORE  THE 
ISTH  DAY  OF  THE  THIRD 
MONTH  AFTER  THE 

CLOSE  OF  THE  PERIOD, 

Page  1 of  Return 

Form  1065  A— UNITED  STATES  INTERNAL  REVENUE  SERVICE 

PARTNERSHIP  AND  PERSONAE  SERVICE  CORPORATION  INCOME  TAX  RETURN 

FOR  CALENDAR  YEAR  1919 

OR 

• Fiscali  Period  begun , and  ended , 1919 

(DaU  rwcalvad) 

IF  AN  EITTENSION  OF  TIME 

(Print  plainly  partnership’s  or  corporation’s  name  and  address) 

Examined  by — 

FOR  FILING  THIS  RETURN  HAS 

BEEN  GRANTED,  THE 

AUTHORIZATION  MUST  BE 

Audited  by — 

ATTACHED  TO  THIS  RETURN. 

STATE  WHETHER  PARTNERSHIP  OR  CORPORATION 


No  In  ii  asMuablo  oa  thi»  Mturn.  Th«  diilributiTe  ihates  o(  the  net  income  »r«  to  be  reported  by  the  individtuil  memberi  of  the  pertnetihip  or  perional  eerrice  corporation,  whether  such  ihare* *  ha«  been  receired  or  not 

QUESTIONS. 


KIND  OF  BUSINESS. 

1.  Explain  below  the  nature  of  the  partnership  a or  corporation’s  Inisine-ss  in  sufficient 
detail  to  enow  in  which  of  the  following  general  classes  of  activities  it  falls: 

(1)  Agriculture  and  related  industries,  including  fishing;  (2)  mining,  quarrving,  and 
relatra  industries;  (3)  manufacturing;  (4)  construction;  {o)  trading;  (C)  transportation, 
(7)  storage;  (8)  other  services;  (9)  banlringand  insurance. 

2.  lithe  business  falls  in  any  of  the  classes  from  1 to  .S.  state  the  special  product  or 
products  handled ; if  in  class  5,  state  whether  wholesale  or  retail , or  both ; if  in  class  ti,  state 
whether  rail,  water,  or  other,  whether  general  or  local,  and  tlie  special  commodities  (if 
any)  transported;  if  in  class  7,  stale  the  special  commodities  sttired  (il  anv)  or  tlio  sjiccia! 
land  of  storage;  if  in  class  8,  state  in  detail  the  kind  of  serv  ice  rendered ; if  in  class  9,  stale 
the  branch  of  banking  or  insurance  engaged  in. 

3.  In  all  cases  state  whether  the  partnership  or  corporation  acts  as  principal  (using  its 
own  capital)  or  as  agentor  broker  (on  commission)  or  as  both. 

4.  A personal  aervice  corporation  must  explain  its  business  in  sufficient  detail  to 
justify  its  claim  to  be  ckissed  as  such.  If  the  character  of  the  business  is  different  from 
that  carried  on  during  the  pre'ceding  taxable  perioii,  the  nature  of  the  change  mii.‘<t  be 
explained.  ’Where  necessary,  the  statement  should  be-  made  on  a separate  sheet,  wliich 
ahould  be  firmly  attached  to  this  return; 

(0)  Main  business 

(1)  Collateral  businesses,  if  any 


' OTHER  CONCERNS  IN  SAME  BUSINESS. 

5.  Attach  hereto  a list  of  the  names  and  addressesof  five  representative  concerns  in  your 
localitv  or  section  of  the  country  engaged  in  the  same  kind  of  business. 

ORGANIZATION  OR  INCORPORATION. 

6.  Date  of  organization  or  incorporation  

7.  If  incorporated,  under  the  laws  of  what  State? 

8.  Are  you  a successor  U)  or  were  you  formed  to  take  over  or  conduct  part  of  the  busi- 
ness of  another  organization  ? 

If  so,  state  name  and  address  of  predecessor  or  other  organization,  and  in  the  latter  case, 
the  financial,  managerial,  and  contractual  relationships  existing  between  yourselves  and 

the  other  organizalion - - 

' VALUATIONS  OF  CAPITAL  STOCK. 

9.  IVhat  was  the  fair  value  of  the  total  capital  stocli  of  the  corporation  as  determined 

’In  the  last  aseeasmenl  of  the  capital  stock  tax  (if  any)’ 

Date  of  that  assessment 

BASIS  OF  VALUING  INVENTORIES. 

10.  State  here  which  of  the  methods  described  on  page  2 of  the  Instructions,  in  the 


note  under  the  heading  "Schedule  .t2,"  was  used  in  valuing  inventories  — 


AFfTlIATIONS  with  CORPORATIONS. 

(To  be  an-swered  by  every  p.irtuership  or  personal  service  corporation). 

11.  Do  vou  own  directly  or  control  through  closely  affiliated  interests  or  by  a nominee 
or  nominees' over  50  per  cent  of  the  cuUtanding  voting  capital  stock  of  a corporation  or  of 

other  corxxirations? ■- - 

12.  Is  over  50  per  cent  of  your  voting  capital  stock  owned  or  controlled  by  another 

corporation  or  by  two  or  more  corporations  that  are  affiliated? 

13.  Isover  50  per  cent  of  your  vot  ing  capital  stock  a,s  well  as  over  50  per  cent  of  the  voting 
capita  stock  of  another  corporation  or  of  other  corporations  owned  or  controlled  by  the  same 

individual  or  partnership  or  by  the  earns  individuals  or  partnerships?  

H.  If  any  of  the  conditions  indicated  in  11, 12,  or  13  exist,  the  following  requirements 
must  be  compiled  with. 

15.  If  the  answer  to  Question  11  is  "Yes,”  submit  a statement  showing  for  each  of  the 
corporations  over  50  per  cent  of  whose  voting  stock  is  owned  or  controlled  by  you,  either 

. directly  or  through  closely  aniliated  interests  or  by  a noniinee  or  nominees; 

• (n)  The  nanie  and  address.  . . • < v 

tb)  The  total  par- value  of  the  outstanding  capital  stock  at  the  be^nmng  of  the 
taxable  year,  and  the  date  and  amount  of  each  change  therein  during  the 
taxable  year,  classifying  the  stock  as  to  preferred  and  common,  voting  and 
non-voting.  • , , 

(c)  The  total  p;ir  value  of  each  class  of  such  outstanding  capital  stock  owned  ot 
controlled  by  you  al  the  beginning  of  the- taxable  year,  or  at  the  date  of 
acquisition  if  acquired  during  the  taxable  year,  and  the  date  and  amount 
of  each  change  therein. 

16.  If  the  answer  to  Question  12  is  "Yes,”  state— 

(a)  The  name  and  address  of  such  corporation  or  corporations. 

(5)  The  par  valife  and  percentage  of  your  stock  held  by  each. 

(cj  Whether  (if  yom- Bttx  k is  owned  by  two  or  more  corporations)  these  forpora- 
tions  are  aHiliated  and  reasons  fur  your  conclusion. 

17.  If  the  answer  to  Question  13  i.s  "Yes,”  submit  a statement  showing— 

a)  The  names  and  addresses  of  such  corporations. 

b)  The  name  or  names  and  address  or  addresses  of  the  owning  or  controlling 
interest  or  interests. 

(c)  The  total  par  value  of  the  outstanding  capital  stock  of  each  corporation  at  the 

beginning  of  the  taxable  year,  and  the  date  anti  amount  of  each  change 
therein  during  the  taxable  year,  classifying  the  stock  as  to  preferred  and 
common,  voting  and  non-voting. 

(d)  The  total  p-ar  value  of  the  outstanding  capital  stock  of  each  corporation  owned  ot 

controlled  by  each  one  of  the  several  individuals  or  partnerships  at  the  begin- 
ning of  the  taxable  year,  and  the  date  and  amount  of  each  change  therein 
during  the  taxable  year. 

LIST  OF  ATTACHED  SCHEDULES. 

18.  Attach  a list  of.schedules  accompanying  this  return,  giving  for  each  a brief  title 
and  a schedule  number.  (See  opening  paragra;m  on  page  2 of  Instructions.) 


SCHEDULE  1. -COMPUTATION  OF  DISTRIBUTABLE  INCOME  AND  CREDITS. 


Enter  below,  in  accordance  with  paragraphs  10  to  13,  page  1 of  Instructions,  tlie  income  and  credits  to  be  accounted  for  by  members  of  a partnership  or  shareholders  of  a personal 
ecrvice  corporation  filing  a return  for  the  calendar  year  1919  or  for  a fiscal  period  ended  in  the  calendar  year  1919. 


t. 

2.  Cash  dividends. 

.5.  Slock  dividends. 

4.  Interest  on  Liberty 
Bonds,  etc.,  issued 
since  SepCembor  24, 
1917. 

5 other  Income. 

6.  Income,  war-proflU, 
and  oxccss-prodl3  tax* 
es  paid  or  accrued  to  o 
possession  oi  the  IL  fi. 
or  to  a foreign  country. 

(«)  Net  income  and  crodiU  for  calendar  or  fieca}  yoar«. 

$ 

$ 

$ 

8 , . . . 

s 

Pnrtinr  ftMigriAblp  f/i  .....  ..  .. 

(r)  PnrtinTi  suwignahk;  Iftlfi  . 

iti  Portion  assignable  to  1913-1917 ;. 

! X X X X X 

X X 

1 X X X X X 

X X 

■ X X X X X 

X X 1 

X X X X X 

X X 

SCHEDULE  II.— MEMBERS’  SHARES  OF  INCOME,  ETC. 


Sworn  to  and  Mibacribed  before  Jno  this. day  of 19„ 


J'ntitlenl  oj  corporalym. 
Member  of  partnertlap. 


{6aiei^rni^i\y~  yiemotrof forporatian 


of  ofTicvr 
makinf  aAmIavIU 


Page  I of  ]‘'orm  1065 A. 

Income  Tax 

Supplementary  Page  77. 


Page  S of  Return, 

SCHEDULE  A-ZNCOME  TO  BE  ACCOUNTED  FOR  BY.  MEMBERS. 


'I.— 


Leas  cost  of  goods  sold,  exclusive  of  expenses,  repairs,  and  other  items  called  for  separately 
below  (from  Schedule  A2) 

Gross  income  from  services  or  from  operations  other  than  trading  or  manufacturing,  less  allowances  (from  Schedule  A3) [ 

Interest  on  obligations  of  the  United  States  issued  since  September  24,  1917  (from  Schedule  A4) I 

Interest  from  other  sources  (not  including  interest  referred  to  in  Schedule  B,  Item  6)  (from  Schedule  A5) 

Rentals 

Royalties 


Share  of  net  income  earned  during  period  by  personal  service  corporations  (whether  received  or  not) 

Cash  dividends  on  stock  of  domestic  and  resident  corporations  (excluding  dividends  on  stock  of  personal 


servuce  corpora- 


Stock  dividends  on  stock  of  domestic  and  resident  corporations  (excluding  those  of  personal  service  corporations  declared 
out  of  net  income  earned  since  December  31,  1017) 

Dividends  on  stock  of  foreign  corporations  (from  Schedule  All) [ 

Gross  income  from  all  other  sources  (not  including  any  amount  in  respect  of  sales  of  capital  assets  or  miscellaneous  invest-  I 
ments — see  Item  24,  below)  (from  Schedule  A12) ' 


ToTAi  OF  Items  1 to  12.. 


DEDUCTIONS, 

Ordinary  and  necessary  expenses  (except  amounts  reported  in  Item  2 above  or  called  for  separately  below,  and  not  includ- 
ing cost  or  value  of  capital  assets  or  miscellaneous  in  vestments  sold  during  taxable  yean— see  Item  24)  (from  Schedule  A14)- ■? 

Compensation  of  members  (including  shareholders  of  personal  service  corporation  who  drew  salaries  therefrom  and  salaries,  I 
comuriwio'ns,  and  other  compensation  in  whatever  form  paid)  (from  Schedule  A15)  _i I. 

Repairs  (iscluding  labor,  supplies,  overhead,  and  other  items  properly  chargeable  to  repairs)  (from  Schodulo  AlOi 

Interest  (except  on  indebtedness  incurred  or  continued  to  purchase  or  carry  obligations  or  securities,  other  than  obligations 
of  the  United  States  issued  after  September  24,  1917,  the  interest  on  which  is  wholly  exempt  from  Income  tax) L 

T.axes  (except  Federal  Income",  waryprolits,  and  excc-es-profits  taxes,  taxes  which  are  a credit  under  Section  222  or  I 
Section  238,  and  taxes  assessed  against  local  benefits  of  a kind  tending  to  increase  the  value  o(  the  property  apecssod) |- 

Debts  ascertained  to  be  worthless  and  charged  off  within  tho  taxable  year |. 

Exhaustion,  wear  and  tear  (including  obsolescence)  (from  Schedule  A20) L 

Depletion  (if  depletion  is  claimed,  the  information  called  for  in  Form  A (revised)  of  .Mines  and  Minerals  Section  or  Form  X 
of  Oil  and  Gas  Section  should  be  submitted).  (Copies  of  these  forms  can  be  obtained  from  tho  Collector) L 

Total  op  Items  14  to  21 


.1 X.I.. 


DirFEREN'CE  Between  Items  13  and  22..., 


Profit  or  loss  on  sales  of  capital  assets  and  miscellaneous  investments  (from  Schedule  A24) $ I. 

Losses  sustained  during  tho  taxable  year  and  deducted  under  Section  234  (p)  (4)  of  the  Act  of  191S  (from  Schedule  A25) I I. 

Amortization  of  War  Facilities  (from  Schedule  A2G)  (Extend  in  last  column  net  total  of  items  24,  2.5,  and  2C) .1 1. 

Total  to  be  Accounted  for  by  Members  (Totai.  or  on  DirrERENCE  Between  Itfm  23  and  Item  2i?,  Last  Column) 


SCHEDULE  B— RECONCILIATION  OF  NET  PROFIT  PER  BOOKS  WITH  INCOME  SHOWN  ON  LINE  27,  SCHEDULE  A. 


1.  Net  profit  for  year  per  books,  before  any  adjustments  aro 

made  therein 

2.  Unallowable  deductions: 

(а)  Donations,  gratuities,  and  contribv:tions ■% 

(б)  Income,  war-profits,  and  excess-profits  taxes  paid  or 


accrued  to  the  United  States.. 


(d)  Special  improvement  taxes 

(«)  Furniture  and  fixtures,  additions,  or  betterments 
■ treated  as  expanses  on  the  books 


(/)  Replacements  covered  by  depreciation... 


(h)  Interest  on  indebteJness  incurred  or  continuod  to  purchase  or  can-T 
' ' obligaticus  or  e^enhties  (other  than  ohii^tion^  of  the  I'nitea 
8(.ite8iS8ned  aftt-r  September  34,  the  iotereet  apoo  which 
is  wholly  cnwnpt  from  income  tat 

(l)  Additions  to  reserves  for  bad  debts,  contingencies,  etc. 

(to  be  detailed) . 

<J)  - 
(f)  ... 

(0  - - 

(m) ... 

(n)  Other  unallowable  deductions  (to  be  detailed) 


(P)  

3.  Partnership's  distribntire  share  of  net  Incou 
by  personal  service  corporations  not  received  o 
a.ljn8t  book 
Scbednle  1 

Total . 


C.  Income  not  to  be  accounted  for  b)'  members: 

(c)  Interest  on  obligationa  of  tho  United  States  issued 
before  September  2-1,  1917,  and  on  obligations  of 
its  possessions 


(o)  Interest  on  obligations  of  States,  Territories,  and  n 
political  subdivisions  thereof 


(d)  Divddcods  on  stock  of  perscnal  eerviee  corporations 
from  not  income  earned  during  the  period  be- 
tween January  1,  1918,  and  the  beginning  of  the 
taxable  year  1919 


(e)  Dividends  received  from  net  earning 
prior  to  .March  1,  1913 


accumulated 

(/)  Other  items  of  nontaxable  income  (to  be  detailed).. 

(?)  - 


j [ 


Clnrges  Rgjanst  rescrv'CB  for  bad  debts,  contingencies,  etc. 
(to  be  detailed) 


8.  Amount  necessary  to  adjust  book  profit  or  loss  ^7ilh  the 
amounta  reported  in  Itenia  24  and  25,  Schedule  A (un- 
less entry  bedonge  on  lino  4) 


Income  to  be  L^vcounted  for  by  members  (Item  27, 
Schedule  A) - 


Attach  hereto  balance  sheets  as  of  the  beginning  and  end 
sheets  should  be  prepared  from  the  books  and  should  bo  in 
ASSETS. 

Co>h  (Including  cosh  in  Ixink  and  on  hand,  certklcatcsof  deposit, etc.). 
Trade  accounts  and  note*  receivable  (before  deducting  reserras  for 
losses). 

Other  accounts  and  notes  rscelvable  (to  bo  classlued). 

Inventoriest 

Raw  materials. 

Work  in  progress. 

Finisitod  products. 

Supplies.  y 

Investments: 

U.  S.  bonds  and  obligations  (each  Issue  te  bo  stat^  saparately). 
Stock  of  corporations— 

ForcigD. 

Domestic. 

Bonds— 

Exempt  (municipal.  State,  etc.). 

Other. 


SCHEDULE  C— BAI-ANCE  SHEETS.  . 

of  the  taxable  ye.ar  (preferably  in  parallel  colunins),  ebowingas  nearly  .aa  practicable  the  details  called  for  below;  (These  babiii0e 
agreement  tlierewiih,  or  any  differences  .should  be  r«coucilcd.) 


PafcJ  for  in  cash  or  other  tangible  property, 
raid  for  in  stock  (other  than  stock  divkicnds)  or  In  shares  cf  t 
partr>ersbip. 

Created  by  stock  dirldend  or  otherwise. 

Discounti 
On  bonds. 

On  stock. 

Totai.. 


LIABILITIES. 

Notes  payable! 

To  members. 

To  others  (including  bonk  loans). 
Accounts  payable: 

Trade. 

Other. 


Reserve  for  losses  oi 
Reserves  for  contini 
allowable  deduou 

Capital  stock  outstandinv  (to 
Surplus  and  undivided  profits. 

Total, 


I accounts  receivable. 


r all  partners'  capMi 


SCHEDULE  D— ANALYSIS  OF  SURPLUS  OR  PARTNERSHIP  NET  WORTH  ACCOUNTS. 

Attach  hereto  an  analysis  of  the  surplus  or  partucishlp  not  worth  accounts,  showing  tho  details  of  all  changes  therein  during  the  taxable  year,  as  nearly  as  practicable  i 


the 


follovnng  form: 

I.  Surplus  or  partnenliip  net  worth  at  beginning  of  year  per  books. 
Add;  2.  Total  net  profit  per  books  and  per  Schedule  B (Item  I). 

8.  Other  creuits  (to  be  detailed). 

4.  Total  of  Items  1,  2,  and  3. 


Deduct:  5.  Withdrawals  or  divudends  (stale  date  dividends  payable,  amount  of  each, 
and  whether  in  cash  or  in  stock). 

C.  Other  debits  (to  bo  detailed).  — — _ 

7.  Surplus  tit  partnership  net  worth  at  end  of  year  per  books.  t-ttm 


Page  2 of  Form  1065A. 


Income  Tax 

Supplementary  Page  78. 


Page  1 of  InstructioMi"^ 
GENERAL  INSTRUCTIONS. 

References  to  RegiilationsL  45  are  to  revised  edilion, 


PARTNERSHIPS  AND  PERSONAL  SERVICE  CORPORATIONS  REQUIRED  TO 
MAKE  A RETURN  OF  INCOME. 

1.  Partnerships,. — Every  domestic  partnership  and  every  foreign 
partnership  doing  business  in  the  United  States  must  make  a return  of 
income  on  this  form  regardless  of  the  amount  of  its  gross  or  net  income. 
(See  Reguations  45,  Articles  321, 1503. 1505-1507  and  1509.) 

2.  Personal  sen-ice  pE  very  personal  se^vicecorporation, 

as  defined  below,  must  make  a return  of  income  on  this  fonn  regardless  of 
Uie  amountof  its  gross  or  net  income.  (See  Article  G24  of  Regulations  45.) 

3.  Personal  sa-'  ice  corporation  defined. — The  term  “personal  service 
corporation"  means  a corporation,  not  expressly  excluded,  the  income  of 
which  is  derived  frr.m  a jn-ofession  or  business  (a)  which  consists  prin- 
cipally of  rendering  personal  service,  (5)  the  eamings  pf  which  are  to  bo 
ascribed  primarily  to  the  activities  of  the  principal  otVr.ers  or  stock- 
lioldei-s  (who  are  referred  to  in  this  return  members''),  and  (c)  in 
which  the  employment  of  capital  is  not  necessary  or  is  only  incidental. 
No  definite  and  conclusive  tests  can  be  prescribed  by  which  it  can  be  finally 
determined  in  advance  of  an  examination  of  the  corporation’s  return 
whether  or  not  it  is  a personal  service  corpore.tion.  The  general  principles 
under  which  such  d terniinr.tiou  will  be  )nade  are  laid  down  in  Articles 
1523  to  1532  of  Reg  ilations  45. 

4.  Corporations  exeludcd. — The  following  classes  of  corporations  are 
expressly  excluded  from  classification  as  person.al  service  corporations; 
(a)  foreign  corporaliops;  ih)  corpwiations  50  per  cent  or  more,  of  whoso 
gross  income  consist  - of  trains,  profits,  or  income  derived  from  trading  as  a 
principal ; and  (c)  corporations  .50  per  cent  or  more  of  whose  gro.ss  income 
h-onsists  of  gains,  profit.s.  commis-.ions.  or  other  income  derived  from  a 
Government  contract  or  contracts  made  lictweeri  April  0. 1917.  and  Novem- 
ber 11,  1916,  inclusive. 

5.  More  than  ore  business. — A corporation  cr.gag-cd  in  two  or  more 
professions  or  businesses  wliich  are  .m-re  or  less  related,  one.  of  wbicli 
does  not  consist  of  reiulei ing. personal  -ervice.  is  not  a personal  service 
corporation  iinle.ss  the  ncnpei-sonal  soi”,  i.  e element  is  m-gliglblc  or  merely 
incidental  and  no  aiipreciable  jiarf  of  its  earnings  are  to  be  ascribed  to 
sucli  sources.  (See  also  .Section  303  of  the  Act.) 

G.  Actiritirs  of  .-tochiuildcr'.. — In  determining  whether  a corporation 
is  a personal  service  corporation,  no  weight  can  bo  given  to  the  fact  that 
it  renders  personal  .-ervices  unles.s  (a;  tlie  principal  owners  or  stock- 
holders are  regularly  engaged  in  the  active  conduct  of  its  allairs  and  are 
engaged  in  sueli  a manner  that  the  e.arnings  are  to  be  ascribed  primarily 
to  their  activities,  and  (o)  its  affairs  are  conducted  principally  by  such 
owners  or  stockholders  If  employee.s  contribute  substantially  to  the 
services  rendered  by  .r  cori'ornticn.  it  is  not  .i  personrd  service  corporation 
imlc;-  in  every  cast  i:.  v.-riicl,  service^  are  sc  rendered  the  value  of  and  the 
compensalioi.  charg’d  for  sucl;  services  ai-t  to  bt  attributed  primarily  to 
the  experience  or  skdl  of  the  principal  ownei-s  or  stockholders. 

7.  Stock  i.ilcre.st  cj  edive  memhirs. — Me,  corporation  or  its  owners 
or  stockholders  shab  make  a return  in  the  first  instance  on  the  basis  of  its 
Ijeing  a personr.l  service  corjioration  unless  at  least  80  per  cent  of  its  stock 
is  held  by  those  regularb,  ciigaged  in  the  active  conduct  of  its  affairs. 

6 Copi'"]. — Tr,  'i'-teT-mininv'  whcihcr  a corporation  is  a personal  serv- 
ice corporatior..  m,  wc.^iit  can  be  given  tc  the  fad  that  the  invested  capital 
of  the  corpoiatior.  iinui-r  Title  III  of  the  Act  or  the  actual  investment  of 
the  principal  owners  oi  stockholders  is  comparatively  small  If  the  use  of 
capital  is  necessary  or  more  than  incidental,  capital  is  a materir.l  income- 
producing  factor  ami  the  corporetion  is  not  a personal  service  coi-poration. 

affiliation  of  personal  3ERVICF.  CORPORATIONS. 

9.  In  order  to  come  under  the  provisions  of  Section  216  (c)  of  the 
Act.  and  the  Regulations  relating  thereto,  a persofial  service  corporation 
must  nornia!]y  lx  owned  by  individuals.  Ordinarily  affiliation  of  a so- 
called  personal  service  corporation  with  another  corporation  (not  itself  a 
personal  service  corporation;  sets  up  a.  presumption  that  such  personal 
BHiA-ice  corfiorntion  is  i.ierely  a department  or  unit  of  another  business 
org.anization.  The  income  of  such  a corporation  shall  be  included  with 
the  income  of  tlie  corporation  or  corporations  with  which  it  is  affiliated, 
A corfiorntion  tan  not  be  treated  a.s  a personal  service  corporation  if  it  is 
{a)  in  efl'ct  merely  the  selling  agency  another  corporation  or  other 
corporations,  {b)  used  for  the  ]>iirpose  of  performing  any  part  of  the  serv- 
ice incident  to  thebu  .incs.sof  an  affiliated  corporation  principally  engaged 
in  traile,  or  in  conlrae'ing-or  mariufacturing,,or  (c)  a mere  instrumentality 
which  is  enabled  to  do  business  witliou't  capital  only  because  it  is  finan- 
eially  sujiportcd  by  affiliated  corporations  or  affiliatedstockliolders. 

IN.STRUCTIONS  FOR  FILLING  IN  SCHEDULE  1,  PACE  1. 

10.  All  return-,.— On  line  (n)  enter  in  column  2 the  amountof  item  9, 
Schedule,  A ; in  coliimii  3.  the  amount  of  Item  10,  .Schedule  A ; in  column  4, 
the  .amount  of  Il'-m  -1,  .Schedule  A:  in  column  5.  the  amount  of  Item  27, 
.Sdiodulc  A,.i  • - the  total  of  Iiem.s  4, 9,  and  10  of  that  .Schedule ; in  column 
G,  the  amount  of  Item  2 (c),  .Schedule  B.  If  the  computation  of  the 
amount  to  be  entered  i n column  ,5  resnits  in  a los.s,  the  amount  should  be 
inriieap-d  by  red  ink  or  olberwist. 

1 1 . lictm : for  , ah  ndar  year  — On  line  ( 5) , columns  2, 4, 5,  and 
C,  enter  tlic  .same  amounU  as  sliown  in  the  corresponiling  cohirnns  on  line 
(ir).  Enter  in  columns  3,  line  (5),  the  amount  of  stock  dividends  wliicli 
were  deefared  after  November  1.  1918,  or  received  after  March  2G,  1919. 
Euler  rm  line  (M  aucIi  part  of  the  remainder  of  stock  dividends  ns  were 
oe. dared  out  of  Ifilr.  eaniings,  and  or.  line  (d)  any  .stock  dividends  not 
entered  upon  lines  (b)  arid  (e). 


12.  Returns  for  fiscal  year  ending  in  1919.— On  line  (i>)  enter  ir.  col- 
umns 2,  4,  5,  and  C as  many  twelfths  of  the  amounts  entered  in  the  same 
columns  on  line  (a)  as  the  number  of  months  of  the  fiscal  year  that  fell  in 
the  calendar  year  1919.  On  line  ( c ; enter  in  columns  2,4.5,  and  6 a£  many 
twelftljs  of  the  amounts  entered  in  the  same  columns  on  line  (a)  as  the 
number  of  months  of  the  fiscal  year  that  fell  in  the  calendar, year  1918. 

13.  Or.  line  (6),  column  3,  enter  as  many  twelfths  of  the  stock  divi- 
dends which  were  declared  after  November  1,  1918.  or  received  after 
March  2G,  1919,  as  the  number  of  months  of  the  fiscal  yer.r  that  fell  in  the 
calendar  year  1919.  On  line  (c),  column  3.  enter  the  remainder  of  the 
stock  dividends  which  were  declared  after  November  1,  1918,  or  received 
after  March  26,  1919,  plus  any  other  stock  dividends  declared  out  of  1918 
earnings.  Enter  on  line  id),  column  3,  any  stock.dividends  not  entered 
on  lines  (i)  and  (c), 

INSTRUCTIONS  FOR  FILLING  IN  SCHEDULE  15,  PAGE  1. 

14.  This  Schedule  is  to  be  used  for  shewing  the  share  of  each  partner 
or  rriember  in  the  income  of  the  partnership  or  personal  service  corporation, 
whether  received  or  not.  Where  the  ownership  of  a personal  service  cor- 
poration has  clianged  during  the  taxable  yoar.  the  distributed  portion  of 
the  net  income  is  taxable  to  the  recipients,  while  the  undistributed  portiou 
is  taxable  to  th^  owners  .ae  at  tlie  end  of  tl.e  taxable  year.  (See  Articles 
330  to  335,  Regula(,ions  45.) 

1.5.  The  distributive  shares  of  the  amounts  shown  on  line  (t)  of 
Schedule  I are  taxable  ujion  the' returns  of  the  individual  members  at  1919 
rales,  those  on  line  (c)  at  1916  rates,  and  tliose  on  liiic'(tf)  at  rates  from 
1913  to  1917,  inclusive.  T!ie  shares  of  e.ach  member  should  be  entered 
according  to  the  years  to  which  applicable,  such  years  being  entered  in 
column  1.  If  the  amount  of  column  5,  Scliedule  I.  shows  a loss,  enter  the 
distributive  shares  of  such  loss  char'gealile  to  eacli  member  in  the  same 
manner  as  though  a not  gain  had  been  realized. 

10.  If  the  space  provi-.led  in  Scliedule  II  is  insufficient  in  which  to 
make  the  necessary  entries,  attach  a supiiiernental  table  in  the  same  form 
as  Schedule  II. 

CREDIT  FOR  INCOME,  WAR-PROFITS,  AND  EXCESS  PROFITS  TAXES 
PAID  OR  .\CCRUED  TO  K FOREIGN  COUNTRY  OR  TO  A 
POSSESSION  OF  THE  UNITED  STATES. 

IT.  If  a credit  is  claimed  in  coiuran  G of  Schedules  I and  II,  a copy  of 
Form  1116,  completely  filled  otA  and  sworn  to  or  affirm.ed,  must  be  raib- 
niitted  with  this  return.  If  credit'  i's  sought' for  taxes  already  paid,  the- 
form  must  have  attached  to  it  the  receipt  for  each  such  tax  payment.  If 
credit  is  sought  for  taxes  accnled.  the  form  mu.st  have  att.ached  to  it  the 
return  on  which  each  such  accrued  tax  was  based.  (See  Article  Oil  Of 
Regulations  45.) 

16.  When  a credit  is  claimed  for  accrued  taxes,  the  .Commissioner 
may.  as  a condition  precedent  to  the  allowance  of  this  cix>dit,  require  the 
taxpayer  to  give  a bond  (Form  1119),  with  Eureties  s.atisfi.ctory -to  and  to 
be  approved  by  him,  in  such  penal  sum  as  he  ma.v  require,  conditioned  for 
the  payment  by  the  taxpayer  of  any  amountof  taxes  found  due  if  the  taxes 
when  paid  differ  from  the  amount  fciaimed  in  respect  thereof, 

PERIOD  COVERED. 

19.  The  taxable  year  is  the  calendar  year  1919  or  (if  the  partnership 
or  corporation  makes  its  return  for  a fiscal  period  of  12  months-ending  on 
the  last  day  of  some  month  other  than  December)  the  fiscal  period  ended 
in  the  calendar  year  1919. 

20.  A partnership  or  corporation  desiring  to  change  the  period  for 
which  its  return  is  made  from  a calendar  year  to  a fiscal  year  or  vice  versa, 
or  from  one  fiscal  year  to  another,  must  give  written  notice  to  the  Collector 
of  such  change  and  the  reasons  therefor  at  lea.st  30  days  before  the  due 
date  of  its  return  on  the  basis  of  its  existing  taxable  year  and  at  lea.st  30 
days  before  the  due  date  of  the  return  on  the  basis  of  the  jiroposed  taxable 
year.  (.See  Articles  2G,  322-324.  41 1,  and  431  of  Regulations  45,  a 1 Sec- 
tion 22G  of  the  Revenue  Act  of  1918.) 

TIME  AND  PLACE  FOR  FILING. 

21. -' Returns  must  be  sent  to  the  Collector  of  Internal  Revenue  for  the 
district-  in  which  the  partnership’s  or  corporationig  principal  place  of 
business  is  located,  so  as  to  reacli  the  Collector’s  office  on  or  before  the  15tli 
day  of  the  third  month  follotving  the  close  of  the  taxable  year,  unless  an 
extension  of  time  lias  been  granted. 

SIGNATURES  AND  VERIFICATION. 

22.  Rctums  of  partnerships  must  be  sworn  to  by  a memlxr  of  the 
partnership.  Corporation  relurns  must  be  sworn  to  by  the  president,  vice 
president,  or  other  jirincipal  officer  and  by  the  treasurer  or  assistant 
treasurer  of  the  corporation.  If  rrreivers.  (nistcos  in  bankruptcy,  or 
assignees  are  operating  the  jiroperlj’  or  business  of  the  purlnersliip  or 
conioration,  such  roeeiver'--.  frustec's,  or  assignee:,  shall  e.xccutc  the  rctuiii 
under  oath. 

PENALTY  FOR  FAILURE  TO  FILE  RETURN  ON  TIME. 

23.  A penally  of  not  more  than  $1,000  attaches  for  f.iilure  to  file  a 

return  wiijiin  the  time  required  liy  law.  If  the  failure  js  willful  or  art 
attemiit  is  made  to  defeat  or  evade,  the  tax,  the  penalty  is  $10,000  or  im- 
prisonment for  not  more  than  one  year,  or  Ixith.  together  with  cost^  of 
prosecution.  »-«««* 


! ri'-OliK*  M'.-ix 

Supplemen'i  ary  I’a^e  79. 


I’ayr  3 of  I'orui 


Page  3 ’of  Instructions. 
SCHEDULES  SUPPORTING  SCHEDULE  A. 


Tke  schedules  called  for  below  should  be  prepared  and  firmly  stapled  to  this  return.  Designate  each  schedule  with  the  number,  of  the  item  in 
Schedule  A which  it  e.xplains.  Make  schedules  on  paper  of  uniform  size  so  far  as  practicable.  Attach  a list  of  schedules  accompanying  this  return, 
giving  for  each  a brief  title  and  schedule  number  References  to  RegulatSms  45  are  to  revised  edition. 


SCHEDULE  A2:  COST  OF  GOODS  SOLD,  EXCLUSIVE  OF  EXPENSES, 

REPAIRS,  AND  OTHER  ITEMS  CALLED  FOR  SEPARATELY. 

In  support  of  Item  2.  Schedule  A.  partnerships  or  corporations  engaged  in  manufac- 
turing or  trading  operations  should  submit  an  analysis,  in  reasonable  detail,  of  the  cost 
of  goods  sold.  This  statement  should  ordinarily  include  the  following  items  but  should 
not  include  any  expense  items  called  for  separately  in  Schedule  A. 

1 Inventories  at  beginning  of  period  fto  be  recopcilcd  with  balance  sheet) 

2.  Purchases  during  period. 

3.  Labor  and  wages  ordinarily  charged  to  manufacturing  cost  on  the  partnership's 

or  coTKiration’s  books,  showing  the  principal  items  separately 

4.  Other  expenses  ordinarily  charged  to  manufacturing  cost  on  the  partnership's 

or  corporation’s  books.  (Stale  separately  large  or  unusual  items.) 

5..  Total. 

Deduct; 

6 Inventories  at  close  of  period  (to  be  reconciled  with  balance  sheet) 

7 Cost  of  goods  sold  (Item  5 less  Item  6) 

XoTE.— Inventories  should  be  valued  at  (a)  cost  or  (1)  cost  or  market,  whichever  is 
lower.  Whichever  basis  is  adopted  m\i3t  be  applied  to  each  item  of  the  inventory 
Inventories  should  be  recorded  in  a legible  manner,  properly  computed  and  simimarized. 
a.ud  should  be  preserved  as  a part  of  the  accounting  records  of  the  taxpayer.  If  claims 
for  losses  on  inventories  or  rebates  on  sales  have  been  allowed  to  the  indiWdual  members 
lor  the  taxable  year  1918.  the  opening  inventory  must  bo  reduced  by  the  amount  of  the 
claims  allowed.  (See  Articles  2CG  and  1581  to  M.S5  of  Kegulations  4.5.) 

SCHEDULE  A3:  CROSS  INCOME  FROM  .SERVICES,  AND  OPERATIONS 

OTHER  THAN  TRADING  OR  MANUFACTURING,  LESS  ALLOWANCES. 

Submit  a schedule  showing  the  nature  and  amount  of  the  principal  items  included 
in  Item  3 Schedule  A 

SCHEDULE  A4:  INTEREST  ON  OBLIG.ATIONS  OF  UNITED  STATES  ISSUED 

SINCE  SEPTEMBER  24,  1917. 

Information  regarding  the  amount  of  tho  parlneiship’s  or  corporation’s  holdings  of 
obligations  of  tho  United  States  issued  since  September  24,  1917,  and  the  interest 
received  thereon,  must  bo  fiirniohcd  in  sufficient  detail  to  enable  the  members  of  the 
partnership  or  personal  scnice  corporation  to  report  corroctiy  tho  amounts  on  their 
individual  returns. 

Submit  a schedule,  showing  in  separate  columns  tho  following  information  with 
jcspect  to  each' class  of  oblig.ations  of  tho  United  States  issued  since  September  24,  1917. 

1.  Description  of  obligations. 

2.  First  and  last  dates  of  each  period  during  which  tho  holdings  of  each  class  of 

obligations  remained  unchanged. 

3:. Amount  of  obligations  of  each  class  held  during  each  such  period. 

4.  Rate  of  interest. 

5.  Interest  derived  from  each  amount  of  principal  staled  in  column  3. 

Enter  as  Item  4,  Schedule  .V,  tho  total  of  column  -5  for  all  classes  of  obligations. 


' I SCHEDULE  AIS:  COMPENSATION  OF  MEMBERS  OF  THE  PARTNERSHIP 
OR  CORPORATION. 

jj  Submit  a schedule  showing  for  each  member  of  the  partnership  or  tor  each  share- 
" holder  who  drew  a salary  from  the  corporation  or  was  engaged  in  its  business.  (1)  name, 

I (2)  duties,  (3)  time  devoted  to  speh  duties,  and  (4)  total  annual  compensation.  A per- 
1 sonal  service  corporation  should  also  explain  fully  the  manner  and  degree  iu  which  the 
j earnings  of  the  corporation  are  dependent  on  tho  activities  of  the  active  shareholders  or 
j fc‘'members.'’ 

! ^’SCHEDULE  A16:  REPAIRS  (including  labor,  supplies,  overhead,  and  other 
I ^ items  properly  chargeable  to  repairs). 

I 'J  Submit  a schedule  showing  the  nature  and  amount  of  the  principal  items  included 
' ftin  Item  16,  Schedule  A. 

( 3 Incidental  repairs,  which  do  not  add  to  the  value  or  appreciably  prolong  the  life  of 
j-  property,  are  deductible  as  expenses.  Expenditures  for  new  buildings  or  tor  permanent 
‘ limprovemcnts  or  betterpents  which  increase  tho  value  of  the  property  are  chargeable 
^ to  capital  account.  Expenditures  tor  restoring  or  replacing  property  are  not  deductible 
!;  under  this  or  any  other  item  of  the  return.  Such  expenditures  are  chargeable  to  capital 
f' account  or  to  depreciation  reserr  es,  depending  on  the  treatment  of  depreciation  on  tho 
fe  books  of  tho  taxpayer 

^'SCHEDULE  A20:  EXHAUSTION,  WEAR  AND  TEAR  (including  obsolescence). 

i Submit  a coUunnar  schedule  containing  in  the  most  practicable  form  substantially 
g the  following  information: 

1 A clas-sification  of  depreciable  assets  subdivided  on  the  bases  of  (a)  character,  end 
I (6)  term  of  useful  life. 

2.  The  year  of  acquisition  of  such  assets  if  prior  to  tax  year.  If  acquired  during  tax 
^ year,  give  actual  date; 

■ ‘ 3.  Nature  and  amount  of  consideration  given  in  payment. 

4.  Tho  fair  market  value  of  such  assets  ll.-j-ch  I,  1913.  if  acqiured  before  that  date. 

5.  The  estimated  life  or  teim  of  reasonable  usefulness  of  such  assets  trom  date  acquired 

or  from  March  1, 1913,  if  acquired  prior  thereto.  Give  reasons  for  your  conclusions, 
t 6.  For  each  class  of  assets  state: 

",  (a)  The  total  provision  lor  depreciation  made  on  tho  books  of  the  corporation, 

'i  from  date  of  acquisition  to  the  beginning  of  the  taxable  year, 

f (6)  The  total  amount  of  depreciation  (exhaustion,  wear  and  tear,  including 

: obsolescence)  claimed  for  the  taxable  year. 

7 A rcconciliation'of  all  figures  in  this  schedule  with  corresponding  figures  reflected; 
in  the  balance  sheets. 

8.  If  any  plan  of  depreciation  other  than  the  "straight  line"  method  contcmplatedi 
by  the  above  instructions  is  used,  a full  explanation  thereof  with  justification, 
should  be  given. 

I SCHEDULES  A24  and  A2S:  PROFIT  OR  LOSS  ON  SALES  OF  CAPITAL  ASSETS 
and  miscellaneous  investments,  and  LOSSES  sustained  during  the  taxable 
j year  from  fire,  storm,  or  other  casualty,  or  from  theft,  not  compensated  for 
j by  insurance  or  otherwise. 

^ Submit  a columnar  schedule  setting  forth  for  each  sale  of  capital  assets  or  of  misceilane- 
OU3  investments  and  for  each  loss  during  the  taxable  year  the  information  called  for  belowt 
y 1.  Description  of  property  sold  or  of  property  in  respect  of  which  a loss  is  claimed. 

2.  Date  acquired. 

3.  Fair  market  price  or  value  on  March  1,  1913,  if  acquired  before  that  date,  or  cost 

if  acquired  after  February  28,  1913. 

4.  Cost  of  improvements,  if  any,  since  February  28,  1913,  or  since  date  of  acquisition,. 

if  acquired  after  February  28,  1913. 

6.  Total  of  Items  3 and  4. 


Submit  also  a statement  in  similar  form  to  tho  above,  with  regard  to  bonds  and  other 
obligations  not  subject  to  income  tax.  (See  Section  215  (6)  (4)  of  the  Act  of  1918). 

SCHEDULE  A5:  INTEREST  FROM  OTHER  SOURCES  (not  including  intere.t 
referred  to  in  Schedule  B,  Item  6). 

Submit  a schedule  showing  the  source,  nature,  and  amount  of  the  principal  items 
Included  herein,  the  minor  items  being  grouped  in  one  figure.  Tho  total  of  the  schedule 
should  be  entered  as  Item  5,  Schedule  A. 

For  interest  on  foreign  bonds  show  (a)  name  of  country;  (5)  kind  of  obligations 
(whether  national,  State,  municipal,  or  corporate  obligations);  (c)*mount  of  principal; 
and  (d)  amount  of  interest. 

SCHEDULE  A9:  CASH  DIVIDENDS  ON  STOCK  OF  DOMESTIC  AND  RESIDENT 
CORPORATIONS. 

Submit  a schedule  showing  (e)  name  ot  cor|>oration ; (b)  State  iu  which  organized; 
(c)  total  par  value  of  stock  held;  and  (d)  amount  of  dividends. 

SCHEDULE  All:  DIVIDENDS  ON  STOCK  OF  FOREIGN  CORPORATIONS. 


6.  Depreciation  or  depletion  of  property  subject  thereto— 

(a)  Per  books. 

(5)  Accrued  but  hot  on  books. 

7.  Salvage  value,  if  any,  of  property  on  which  a loss  is  claimed. 

8.  Amount  of  insurance  or  other  recovery  on  property,  if  any. 

9.  Proceeds  of  sale  or  cash  value  of  property  received  in  exchange  (for  transactions 

falling  in  Item  24,  Schedule  A)  (see  Note). 

Id.  Total  of  Items  6 to  9,  inclusive. 

11.  Profit  or  loss. 

12.  Cause  of  loss  (lor  losses  falling  in  Item  25,  Schedule  A). 

Note. — Submit  evidence  substantiating  the  basis  used  by  you  in  arriving  at  th® 

I value  of  property  received  in  exchange  for  other  property. 

I SCHEDULE  A26:  AMORTIZATION  OF  WAR  FACILITIES. 

i If  a claim  for  amortization  is  made,  the  amortization  allowance  should  be  spread  in 
I accordance  with  the  profits  of  the  business  over  the  entire  amortization  period  in  monthly 
; estimates,  and  there  should  be  entered  as  the  amortization  deduction  in  this  rckurii  the 
I aggregate  amounts  assigned  to  those  months  of  the  amortization  period  which  are  included 
i in  the  taxable  year.  If  tho  return  is  made  for  a fiscal  year  ending  in  1919,  Article  185  ot 
t Regulations  45'should  be  interpreted  as  above  set  forth.  The  im'ormatioa  called  for  in 
! Article  188,  Regulations  45,  should  also  be  submitted. 


Submit  a schedule  showing  (a)  name  of  corporation;  (6)  country  in  which  organized; 
(e)  total  par  value  of  stock  held;  and  (d)  amount  of  dixidends 

SCHEDULE  A12:  GROSS  INCOME  FROM  ALL  OTHER  SOURCES  (not  in- 
cluding any  amount  in  respect  of  sales  of  capital  assets  or  miscellaneous 
investments) 

Submit  a schedule  showing  the  source,  uatvirc,  and  amount  of  the  principal  items 
included  herein,  the  minor  items  being  grouped  in  one  figure.  Tho  total  of  the  schedule 
should  be  entered  as  Item  12,  Schedule  A. 


SCHEDULE  A14:  ORDINARY  AND  NECESSARY  EXPENSES  (except  amounts 
called  for  separately  in  Schedule  A and  not  including  cost  or  value  of 
capital  assets  or  miscellaneous  investments  sold  during  taxable  year). 

• Submit  1^  statement  showing  character  and  amount  of  tho  principal  items  included 
Spi  Itepi  14;  Schedule  4. 


CAPITAL  EMPLOYED  IN  BUSINESS. 

If  tho  balance  sheet  (Schedule  C)  of  a personal  service  corporation  indicates  that  a 
substantial  amount  of  capital  (invested  or  borrowed)  is  employed  in  the  business,  submit 
a statement  explaining  why  the  employment  of  such  capit.al  is  incidental  and  not 
j necessary. 

’ WORKING  PAPERS. 

Eve^  partnersliip  or  corporation  should  prcscrvxq  available  for  inspection  by  a 
revenue' officer,  working  papers  showing— 

1 1.  Tho  balance  in  each  account  on  the  partnership’s  or  corporation’s  books  that 

was  used  in  preparing  Schedule  A. 

2.  The  amount  deducted  from  each  such  balance  on  account  of  each  class  of  non- 

taxable  income,  unallowaljlo  deductions,  and  other  adjustments  indicated 
in  Schedule  B,  with  a reference  to  the  nunibcl  of  the  item  iu  Schedule  B 
in  which  each  amount  so  deducted  was  included. 

3.  The  remainder  of  each  such  '-alance,  analyzed  to  show  the  amount  included 

in  each  item  of  Schedule  A,  with  a reference  to  the  uumhor  of  the  item  in 
Schedule  A'  in  which  each  euch  amount  was  included.  . t-6»» 


IncomCj^Tax 

Supplementary  Page  80. 


Page  4 of  Form  1Q65A. 


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Income  'i’ax 
Supplementary  Page  81 


TRELASTRY  DEPARTMENT 
Intermal  Revente  BimEA0 
Form  1117 


Income  and  Profits  Tax  Bond 

UNDER  SECTION  222  (b)  OF  THE  REVENUE  ACT  OP  1918 


KNOW  ALL  MEN  BY  THESE  PRESENTS,  That  we,  

of , as  principal,  and  

of 

as  surety,  are  held  and  firmly  bound  unto  the  United  States  op  AjueeiCa  in  the  'stun  of 

Dollars,  lawful  money  of  the  United  States,  for  the  pay- 
ment whereof  we  bind  ourselves,  our  heirs,  executors,  administrators,  successors,  and  assigns,  jointly 
and  severally,  firmly  by  these  presents. 

Whereas,  at  the  time  of  filing  his  return  of  income  for  the  taxable  year  1918,  the  above-bounden 
principal  claimed  a credit  on  his  income  tax  return  for  taxes  accrued  but  not  paid  to  foreign  countries 
or  to  possessions  of  the  United  States,  and  duly  attached  thereto  Form  1116  prescribed  for  such 
purpose;  and 

Whereas,  Section  222  (b)  of  the  Revenue  Act  of  1918  provides  -that  in  the  case  of  such  a tax 
accrued  but  not  paid,  the  Commissioner,  as  a condition  precedent  to  the  allowance  of  the  credit,  may 
require  the  taxpayer  tp  give  bond,  with  satisfactory  sureties,  in  such  penal  sum  as  the  Commissioner 
may  require,  conditioned  upon  the  payment  by  the  taxpayer  of  any  amoimt  found  to  be  due,  and 
the  amount  of  this  bond  is  equivalent  to  the  amount  of  the  credit  claimed,  which  is  in  accordance 
with  the  Commissioner’s  requirements: 

Now,  THEREFORE,  the  Condition  of  the  foregoing  obligation  is  such  that  if  the  principal  shall,,  on 
notice  and  demand  by  the  Collector,  duly  pay  any  income,  war  profits,  or  excess  profits  tax  found  by 
the  Commissioner  to  be  due  from  the  principal,  under  the  Revenue  Act  of  1918,  and  shall  otherwise 
well  and  truly  perform  and  observe  all  of  the  provisions  of  law  and  the  regulations,  then  this  obligation 
is  to  be  void,  but  otherwise  to  remain  in  full  force  and  virtue. 

Witness  our  hands  and  seals,  this day  of , 1919. 

Signed,  sealed,  and  delivered  in  the  presence  of-^ 

(l.  s.J 


Bond  approved  this 


day  of 


1919. 


Principal. 


.[L.  8.] 


Surety. 


.[l.  s.] 


Commissioner  of  Internal  Bevenue., 


Income  Tax 

Supplementary  Page  82 


Form  1118 — TTnited  Statm  Interval  Retenttk  Seevtce. 


CLAIM  FOR  CREDIT  ON  INCOME  AND  PROFITS  TAX  RETURN  OF  DOMESTIC  CORPORATION  FOP 
TAXES  PAID  OR  ACCRUED  TO  FOREIGN  COUNTRIES  OR  TO 

POSSESSIONS  OF  THE  UNITED  STATES  ■ , - ; 


Name  of  corporation Address. 


(aty  or  town.) 


(Street  and  number.) 
(State.) 


On  behalf  of  tho  above-named  domeetic  corporation,  credit  is  hereby  claimed,  on  the  attached  corporation  income  and  profits  ta.7 
return,  which  is  based  on  income ' for  the  taxable  year 


(Received  or  accrued.) 

of  the  above-named  corporation,  for  taxes as  follows: 

(Paid  or  accrued.) 


'If  calendar  year;  give  year;  If  fiecaf  y^,  give  montbs.) 


Taxes  Paid  or  Accrued*  During  the  Taxable  Year  to  Possessions  of  the  United  States  on  Behalf  of  the  Corporation. 

Schedule  .A1.  ..  •-  - 

Name  of  p<»soe3ion  imposing  taS: Character  of  tax 

(Income,  war  profits,  or  excess  profits.). 

Date  of  accrual Date  of  pajTnent  (if  paid)  .’.i 

Statute  impoeing  tax  

(To  be  named  fully  and  clearly  so  as  to  be  easily  Identified.) 

1 . Amount  of  tax  pajTnent  (e'videnced  by  attached  receipt  or  return) which  (converted 

(In  foreign  money.) 


at  an  exchange  rate  of ®)  equals  in  dollars.. 


Taxes  Paid  or  Accrued*  During  the  Taxable  Year  to  Possessions  of  the  United  States  on  Behalf  of  the  Corporation. 

Schedule  A2. 

Name  of  poaeeasion  imposing  tax Character  of  tax 

Date  of  accrual 

Statute  imposing  tax 

.1.  Amount  of  tax' payment  (e^'idenced  by  attached  receipt  or  return) which  (converted 


(Inoome,.war  profits,  or  excess  profits.) 
Date  of  payment  (if  paid) 


(To  be  named  fully  and  clearly  so  as  to  be  easily  identified.) 


(In  foreign  money.)'  ■ - .»t  i.  , '■  '^5?,^ 

at  an  exchange  rate  of ®)  equals  in  dollars... $ 


Taxes  Paid  or  Accrued'  During  the  Taxable  Year  to  a Foreign  Country  on  Behalf  o/ the  Coloration. 
' ‘ ' _ ScHEDtTLE  Bl.  ■ **  . 

Name  of  foreign  country  imposing  tax 

Date  of  accrual 

Statute  impofling  tax 

►'I.  Total  net  income  on  which  tax  was  based  . 


^ j ^ . ( Income,  war  profits,  or  excess  profits.), 

Date  of  pa3anent  (if  paid) (. 

, -.i  f •'iOt'i.  Li*,  r; rj  . ■-f ■'*  \ 

(To  be"  nam'cd  fully  and  clearly  so  ns  to  bis  easily  identlfledj  ~~ 


s 

V —A 


•2.  Thiit  amount  of  such  total  net  income  which  was  derived  from  sources  in  that  foreign  country  * ^ ... ^ 

J.  Ratio  of  total  net  income  derived  from  sources  in  that  foreign  country  to  total  net  income  on  which  tax  was ,7.1 1 uv-ri,  J 
(item  2 divided  by  item  1) I ” 1 ' 


4.  Total  amount  of  this  tax  payment  or  accrual  to  that  foreign  country  (evidenced  by  attached  receipt  or  return) . ■■  .1 ' ..j 

6.  That  amount  of  this  tax  payment  or  accrual  which  was  based  on  income  derived  from  sourcee  in  tb^  foreign.,;; 
country  (item  3 multiplied  by  item  4) * which  (converted  at  &n  exclhange'yate"''  " 

(In  foreign  money.)  . ...  . . , . 

of *)  equals  in  dollars 


See  notes  on  poge  3. 


[Page  1 of  Form  1118. 


Income-Tax: 

Supplementary  Page  837. 


Taxes  Paid  or  Accrued‘  During  the  Taxable  Year  to  a Foreign  Country  on  Behalf  of  the  Corporation^ 

Schedule  B2. 


l{ame  of  foreign  country  impoaing  tax 

Date  of  accrual 

Statute  imposing  tax 


Character  of  tax 


'Income,  war  profits,  or  excess  profits.) 


Date  of  payment  (if  paid) 


(To  be  named  fully  and  clearly  so  as  to  be  easily  identified.) 


1.  Total  net  income  on  which  tax  was 


2,  That  amount  of  such  total  net  income  which  was  derived  from  sources  in  that  foreign  cotmtry  * * 

3.  Ratio  of  total  net  income  derived  from  sourtfes  in  that  foreign  country  to  total  net  income  on  which  tax  was  based 

(item  2 divided  by  item  1)  1 

.4,  Total  amount  of  this  tax  payment  or  accrual  to  that  foreign  country  (evidenced  by  attached  receipt  or  return) ’ 

*5.  That  amount  of  this  tax  payment  or  accrual  which  was  based  on  income  derived  from  sources  in  that  foreign 

country  (item  3 multiplied  by  item/4} * which  (converted  at  an  exchange  rate 

tin  foreign  money.) 

of »)  equals  in  dollars $ i.... 


Taxes  Paid®  during  the  Taxable  Year  to  a Foreign  Country  or  a Possession  of  the  United  States  by  a Controlled  Foreign  Corporation. 

Schedule  C. 

(N  OTE.— No  credit  can  be  claimed  for  taxes  paid  on  behalf  of  a foreign  corporation  the  dlvldends'frora  which  are  deductible  from  gross  income  under  section  234  of 
the  Mt.{ 


Foreign 

Corporation 


Name . 


„ Address 


(City  or  town.) 

Incorporated  under  the  laws  of 


Capital  stock 


(Street  and  number.) 

(Jountry.) 

Preferred  Common. 


Total 


Number  of  shares  outstanding... 

Number  of  shares  owned  by  above-named  domestic  corporation 
Has  preferred  stock  voting  rights? 


eyes  or  no.) 

l^ame  of  foreign  country  or  poesesaian  of  United  States  imposing  tax 


Character  of  tax 

(Income,  war  profits,  or  excess  profits.) 


Statute  imposing  tax 


...  Date  of  payment  of  tax 


(To  be  named  fully  and  clearly  so  os  to  be  easily  Identified.) 

Was  any  pful  of  the  net  income  on  which  this  tax  was  based. derived  from  sources  within  the  United  States? 


(Yes  or  no.) 


1 Pfirifid  f»f  or'enia.l  of  this  tax  paymont  * 

2.  Amottnt  of  this  tax  payment  (evidenced  by  attached 
mceiptF  - - - 

Total 

3.  Net  income  on  which  this  tax  was  based  ® 

Total 

4;  Amount  received  during  the  taxable  year  by  the  above-named  domestic  corporation  as  dividends  from  such 
foreign  corporation 

6 Ratio  of  the  amount  of  such  dividends  to  total  net  income  on  which  this  tax  was  based  (item  4 divided  by 

^ total  items  3}^ .i-'-i.... - 

(5.  That  aoKmnt  of  this  tax  payment  which  is  available  for  credit  on  return  of  above-named  domestic  corporation 
(total  items  2 moltipUed  by  item  5,  unless  this  product  is  in  excess  of  total  items  2,  in  which  case  total 

items  2 must  be  entered  here  instead  of  such  product) which  (converted  at  an 

_ (In  foreign  money.) 

exchange  rate  of  .4 *)  equals  in  dollars .V. -— 


See  notes  on  page  3. 


[Page  2 of  Form  1118.1 


Income  Tax 

Supplementarjr  Page  S4 


SUMMARY*  OF  CREDITS  CLAIMED  FOR  TAXES  PAID  OR  ACCRUED  ON  BEHALF  OF  CORPORATION, 


To  a possession  of  the  United  States  (item  1 of  Schedule  Al)' : $ 

To  a possession  of  the  United  States  (item  1 of  Schedule  A2) $ 

To  a foreign  country  (item  5 of  Schedule  Bl) $ 

To  a foreign  country  (item  5 of  Schedule  B.2) $ 

To  a foreign  country  or  a possession  of  the  United  States  on  behalf  of  a controlled  foreign  corporation  (item  6 of 

Schedule  C) $ 

Total  credit  claimed  (to  be  entered  in  Schedule  IV  of  atttached  corporation  return — as  item  19  if 
return  is  on  Form  1120,  as  item  29  if  return  is  on  Form  1120-A)_ $ 


We,  the  undersigned,  president  and  treasurer  of  the  corporation  fof  which  this  claim  is  made,  being  ^verally  duly  sworn,  each 
for  himeelf  deposes  and  says  that  this  claim  has  been  examined  by  him  and  is  to  the  best  of  his  knowledge  and  belief  a true  and  com- 
plete statement  of  facts  in  connection  with  the  credit  for  income,  war  profits,  and  excess  profits  taxes  claimed  herein. 

Sworn  to  and  subscribed  before  me  this 


day  of 19 

Pre^dmt. 


(Offi^  capacity.) Treoaur^. 

« Tf  attached  income  tax  return  is  based  on  income  “received  ”,  then  “ paid  or  accrued  ” wherever  it  appear;  in  this  form  (except  in  Schedule  C)  moans  “paid  II  based 

on  income  “accrued,”  then  “poid  or  accrued”  means  "accrued  ” (See  section  200  of  the  Revenue  Act  of  1918.) 

* State  thisitem  in  terms  of  the  currency  used  in  making  the  return  oh  which  this  tax  was  based  (e.  g.,  pounds,  francs,  marks). 

» Claimant  must  here  state  raw  of  exchange  used  and  must  also  attach  a statement,  describing  in  reasonable  detail  why  and  how  ho  determined  updn  this  particular 

rate. 

< The  person  making  this  claim  must  attach  to  it  a statement  describing  in  reasonable  detail  the  method  by  which  ho  determined  the  amount  of  item  2. 

» Credit  can  be  claimed  for  taxes  paid  on  behalf  of  a forcign-controllcd  corporation  only  in  the  taxable  year  during  which  such  taxes  aro  paid.  There  is  no  such 
credit  for  taxes  accrui-d 

• Where  this  tax  payment  was  of  taxes  accrued  during  only  one  year,  give  dates  of  beginning  and  ending  of  such  year  in  first  column  (c.  g.,  July  1, 1917— June  30, 
1918).  Where  this  tax  payment  was  of  taxes  accrued  during  more  than  one  year,  give  in  separate  columns  the  dates  of  each  aimual  period  during  which  any  part  of 
this  tax  payment  accrued. 

’ State  in  column  under  each  annual  period  named  in  item  ) the  amount  of  this  tax  payment  which  accrued  in  such  period. 

» State  in  column  under  each  part  of  this  tax  payment  as  given  in  item  2 the  amount  of  the  net  income  upon  which  such  part  of  tho  tax  payment  was  based. 

» Where  there  are  more  than  two  possessions  of  the  United  Stales  or  foreign  countries  to  which  taxes  are  paid  by  the  domestic  corporation,  or  nrore  than  one 
controlled  foreign  corporation,  or  more  than  one  possassion  of  the  United  States  or  foreign  country  to  which  taxes  are  paid  on  behalf  of  a controlled  foreign  corporation, 
additional  schedules  should  bo  attached,  and  the  credit  claimed  on  each  such  schedule  should  bo  written  Into  this  Summary.  2— eoss 


I [Page  3 of  Form  1118.1 


ItK:om«  Tax 
Suppdemtntarf  Page  85 


INSTRUCTIONS  REGARDING  USE  OF  FORM  1118 


CREDIT  FOR  TAXES 


Provisions  of  Reven  ue  Act  of  191.8 

Seo.  238.  (a)  That  in  the  case  of  a domestic  corporation  Ihe  total  taxes  imposed  for  the  taxable  year 
by  this  title  and  by  Title  III  shall  be  credited  with  the  amount  of  any  income,  war-profits  and  excess-profits 
taxes  paid  during  the  taxable  year  to  any  foreign  country,  upon  income  derived  from  sources  therein,  or  to 
any  possession  of  the  United  States. 

If  accrued  taxes  when  paid  differ  from  the  amounts  claimed  as  credits  by  the  corporation,  or  if  any  tax 
paid  is  refunded  in  whole  or  in  part,  the  corporation  shall  at  once  notify  the  Commissioner  who  shall  redeter- 
mine the  amount  of  the  taxes  due  under  this  title  and  irnder  Title  III  for  the  year  or  years  affected,  and  the 
amount  of  taxes  due  upon  such  redetermination,  if  any,  shall  be  paid  by  the  corporation  upon  notice  and 
demand  by  the  collector,  or  the  amount  of  taxes  overpaid,  if  any,  shall  be  credited  or  refunded  to  the.corpora- 
tion  in  accordance  with  the  provisions  of  section  252.  In  the  case  of  such  a tax  accrued  but  not  paid,  the 
Commissioner  as  a condition  precedent  to  the  allowance  of  this  credit  may  require  the  corporation  to  give  a 
bond  with  sureties  satisfactory  to  and  to  bo  approved  by  him  in  such  penal  sum  as  he‘may  requii’e,  conditioned 
for  the  payment  by  the  taxpayer  of  any  amount  of  taxes  foimd  due  upon  any  such  redetermination;  and  the 
bond  herein  prescribed  shall  contain  such  further  conditions  as  the  Commissioner  may  require. 

(b)  This  credit  shall  be  allowed  only  if  the  taxpayer  furnishes  evidence  satisfactory  to  the  Commissioner 
showing  the  amount  of  income  derived  from  sources  within  such  foreign  country  or  such  possession  of  the , 
United  States,  as  the  case  may  be,  and  aU  other  information  necessary  for  the  computation  of  such  credit. 

(c)  If  a domestic  corporation  makes  a return  for  a fiscal  year  beginning  in  1917  and  ending  in  1918, 
only  that  proportion  of  this  credit  shall  be  allowed  which  the  part  of  such  period  within  the  calendar  year- 
1018  bears  to  the  entire  period. 

Sec.  240.  (c)  For  the  purposes  of  section  238  a domestic  corporation  which  owns  a majority  of  the  voting 
stock  of  a foreign  corporation  shall  be  deemed  to  have  paid  the  same  proportion  of  any  mcoine,  war-profits 
and  excess-profits  taxes  paid  (but  not  including  taxes  accrued)  by  such  foreign  corporation  during  the  taxable 
year  to  any  foreign  country  or  to  any  possession  of  the  United  States  upon  income  derived  from  sources 
without  the  United  States,  which  the  amount  of  any  dividends  (not  deductible  under  section  234)  received  by 
such  domestic  corporation  from  such  foreign  corporation  during  the  taxable  year  bears  to  the  total  taxable 
income  of  such  foreign  corporation  upon  or  with  respect  to  which  such  taxes  were  paid:  Providedy  That  in 
no  such  case  shall  the  amount  of  the  credit  for  such  taxes  exceed  the  amount  of  such  dividends  (not  deductible 
under  section  234)  received  by  such  domestic  corporation  during  the  taxable  year. 

CoNDraoNs  OF  Allowance  of  Credit. — {a)  When  credit  is  sought  for  income,  war-profits  or  excess- 
profits  taxes  paid  other  than  to  the  United  States,  the  income  and  profits  tax  return  of  the  corporation  must 
be  accompanied  by  this  form,  carefully  filled  out  with  all  the  information  called  for  and  with  the  calculations 
of  credits  indicated,  and  duly  signed  and  sworn  to.  When  credit  is  sought  for  taxes  already  paid  the  form 
must  have  attached  to  it  the  receipt  for  each  such  tax  payment.  When  credit  is  sought  for  taxes  accrued 
the  form  must  have  attached  to  it  the  return  on  which  each  such  accrued  tax  was  based.  This  receipt  or 
return  so  attached  must  be  either  the  original,  a duplicate  original,  a duly  certified  or  authenticated  copy, 
or  a sworn  copy.  In  case  only  a sworn  copy  of  a receipt  or  return  is  attached,  there  must  be  kept  readily 
available  for  comparison  on  request  the  original,  a duplicate  original,  or  a duly  .certified  or  authepticated 
copy,  {h)  In  the  case  of  a credit  sought  for  a tax  accrued  but  not  paid,  the  Commissioner  may  require  as  a 
condition  precedent  to  the  allowance  of  credit  a bond  from  the  taxpayer  in  addition  to  this  form.  If  such 
a bond  is  required.  Form  1119  shall  be  iLsed  for  it.  It  shaV  be  in  such  penal  sum  as  the  Commissioner  may 
prescribe,  and  shall  be  conditioned  for  the  payment  by  the  taxpayer  of  any  amount  of  tax  found  due  upon, 
any  redetermination  of  the  tax  made  necessary  by  such  credit  proving  incorrect,  with  such  further  conditions 
as  the  Commissioner  may  require.  This  bond  shall  be  executed  by  the  taxpayer,  its  agent  or  repr^entative, 
as  principal,  and  by  sureties  satisfactory  to  and  approved  by  the  Commissioner.  See  also  section  1320  of  the 
Revenue  Act  of  1918.  Articles  611  and  383,  Regulations  45. ' 

[Page34  of  Form’  1118.1 


Income 

StipplcmentaryjPage  86 


ORIGINAL 

For  uso  of  Nonresident  Allens  as  to  United  States 

Form  KHOC-UNITEB  STATES  INTERNAL  REVENUE  SERVICE 


INDIVIDUAL  INCOME  TAX  RETURN 


FOR  NET  INCOMES  OF  NOT  MORE  THAN  $5,000 


For  Taxable  Period  1919 

PRINT  NAME  AND  ADDRESS  PLAINLY  BELOW 

Name  ^ 

Address  

Subject  of  


INCOME  FOR  PRIOR  YEARS 


VEAR 

AMOUNT  OF  INCOME.! 

TAX 

DISTRICT  IN  WHICH  RETUR.N  WAS  FILED 



$ 

1917 

1918 

INCOME  FROM  SALARIES,  WAGES,  COMMISSIONS,  BONUSES.  ETC.,  FOR  1S19 


1.  By  whom  rocelvid.  | 

1 2.  Occupation, 

3.  Name  and  address  of  employer. 

4.  Not  inromo. 

5.  Tax  wllbbelJ 

1,1  tony 

$ 

^ - 

Total..... 

$ - 

CALCULATION  OF  TAX  FOR  1919 


0«  B«l  wnic  iKie. 

A.  Nel  hitoaie 

f._ 

D»  M her*. 

D.  Tii  due  (8%  OD  aiBwiBl  of  Ileia  C) 

$ 

B.  Less  persoul  cicnptioe . . 

L Lest  lu  wilhbdil  at  seme* 



C Balinre  finrome  lasahle  at  RtSl 

f 

r.  tbiLfirp  of  Ixi  dup  . .. 

f.  

1 

G.  Aieoiial  of  las  paid  on  tnbiaitsiee  of  rttam 

AFFIDAVIT 

1 swoar  jor  uninn)  lh;it  fliis  return,  to  tho  beat  of  my  knowledge  and  belief,  ia  a true  and  complote  slatemcnt  of  all  taxable  gains, 
profile,  and  incoini-  Tcceivcd  by  or  accrued  lo  me  (or  the  person  for  whom  this  return  ia  made)  during  tlio  year  1919,  and  that  ail 
dr-diietiojw  entered  or  claimed  herein  arc  allowable  under  the  law. 


(If  rotum  lx  made  by  ii<ent,  the  i 


I therefor  must  be  stated  on  this  line.) 


Sworn  lo  and  aubacribed  before  me  this day  of 1919. 


(Signature  of  Individual  or  agent.) 


(Signature  of  olliccr  administering  oath  j (Title.)  ""(  Address' of  individual  or  ag'-uit.) 

. Tlu.s  certiCf*  that  the  above-named  person  h.-ut  complied  with  all  tax  oblig-ationa  with  r^apcct  to  income  nccniing  up  to  the  end 
of  tho  mouth  jii.tt  precetling  the  date  of  tnia  certificate,  aa  discloecd  by  aaaeaameut  made  by  this  olficc,  or  pmof  of  exemption  theiv 
furuiahed. 


Collector  of  InUriud  Revenue, 
DUtHct, 


Income  Tax 
Supplementary  Page  87 


BUPJLICATE 

For  use  of  Nonresident  Aliens  as  to  United  States 


Form  KMOC-UNITED  STATES  INTERNAL  REVENITE  SERVICE 

INDIVIDUAL  INCOME  TAX  RETURN 

FOR  NET  INCOMES  OF  NOT-MORE  THAN  $5,000 
For  Taxable  Period  1919 

PRINT  NAME  AND  ADDRESS  PLAINLY  BELOW 

Name  

Addreag  

Subject  of  - - 


INCOME  FOR  PRIOR  YEARS 


YEAR 

AMOUNT  OF  I.s'COME. 

I T.VX 

DISTRICT  IN  WHICH  RETURN  WAS  FILED 

1916 

$ 

1917 

1918 

INCOME  FROM  SALARIES,  WAGES,  COMMISSIONS,  BONUSES,  ETC.,  FOR  1919 


1.  By  whom  received.  | 2.  Occupa'iDU. 

3.  Name  and  address  of  employer. 

t.  Net  Income. 

5.  Taxwithhold.ifany. 

$ . . 

$ 

Total 

$ 

- 

CALCULATION  OF  TAX  FOR  1919 


Do  Ml  writo  bat. 

A.  N.?t  ici:a.iie . | 

$ - 

Do  Ml  write  ben. 

D.  Tai  doe  (8%  on  ainoaot  of  Item  C)— 

B.  less  liersjaal  exemolioa | 

L Less  lax  withheld  at  sourre  

C.  Baiince  (iacoico  taxable  a!  ) ' 

$ - 

F.  Balance  of  tax.  due 

§ 

1 

G.  Amount  of  fax  paid  on  submisaioo  of  reiuro 

$- 

AFFIDAVIT 

I Bwear  (or  aSimi)  iJiiit  t.bis  retam,  to  the  best  of  my  knowledge  and  belief,  is  a true  an^l  complete  statement  of  all  taxable  gains, 
proSts,  and  income  received  by  or  accrued  to  me  (or  the  person  for  whom  this  return  is  made)  during  the  year  1919,  and  that  all 
deductions  entered  or  claimed  herein  are  allowable  under  the  law. 


(H  retuni  is  nmdo  by  agent,  the  rcasna  iborefor  must  be  stated  on  this  line.) 

Sworn  tt)  and  subscribed  before  me  this d.ay  of 1919,  

(Signature  o(  individual  or  agent.) 

(Signature  of  ofliccr  administering  oath.)  (Title.)  (Address  o(  individu^  or  agent.) 

This  certifies  that  the  above-named  person  has  complied  with  all  tax  obligations  with  respect  to  income  accruing  up  to  the  end 
of  the  month  just  preceding  the  date  of  this  certificate,  as  disclosed  by  assessment  made  by  this  office,  or  proof  of  exemption  there 
furnished.  I 

Collector  of  Inlemai  Revenue, 

ZHstricl. 


Income  'I'ax 

Supplementary  Page  88 


A LIST  OF  THE  SEVERAL 


COLLECTION  DISTRICTS 

WITH  THE 

NAMES  AND  ADDRESSES  OF  COLLECTORS 


REORGANIZATION  OF  JULY  1,  1887 
Revised  to  February  21,  1919. 

(Unless  otherwise  indicated  the  district  bears  the  name  of  the  State  under  which 
the  Collector’s  name  is  given.) 

ALABAMA  (Includes  Mississippi),  JOHN  D.  McNEEL,  Birmingham. 

ALASKA  (See  Washington). 

ARIZONA  (See  New  Mexico). 

ARKANSAS,  JACK  WALKER,  Little  Rock. 

CALIFORNIA, 

First  District. — The  counties  of  Alameda,  Alpine,  Amador,  Butte,  Calaveras,  Colusa,  Contra 
Costa,  Del  Norte,  Eldorado,  Fresno,  Glenn,  Humboldt,  Inyo,  Kings,  Lake,  Lassen, Madera, 
Marin,  Mariposa,  Mendocino,  Merced,  Modoc,  Mono,  Monterey,  Napa,  Nevada,  Placer, 
Plumas,  Sacramento,  San  Benito,  San  Francisco,  San  Joaquin,  San  Mateo,  Santa  Clara, 
Santa  Cruz,  Shasta,  Sierra,  Siskiyou,  Solano,  Sonoma,  Stanislaus,  Sutter,  Tulare,  Tehama, 
Trinity,  Tuolumne,  Yolo,  Yuba,  and  the  State  of  Nevada. 

JUSTUS  S.  WARDELL,  San  Francisco. 

Sixth  District. — The  counties  of  Imperial,^  Kern,  Los  Angeles,  Orange,  Riverside,  San  Ber- 
nardino, San  Diego,  San  Luis  Obispo,  Santa  Barbara,  and  Ventura. 

JOHN  P.  CARTER,  Los  Angeles. 

COLORADO  (Including  Wyoming),  MARK  A.  SKINNER,  Denver. 

CONNECTICUT  (Includes  Rhode  Island),  JAMES  J.  WALSH,  Hartford. 

DELAWARE  (See  Maryland). 

DISTRICT  OF  COLUMBIA  (See  Maryland). 

FLORIDA,  JAMES  M.  CATHCART,  Jacksonville. 

GEORGIA,  AARON  O.  BLALOCK,  Atlanta. 

HAWAH,  H.  HATHAWAY,  Honolulu. 

IDAHO  (See  Montana). 

ILLINOIS, 

First  District. — The  counties  of  Boone,  Carroll,  Cook,  DeKalb,  Dupage,  Grundy,  Jo  Daviess, 
Kane,  Kankakee,  Kendall,  Lake,  Lasalle,  Lee,  McHenry,  Ogle,  Stephenson,  Whiteside, 
Will,  and  Winnebago. 

JULIUS  F.  SMIETANKA,  Chicago. 

Fifth  District. — The  counties  of  Bureau,  Henderson,  Henry,  Knox,  Marshall,  Mercer,  Peoria, 
Putnam,  Rock  Island,  Stark,  and  Warren. 

EDWARD  D.  McCABE,  Peoria. 

Eighth  District. — The  counties  of  Adams,  Bond,  Brown,  Calhoun,  Cass,  Champaign,  Chris- 
tian, Coles,  Cumberland,  Dewitt,  Douglas,  Edgar,  Ford,  Fulton,  Greene,  Hancock 
Iroquois,  Jersey,  Livingston,  Logan,  McDonough,  McLean,  Macon,  Macoupin,  Mason, 
Menard,  Montgomery,  Morgan,  Moultrie,  Piatt,  Pike,  Sangamon,  Schuyler,  Scott,  Shelby, 
Tazewell,  Vermilion,  and  Woodford. 

JOHN  L.  PICKERING,  Springfield. 

Thirteenth  District. — The  counties  of  Alexander,  Clark,  Clay,  Clinton,  Crawford,  Edwards, 
Effingham,  Fayette,  Franklin,  Gallatin,  Hamilton,  Hardin,  Jackson,  Jasper,  Jefferson, 
Johnson,  Lawrence,  Madison,  Marion,  Mas-sac,  Monroe,  Perry,  Pope,  Pulaski,  Randolph, 
Richland,  St.  Clair,  Saline,  Union,  Wabsish,  Washington,  Wayne,  White,  and  Williamson. 

JOHN  M.  RAPP,  Eafit  St.  Louis. 

INDIANA, 

Sixth  District. — The  counties  of  Adams,  Allen,  Bartholomew,  Benton,  Blackford,  Brown, 
Cass,  Dearborn,  Decatur,  Dekalb,  Delaware,  Elkhart,  Fayette,  Franklin,  Fulton,  Grant, 
Hamilton,  Hancock,  Hendricks,  Henry,  Howard,  Huntington,  Jackson,  Jasper,  Jay, 
Jefferson,  Jennings,  Johnson,  Kosciusko,  Lagrange,  Lake,  Laporte,  Lawrence,  Madison, 
Marion,  Marshall,  Miami,  Monroe,  Morgan,  Newton,  Noble,  Ohio,  Porter,  Pulaski, 
Randolph,  Ripley,  Rush,  St.  Joseph,  Shelby,  Starke,  Steuben,  Switzerland,  Tipton, 
Union,  Wabash,  Wayne,  Wells,  White,  and  Whitley. 

PETER  J.  KRUYER,  Indianapolis. 

Prior  missing  Supplementary  Pages  reseived  for  Forms. 

Income  Tax 

Supplementary  Page  101 


INTERNAL  REVENUE  DISTRICTS  AND  COLLECTORS. 


INDIANA  (Concluded) 

Seventh  District. — The  counties  of  Boone,  Carroll,  Clark,  Clay,  Clinton,  Crawford,  Daviess, 
Dubpis,  Floyd,  Fountain,  Gibson,  Greene,  Harrison,  Knox,  Martin,  Montgomery,  Orange, 
Owen,  Parke,  Perry,  Pike,  Posey,  Putnam,  Scott,  Sjpencer,  Bullivah,  Tippecanoe,  Vander- 
burg.  Vermilion,  Vigo,  Warren,  Warrick,  and  Washington. 

ISAAC  R.  STROUSE,  Terre  Haute 
IOWA,  LOUIS  MURPHY,  Dubuque. 

This  district  is  officially  designated  as  the  Third  District  of  Iowa. 

KANSAS,  WM.  H.  L.  PEPPERELL,  Wichita. 

KENTUCKY, 

Second  District. — The  counties  of  Allen,  Ballard,  Barren,  Breckenridge,  Butler,  Caldwell, 
Calloway,  Carlisle,  Christian,  Clinton,  Crittenden,  Cumberland,  Daviess,  Edmonson, 
Fulton,  Graves,  Grayson,  Hancock,  Hart,  Henderson,  Hickman,  Hopkins,  Livingston, 
Logan,  Lyon,  McCracken,  McLean,  Marshall,  Metcalfe,  Monroe,  Muhlenberg,  Ohio. 
Russell,  Simpson,  Todd,  Trigg,  Union,  Warren,  and  Webster. 

JOSH  T.  GRIFFITH,  Owensboro. 

Fifth  District. — The  city  of  Louisville  and  the  counties  of  Adair,  Bullitt,  Casey,  Green,  Hardin 
Henry,  Jefferson,  Larue,  Marion,  Meade,  Nelson,  Oldham,  Owen,  Shelby,  Spencer,  Taylor 
and  Washington. 

J.  ROGERS  GORE,  (Acting)  Louisville. 

Slith  District. — The  counties  of  Boone,  Bracken,  Campbell,  Carroll,  Gallatin,  Grant,  Harrison 
Kenton,  Pendleton,  Robertson,  and  Trimble. 

CHARLTON  B.  THOMPSON,  Covington. 

Seventh  District. — The  counties  of  Bath,  Bourbon,  Boyd,  Carter,  Clark,  Elliott,  Fayetta, 
Fleming,  Franklin,  Gr.,enup,  Johnson,  Lawrence,  Lewis,  Martin,  Mason,  Menifee,  Mont- 
gomery, Morgan,  Nicholas,  Powell,  Rowan,  Scott,  and  Woodford 

EL  WOOD  HAMILTON,  Lexington. 

Eighth  District. — The  counties  of  Anderson,  Bell,  Boyle,  Breathitt,  Clay,  Estill,  Floyd,  Garrard, 
Harlan,  Jackson,  Jessamine,  Knott,  Knox,  Laurel,  Lee,  Leslie,  Letcher,  Lincoln,  Madison, 
Magoffin,  Mercer,  McCreary,  Owsley,  Perry,  Pike,  Pulaski,  Rockcastie,  Wayne.  Wffiitley, 
and  Wolfe. 

JOHN  V;.  HUGHES,  Danville. 

LOUISIANA,  JOHN  Y.  FAUNTLEROY,  New  Orleans. 

MAINE  (See  New  Hampshire), 

MARYLAND,  JOSHUA  W.  MILES,  Baltimore. 

District  of  Maryland  consists  of  the  following-named  territory:  The  States  of  Maryland 
and  Delaware,  the  District  of  Columbia,  and  the  counties  of  Accomac  and  Northampton  of  the 
State  of  V^irginia. 

MASSACHUSETTS,  JOHN  F.  MALLEY,  Boston. 

This  district  is  officially  designated  as  the  Third  District  of  Massachusetta. 

MICHIGAN, 

First  District. — Counties  of  Alcona,  Alpena,  Arenac,  Bay,  Branch,  Calhoun,  Cheboygan, 
Clare,  Clinton,  Crawford,  Genessee,  Gladwin,  Gratiot,  Hillsdale,  Huron,  Ingham,  Iosco, 
Isabella,  Jackson,  Lapeer,  Lenawee,  Livmgston,  -Macomb,  Midland,  Monroe,  Mont- 
morency, Oakland,  Ogemaw,  Oscoda,  Otsego,  Presque  Isle,  Roscommon,  Saginaw,  Sanilac, 
Shiawassee,  St.  Clair,  Tuscola,  Washtenaw,  and  Wayne. 

JAMES  J.  BRADY,  Detroit. 

Fourth  District. — Counties  of  Alger,  Allegan,  Antrim,  Baraga,  Barry,  Benzie,  Berrien  Casa, 
Charlevoix,  Chippewa,  Delta,  Dickinson,  Eaton,  Emmet,  Gogebic,  Grand  Traverse, 
Houghton,  Ionia,  Iron,  Kalamazoo,  Kalkaska,  Kent,  Keweenaw,  Lake,  Leelanau,  Luce, 
Mackinac,  Manistee,  Marquette,  Mason,  Mecosta,  Menominee,  Missaukee,  Montcalm, 
Muskegon,  Newaygo,  Oceana,  Ontonagon,  Osceola,  Ottawa,  St.  Joseph,  Schoolcraft,  Van 
Buren,  and  Wexford. 

EMANUEL  J.  DOYLE,  Grand  Rapids. 

MINNESOTA,  EDWARD  J.  LYNCH,  St.  Paul. 

MISSISSIPPI  (See  Alabama). 

The  State  of  Mississippi  detached  from  the  District  of  Louisiana  and  added  to  the  District 
of  Alabama  June  1,  1908..’ 

MISSOURI, 

First  District. — The  counties  of  Adair,  Audraid,  Bollinger,  Boone,  Butler,  Callaway,  Cape, 
Girardeau,  Carter,  Clark,  Crawford,  Dent,  Dunklin,  Franklin,  Gasconade,  Howard, 
Iron,  Jefferson,  Knox,  Lewis,  Lincoln,  Linn,  Macon,  Madison,  Maries,  Marion,  Mississippi, 
Montgomery,  Monroe,  New  Madrid,  Oregon,  Osage,  Pemiscot,  Perry,  Phelps,  Pike,  Pu- 
laski, Ralls,  Randolph,  Reynolds,  Ripley,  St.  Charles,  St.  Francois,  Ste.  Genevieve,  St. 
Louis,  Schuyler,  Scotland,  Scott,  Shannon,  Shelby,  Stoddard,  Warren,  V/ashington,  and 
Wayne, 

GEORGE  H.  MOORE,  St.  Louis. 

Sixth  District. — The  counties  of  Andrew,  Atchison,  Barry,  Barton,  Bates,  Benton,  Buchanan, 
Caldwell,  Camden,  Carroll,  Cass,  Cedar,  Charlton,  Christian,  Clay,  Clinton,  Ccle,  Cooper, 
Dade,  Dallas,  Daviess,  Dekalb,  Douglas,  Gentry,  Greene,  Grundy,  Harrison,  Henry, 
Hickory,  Holt,  Howell,  Jackson,  Jasper,  Johnson,  Laclede,  Lafayette,  Lawrence,  IJving- 
Bton,  McDonald,  Mercer,  Miller,  Moniteau,  Morgan,  Newton,  Nodaway,  Ozark,  PettUi. 
Platte,  Polk,  Putnam,  Ray,  St.  Clair,  Saline,  Stone,  Sullivan,  Taney,  Texas,  Vernon, 
Webster,  Worth,  and  Wright 

GEO.  F.  CRUTCHLEY,  Kansas  City. 

Income  Tax 

Supplementarv  Page  102. 


INTERNAL  REVENUE  DISTRICTS  AND  COLLECTORS. 

MONTANA  (Includes  Utah  and  Idaho),  WILLIAM  C.  WHALEY,  Helena. 
NEBRASKA,  GEO.  L.  LOOMIS,  Omaha.  . . . 

NEVADA  (See  First  California). 

NEW  HAMPSHIRE  (Includes  Maine  and  Vermont),  SETH  W.  JONES,  Portsmouth. 
NEW  JERSEY, 

First  District. — The  counties  of  Atlantic,  Burlington,  Camden,  Cape  May,  Cumberland, 
Gloucester,  Mercer,  Monmouth,  Ocean,  and  Salem. 

SAMUEL  IREDELL,  Camden.' 

Fifth  District. — The  counties  of  Bergen,  Essex,  Hudson,  Hunterdon,  Middlesex,  Morris,  Passaic, 
Somerset,  Sussex,  Union,  and  Warren. 

CHARLES  V.  DUFFY,  Newark. 

NEW  MEXICO  (Includes  Arizona),  ALFRED  FPvANKLIN,  Phoenix,  Arizona. 
NEW  YORK, 

First^District. — The  counties  of  Kings,  Nassau,  Queens,  Richmond,  and  Suffolk. 

BERTRAM  GARDNER,  Federal  Building,  Brooklyn. 

Second  District. — The  old  first,  second,  third,  fourth,  fifth,  sixth,  eighth,  ninth,  and  fifteenth 
wards  of  New  York  City;  that  portion  of  the  old  fourteenth  wai*d  lying  west  of  the  center 
of  Mott  Street;  that  portion  of  the  cld  sixteenth  ward  lying  south  of  the  center  of  West 
Twentj; -fourth  Street,  and  Governors  Island. 

WILLIAM  H.  EDWARDS,  Custom  House,  New  York. 

Third  District. — The  old  seventh,  tenth,  eleventh,  twelfth,  thirteenth,  seventeenth,  eighteenth, 
nineteenth,  twentieth,  twenty-first  and  twenty-second  wards  of  New  York  City;  that 
part  cf  the  cld  fouiteenth  ward  lying  east  of  the  center  of  Mott  Street,  that  part  of  the  old 
sixteenth  ward  lying  north  of  the  center  cf  West  Tv/enty-fourth  Street  and  Blackwells, 
Randalls,  and  Wards  Islands. 

AIARK  EISNER,  1150  Broadv/ay,  (27t]i  Street),  New  York. 

Fourteenth  District. — The  counties  of  /.Ibany,  Clinton,  Columbia,  Dutchess,  Essex,  Fulton, 
Greene,  Hamilton,  Montgomery,  Orange,  Putnam,  Rensselaer,  Rockland,  Sa’-atoga, 
Schenectady,  Schoharie,  Sullivan,  Ulster,  Warren,  Washington,  and  'Westchester,  and 
the  cld  twenty-third  and  twentv-fourth  wards  of  New  York  City. 

ROSCOE  IRWIN,  Albany. 

Twenty-first  District. — The  counties  of  Broome,  Cayuga,  Chenango,  Cortland,  Delaware, 
Franklin,  Herkimer,  Jefferson,  Lewis,  Madison,  Oneida,  Onondaga,  Oswego,  Otsego,  Sf 
Lawrence,  Schuyler,  Seneca,  Tioga,  Tompkins,  and  Wayne. 

NEIL  BREWSTER,  Syracuse. 

Twenty-eighth  District. — The  counties  of  Allegheny,  Cattaraugus,  Chautauqua,  Chemung, 
Erie,  Genessee,  Livingston,  Monroe,  Niagara.  Ontario,  Orleans,  Steuben,  W^eming,  and 
Yates. 

VINCENT  H.  RIORDAN,  Buffalo. 

Collection  Districts  for  New  York  City. 

New  York  City  (Greater  New  York)  is  embraced  within  four 
collection  districts;  the  First,  the  Second,  the  Third  and  the  Four- 
teenth New  York. 

First  District.  The  Boroughs  of  Brooklyn,  Queens  and  Rich- 
mond are  in  the  First  District;  Oihee,  Post  Office,  Brooklyn. 

Second  District.  The  Borough  of  Manhattan  (Manhattan  Island) 
itself  consists  of  two  collection  districts,  the  Second  and  the  Third. 
The  Second  District  (Office — Custom  House)  consists  of  that  portion 
of  Manhattan  Borough  which  is  bounded  by  the  East  River  from  the 
cqj^ter  of  Catharine  Slip  (Pier  26,  E.  R.,  four  blocks  north  of  Brooklyn 
Bridge)  to  the  Battery;  by  the  North  River  from  the  Battery  to  the 
center  of  West  24th  Street  (Pier  64,  N.  R.);  and  by  a line,  beginning 
at  the  North  (Hudson)  River,  running  east  along  the  center  of  West 
Twenty-fourth  Street  to  the  center  of  Sixth  Avenue,  down  the  center 
of  Sixth  Avenue  to  the  center  of  Fourteenth  Street,  east  along  the 
center  of  Fourteenth  Street  to  the  center  of  Fourth  Avenue,  down  the 
center  of  Fourth  Avenue  to  Cooper  Square,  around  the  north  and  east 
sides  of  Cooper  Square  (i.  e.,  all  of  Cooper  Square  is  in  the  Second  Dis- 
trict) to  the  east  side  of  the  Bowery,  down  the  east  side  of  the  Bowery 
to  the  center  of  Fast  Houston  Street  (i.  e.,  both  sides  of  the  Bowery 
north  of  East  Houston  Street  arc  in  the  Second  District),  west  along 
the  center  of  East  Houston  Street  to  the  center  of  Mott  Street,  down 
the  center  of  Mott  Street  to  the  center  of  Canal  Street,  east  along 
the  center  of  Canal  Street  to  the  center  of  the  Bowery,  down  the  center 

Income  ')*ax 

Supplementary  Pa},'C  103 


INTERNAL  REVENUE  DISTRICTS  AND  COLLECTORS. 


of  the  Bowery  to  the  center  of  Catharine  Street  (at  Division  Street), 
along  the  center  of  Catharine  Street  to  Catharine  Slip  and  across  the 
center  of  Catharine  Slip  to  the  East  River  (Pier  26,  E.  R.).  The  Second 
District  includes  Governors  Island  also. 

Third  District.  The  Third  District  (Office,  1150  Broadway, 
between  26th  and  27th  Streets)  embraces  all  of  the  rest  of  Manhattan 
Island;  that  is,  all  of  Manhattan  Borough  not  included  within  the 
boundaries  of  the  Second  District  outlined  above,  together  with  Black- 
wells, Randalls  and  Wards  Islands. 

Fourteenth  District.  The  rest  of  Greater  New  York,  that  is  all  of 
Bronx  Borough,  which  lies  north  and  east  of  the  Harlem  Ship  Canal 
and  the  Harlem  River,  is  in  the  Fourteenth  District  (Office,  Albany). 
NORTH  CAROLINA, 

Fourth  District. — The  counties  of  Alamance,  Beaufort,  Bertie,  Bladen,  Brunswick,  Camden, 
Carteret,  Caswell,  Chatham,  Chowan,  Columbus,  Craven,  Cumberland,  Currituck,  Dare, 
Duplin,  Durham,  Edgecombe,  Franklin,  Gates,  Granville,  Greene,  Halifax,  Harnett, 
Hertford,  Hyde,  Johnston,  Jones,  Lenoir,  Martin,  Montgomery,  Moore,  Nash,  New 
Hanover,  Northampton,  Onslow,  Orange,  Pamlico,  Pasquotank,  Pender,  Perquimans, 
Person,  Pitt,  Richmond,  Robeson,  Sampson,  Scotland,  Tyrrell,  Vance,  Wake,  Warren, 
Washington,  Wayne,  and  Wilson. 

JOSIAH  VV.  BAILEY,  Raleigh. 

Fifth  District. — The  counties  of  Alexander,  Allegheny,  Anson,  Ashe,  Buncombe,  Burke,  Cabar- 
rus, Caldwell,  Catawba,  Cherokee,  Clay,  Cleveland,  Davidson,  Davie,  Forsyth,  Gaston, 
Graham,  Guilford,  Haywood,  Henderson,  Iredell,  Jackson,  Lincoln,  McDowell,  Macon, 
Madison,  Mecklenburg,  Mitchell,  Polk,  Randolph,  Rockingham,  Rowan,  Rutheiford, 
Stanly,  Stokes,  Surry,  Swain,  Transylvania,  Union,  Watauga,  Wilkes,  Yadkin,  and  Yancey. 


ALSTON  D.  WATTS,  Statesville. 

NORTH  AND  SOUTH  DAKOTA,  JAMES  COFFEY,  Aberdeen,  S.  Dak. 

OHIO, 

First  District. — The  counties  of  Brown,  Butler,  Clarke,  Clermont,  Clinton,  Fayette,  Greene, 
Hamilton,  Highland,  Miami,  Montgomery,  Preble,  and  Warren. 

ANDREW  C.  GILLIGAN,  Cincinnati. 

Tenth  District. — The  counties  of  Allen,  Auglaize,  Champaign,  Crawford,  Darke,  Defiance, 
Erie,  Fulton,  Hancock,  Hardin,  Henry,  Huron,  Logan,  Lucas,  Mercer,  Ottawa,  Paulding, 
Putnam,  Sandusky,  Seneca,  Shelby,  Van  Wert,  Williams,  Wood,  and  Wyandot. 

FRANK  B.  NILES,  Toledo. 

Eleventh  District. — The  counties  of  Adams,  Athens,  Coshocton,  Delaware,  Fairfield,  Franklin  » 
Gallia,  Guernsey,  Hocking,  Jackson,  Knox,  Lawrence,  Licking,  Madison,  Marion,  Meigs, 
Morgan,  Morrow,  Muskingum,  Noble,  Perry,  Pickaway,  Pike,  Ross,  Scioto,  Union, 
Vinton,  and  Washington. 

BERIAH  E.  WILLIAMSON,  Columbus. 

Eighteenth  District. — The  counties  of  Ashland,  Ashtabula,  Belmont,  Carroll,  Columbiana, 
Cuyahoga,  Geauga,  Harrison,  Holmes,  Jefferson,  Lake,  Lorain,  Mahoning,  Medina, 
Monroe,  Portage,  Richland,  Stark,  Summitt,  Trumbull,  Tuscarawas,  and  Wayne. 

HARRY  H.  WEISS,  Cleveland. 

OKLAHOMA,  HUBERT  L.  BOLEN,  Oklahoma  Citv. 

OREGON,  MILTON  A.  MILLER,  Portland. 

PENNSYLVANIA, 

First  District. — The  counties  of  Berks,  Bucks,  Chester,  Delaware,  Lehigh,  Montgomery, 
Philadelphia,  and  Schuylkill.  •; 

EPHRAIM  LEDERER,  Philadelphia. 

Ninth  District. — The  counties  of  Adams,  Bedford,  Blair,  Cumberland,  Dauphin,  Franklin, 
Fulton,  Huntingdon,  Juniata,  Lancaster,  Lebanon,  Mifflin,  Perry,  Snyder,  York. 

BENJAMIN  F.  DAVIS,  Lancaster. 

Twelfth  District. — Bradford,  Carbon,  Center,  Clinton,  Columbia,  I/ackawanna,  Luzerne, 
Lycoming,  Monroe,  Montour,  Northampton,  Northumberland,  Pike,  Potter,  Sullivan, 
Susquehanna,  Tioga,  Union,  Wayne,  Wyoming.  (Twelfth  District  re-established  May 

FRED.  C.  KIRKENDALL,  Scranton. 

Twenty-Third  District. — The  counties  of  Allegheny,  Armstrong,  Beaver, ^Butler,  Cambria, 
Cameron,  Clarion,  Clearfield,  Crawford,  Elk,  Erie,  Fayette,  Forest,  Greene,  Indiana, 
Jefferson,  Lawrence,  McKean,  Mercer,  Somerset,  Venango,  Warren,  ^Washington,  and 
Westmoreland. 

C.  GREGG  LEWELLYN,  Pittsburgh. 

PHILIPPINE  ISLANDS,  JAMES  J.  RAFFERTY,  Manila. 

RHODE  ISLAND  (See  Connecticut). 


Income  Tax 

Supplementary  Page  104 


INTERNAL  REVENUE  DISTRICTS  AND  COLLECTORS. 


SOUTH  CAROLINA,  DUNCAN  C.  HEYWARD,  Columbia. 

SOUTH  DAKOTA  (See  North  and  South  Dakota). 

TENNESSEE,  EDWARD  B.  CRAIG,  Nashville. 

TEXAS,  ALEXANDER  S.  WALKER,  Austin. 

UTAH  (See  Montana). 

VERMONT  (See  New  Hampshire). 

VIRGINIA, 

Second  District. — The  counties  of  Amelia,  Appomattox,  Brunswick,  Buckingham,  Carolina, 
Charles  City,  Chesterfield,  Cumberland,  Dinwiddle,  Elizabeth,  City  Essex,  Fluvanna, 
Gloucester,  Goochland,  Greensville,  Hanover,  Henrico,  Isle  of  Wight,  James  City,  King 
and  Queen,  King  George,  King  William,  Lancaster,  Louisa,  Lunenburg,  Mathews,  Middle- 
sex, Nansemond,  New  Kent,  Norfolk,  Northumberland,  Nottoway,  Powhatan,  Prince 
Edward,  Prince  George,  Princess  Anne,  Richmond,  Stafford,  Southampton,  Spottsylvania, 
Surry,  Sussex,  Warwick,  Westmoreland,  and  York. 

RICHARD  C.  L.  MONCURE,  Richmond. 

Sixth  District. — The  counties  of  Albemarle,  Alexandria,  Alleghany,  Amherst,  Augusta,  Bath. 
Bedford,  Bland,  Botetourt,  Buchanan,  Campbell,  Carroll,  Charlotte,  Clarke,  Craig,  Cul- 
pepper, Dickenson,  Fairfax,  Fauquier,  Floyd,  Franklin,  Frederick,  Giles,  Grayson,  Greene- 
Halifax,  Henry,  Highland,  Lee,  Loudoun,  Madison,  Mecklenburg,  Montgomery,  Nelson, 
Orange,  Page,  Patrick,  Pittsylvania,  Prince  William,  Pulaski,  Rappahannock,  Roanoke, 
Rockbridge,  Rockingham,  Russell,  Scott,  Shenandoah,  Smyth,  Tazewell,  Warren,  Wash- 
ington, Wise,  and  Wythe. 

JAMES  S.  PERSINGER,  Roanoke. 

The  counties  of  Accomac  and  Northampton  are  in  the  District  of  Maryland. 

WASHINGTON  (Includes  Alaska),  DAVID  J.  WILLIAMS,  Tacoma. 

WEST  VIRGINIA,  SAMUEL  A.  HAYS,  Parkersburg. 

WISCONSIN, 

First  District. — Counties  of  Brown,  Calumet,  Dodge,  Door,  Florence,  Fond  du  Lac,  Forest 
Green  Lake,  Kenosha,  Kewaunee,  Manitowoc,  Marinette,  Marquette,  Milwaukee,  Oconto, 
Outagamie,  Ozaukee,  Racine,  Shawano,  Sheboygan,  Walworth,  Washington,  Waukesha, 
Waupaca,  Waushara,  Winnebago,  and  county  of  Langlade  with  exception  of  the  eight 
townships  of  said  county  which  were  formerly  in  Lincoln  County. 

PAUL  A.  HEMMY,  Milwaukee. 

Second  District. — Counties  of  Adams,  Ashland,  Barron,  Bayfield,  Buffalo,  Burnett,  Chippewa, 
Clark,  Columbia,  Crawford,  Dane,  Douglas,  Dunn,  Eau  Claire,  Grant,  Green,  Iowa,  Iron, 
Jackson,  Jefferson,  Juneau,  La  Crosse,  Lafayette,  Lincoln,  Marathon,  Monroe,  Oneida, 
Pepin,  Pierce,  Polk,  Portage,  Price,  Richland,  Rock,  Rusk,  St.  Croix,  Sauk,  Sawyer, 
Taylor,  Trempealeau,  Vernon,  Vilas,  Washburn,  Wood,  and  the  eight  townships  in  the 
western  part  of  Langdalc  County  which  were  formerly  in  Lincoln  County. 

BURT  WILLIAMS,  Madison. 

WYOMING  (See  Colorado). 


Income  Tax 

Supplementary  Page  105 


T.  D.  AND  SPECIAL  MATTER  FINDER 
In  these  tables  are  shown  the  locations  within  this  book,^bysparagraph]^num- 
bers  of  all  matters  printed  herein,  that  appeared  in  our  1918  Service.  ; 

Any  regulation,  part  of  a regulation,  letter,  or  other  matter^contained  in  our 
1918  Service  not  found  in  the  subjoined  tables  was  repealed,^amended,t8uper- 
seded,  or  otherwise  annulled,  or  was  repeated  in  a subsequent^regulation^which 
has  been  cited  as  being  the  latest  ruling. 

TREASURY  DECISIONS.  u 

NOTE. — For  Reg.  No.  33,  see  Supplementary  Page  108  and  for  Reg.  33,|Rev. 
see  Supplementary  Page  109. 

Treasury  Paragraph  Treasury  Paragraph 

Decisions  Numbers  Decisions  Numbers] 

’ T.  D.  2341. .2468 
T.  D.  2343. .2141  - " 


T.  D.  1890.  .564,  565 
T.  D.  1892. .993 
T.  D.  1903. .634,  636 
T.  D.  1909. .1386 
T.  D.  1932. .1622 
T.  D.  1946.  .971 
T.  D.  1949. .1500 
T.  D.  1956. .1500 
T.  D.  1962.  .2646 
T.  D.  1965. .723 
T.  D.  1974.  .645-649 
T.  D.  1976. .689 
T.  D.  1986. .637 
T. D.  1989.. 1067,  1087 
T.  D.  1995. .2401 
T.  D.  2005. .1074,  1879,  2065,  2069, 
2125 

T.  D.  2016. .1647 

T.  D.  2022. .663 

T.  D.  2024. .1635 

T. D.  2077. .2126 

T.  D.  2079. .570,  863 

T.  D.  2090.  .Synopsis — see  below 

T.  D.  2109. .595 

T.  D.  2124. .872 

T.  D.  2131. .726 

T.  D.  2135.  .Synopsis — see  below  ' 

T.  D.  2137.  .Synopsis — see  below 

T.  D.  2152.  .Synopsis — see  below 

T.  D.  2161.  .1712,  1941,  2292- 

T.  D.  2166.. 2372 

T.  D.  2174. .1469 

T.  D.  2185. .2078 

T.  D.  2198. .2057 

T.  D.  2205. .2458 

T.  D.  2210. .2025 

T.  Df 2224. .2100 

T.  D.  2226. .2466 

T.  D.  2231. .585,  1233,  1234,  1165 
1178 

T.  D.  2235. .1453 

T.  D.  2238. .1456 

T.  D.  2242.  .489,  491,  493 

T.  D.  2258. .666 

T.  D.  2262. .2000 

T.  D.  2267. .1253 

T.  D.  2289. .1203 

T.  D.  2290. .2685 

T.  D.  2293. .1458 

T.  D.  2300. .2715 

T.  D.  2301. .2580 

T.  D.  2302. .2719 

T.  D.  2303. .2722 

T.  D.  2313.  .496,  506,^540 

T.  D.  2317. .507 

T.  D.  2325. . 1362 

T.  D.  2332. .2462 


T.  D.  2369. .2658 
T.  D.  2374. .576 
T.  D.  2394. .2633 
T.  D.  2396. .2490 
T.  D.  2433. .1928 
T.  D.  2442. .1968 
T.  D.  2443. .2575 
T.  D.  2451. .2253 
T.  D.  2468. .706 
T.  D.  2475. .1727,  2024 
T.  D.  2481. .2154 
T.  D.  2494. .1184 
T.  D.  2499. .1945 
T.  D.  2501.. 2252 
T.  D.  2507. .2635 
T.  D.  2512. .774 
T.  D.  2534. .1463 
T.  D.  2570.. 936 
T.  D.  2581. .1510 
T.  D.  2584. .1568 
T.  D.  2585. .976 
T.  D.  2609. .1862 
T.  D.  2620. .1726 
T.  D.  2623. .598 
T.  D.  2627. .2429 
T.  D.  2631.  .2073 
T.  D.  2634. .2738 
T.  D.  2649. .1867 
T.  D.  2652. .599 
T.  D.  2654. .2558 
T.  D.  2659. .834 
T.  D.  2660. .2007 
T.  D.  2661. .2594 
T.  D.  2665. .890 
T.  D.  2666. .2434 
T.  D.  2668. .1015 

T.  D.  2670.  .1320,  1324,  1326,  1328, 
1344,  1347,  1373 
T.  D.  2672. .1512 
T.  D.  2673. .1514 
T.  D.  2678. .840 
T.  D.  2679.  .24081 
T.  D.  2686.  .18193 
T.  D.  2687. .703 
T.  D.  2688. .2472 
T.  D.  2692. . 1131,  1132 
T.  D.  2693.. 1325,  1754 
T.  D.  2695. . 1823 
T.  D.  2696. .1979 
T.  D.  2697. .2379 
T.  D.  2698. .2570 
T.  D.  2700. .806 
T.  D.  2706. .1840 
T.  D.  2707. .1894 
T.  D.  2709. .661 


Income  Tax 
Supplementary  Page”106 


T.  D.  AND  SPECIAL  MATTER  FINDER. 


TREASURY  DECISIONS— Concluded.- 


Treasury  Paragraph 

Decisions  Numbers 

T.  D.  2734.. 818 
T.  D.  2711. .1274 
T.  D.  2715. .968 
T.  D.  2720. .1689 
T.  D.  2726. .2754 
T.  D.  2729. .2776 
T.  D.  2730. .2804 
T.  D.  2731. .2763 
T,  D.  2732. .2802 
T.  D.  2733. .1847 
T.  D:  2734. .1875 


Treasury  Paragraph 

Decisions  Numbers 

T.  D.  2737. .1780 
T.  D.  2740. .2742 
' T.  D.  2744.. 1871 
T.  D.  2747,. 999  - ’ 

T.  D.  2754.. 2106 
T.  D.  2755.. 1853 

T.  D.  2759.. 655,  1351,  1353,  1359, 
1361,  1379,  1384 
T.  D.  2762. .981 
T.  D.  2778. .2451 
T.  D.  2783..2819J 


T.  D.  2090  (A  SYNOPSIS  OF  DECISIONS  ISSUED  DECEMBER  14,  1914) 

(The  references  are  to  paragraph  numbers.) 

American  wife.  .492  . • • 

No  withholding  at  source.  .567-569 

Withholding  on  calendar  year  basis.  .596  > 

Notes  in  lieu  of  cash.  .597 
Obligations  of  corporations  defined.  .615 

Equipment  trust  notes.  .616  . 

Investment  certificates.  .617 
Scrip..  618 

Municipality  purchasing  public  utilities.  .620,  969 

Interest  coupons  for  funding  bonds.  .681 

Retirement  of  bonds . . 682 

Privately  printed  forms.  .694 

Surtax:  husband  and  wife.  .739 

Income  received  through  fiducaries.  .741,  937 

Dividends  received  through  fiducaries.  .743,  942 

Foreign  dividends.  .791 

Salaries  paid  by  exempt  corporations.  .861 

Living  quarters.  .862 

Clergyman’s  fees.  .886 

Property  acquired  by  gift.  .931 

Legacies. . 932 

Beneficiary  to  make  own  return.  .943,  1212 
Life  insurance.  .947 

Decedent’s  salary  continued  to  widow.  .962 
Premium  on  fidelity  bond.  . 1047 
Losses:  “In  Trade” ..  1070 
Losses:  Book  values.  . 1079 
Depreciation:  Farm  buildings.  . 1090 
Agents  vs.  fiducaries.  . 1073 
Attorney-in-fact.  .1174 

Dividends  paid  by  foreign  corporations. . 1370 
Foreign  pensions.  . 1388 
Duty  to  make  returns:  corporations.  .1400 
Acknowledgments  by  persons  residing  abroad. . 1465 
Notary’s  seal.  . 1468 

Corporation’s  principal  place  of  business.  . 1532  ■ ' 

Corporations  in  Philippines  and  Porto  Rico.  .1534,  1535 
Corporations  transacting  no  business  during  year. . 1707 
Corporations  in  existence  but  part  of  year. . 1709 
Corporations  owning  sugar  plantations. . 1774 
Corporations  engaged  in  agricultural  pursuits. . 1775 
Fruit  growers  associations. . 1779 
Assessments  on  capital  stock.  . 1952 

Salaries  paid  salesmen ..  2004  • 

Commission  to  real  estate  agents.  .2005  ’ 

Taxes  assessed  against  local  benefits.  .2044 
T:  D.  2135  (A  SYNOPSIS  OF  DECISIONS  ISSUED  JANUARY  23,  1915) 
Citizenship.  .485 

Withholding:  Federal  officers.  .586 
Miscellaneous  income  defined.  .594 


Income  Tax 

Supplementary  Page  107 


T.  D.  AND  SPECIAL  MATTER  FINDER. 


T.  D.  2135 — Concluded. 

(The  references  are  to  paragraph  numbers.) 

Appointment  of  paying  agent.  .625 
Filing  of  return  by  paying  agent.  .627 
Filing  list  returns.^. 716 

Corporations  availed  of  to  avoid  surtax.  .750 
Taxes  paid  by  bank  on  outstanding  stock.  .796 
Rental  payments  other  than  in  cash.  .852 
Trustee’s  services.  .885 
Accident  expenses.  . 1002 
Accident  insurance.  . 1003 
Losses.  . 1072,  1080 
Expenses  of  administration.  . 1251 
Secrecy  of  returns  of  withholding  agents.  .2649 
T.  D.  2137  (SYNOPSIS  OF  DECISIONS  ISSUED  JANUARY  30,  1915) 
Royalties.  .504 

Surtax:  Husband  and  wife.  .740 
Income  from  private  banks.  .794,  1733 
Private  bank  owned  by  individual,  .929,  1737 
Profits  of  partnerships  as  dividends.  .797 
Dividends  paid  on  insurance  policies.  .798,  952 
Insurance  agent’s  commissions.  .888 
Expenses:  Non-taxable  income.  . 1030 
Tentative  returns  by  foreign  corporations.  . 1440 
Returns  to  set  forth:  Stock.  . 1444 

• Returns  to  set  forth:  Interest  bearing  indebtedness. . 1446 

'Supplementary  statements  of  public  service  corporations. . 1447 

iBooks  kept  abroad.  . 1533 

Corporations:  Porto  Rico.  . 1536 

Supplementary  statements  of  corporations.  . 1644 

Corporations  formed  to  hold  property  to  avoid  partitioning. . 1713 

Corporations  owned  by  exempt  corporations.  . 1714 

Private  bank  having  corporate  organization.  . 1732 

Cost  of  real  estate.  . 1881 

Interest  on  capital  Invested,  . 1962 

Additions  and  betterments  made  by  tenant  corporations. . 1967 
Fore'gn  corporations  doing  business  by  agents.  .2290 
T.  D.  2152  (SYNOPSIS  OF  DECISIONS  ISSUED  FEBRUARY  12,  1915) 
Income  from  private  banks.  .792 
Bonuses.  . 859 
•Life  insurance.  ,947 
Corporations  subject  to  tax.  .1702 
Royalties  from  mines.  .1817 
Cost  of  manufactured  products.  . 1960 
Franchise,  etc.,  taxes  deductible.  .2046 
Depreciation:  Stocks  and  bonds.  .2127 
Income  taxes  to  other  countries.  .470 


REGULATIONS  NO.  33 
(January  5,  1914) 


Article  Paragraph  Article 


Numbers  Numbers 

Numbers 

10. .1135,  1141,  1151 

55. 

. 1385 

14.. 1288 

57. 

.1382, 

17. .1162 

62. 

. 1387 

18. .1166 

64. 

.722 

22.. 1461 

67. 

.854 

23.. 1503 

69. 

.701 

32. .566 

72. 

.1213 

33. .589,  725,  2518 

73. 

.1177 

34.. 721,  727 

83. 

.2318 

35. .714,  717 

84. 

. 1706 

37.. 619 

95. 

.1443 

38.. 623,  624,  626,  715 

112. 

.1804 

39. .659 

116. 

.2295 

40. .635 

117. 

.2006 

31. .718 

126. 

Income  Tax 

.2101 

Paragraph 

Numbers 

1383 


Supplementary  Page  108 


T.  D.  AND  SPECIAL  MATTER  FINDER. 


REGULATIONS  NO.  33 — Concluded. 

Article  Paragraph 

Article  Paragraph 

Number  Number 

Number  Number 

146. .2149 

185. .742 

173. .1506 

186.. 2351 

178. .1645 

189. .724 

179.. 1646 

196. .719,  1474 

182..  1940 

183..  1942 

197. .2400 

REGULATION  NO.  33,  REVISED 
(January  2,  1918) 

Article  and  Our 

Article  and  Our 

Paragraph  Paragraph 

Paragraph  Paragraph 

Number  Number 

Number  Number 

3— ARTICLE 

63. . 1856 

7. .1228 

71. . 1013 

11. .1270,  1283 

8 -ARTICLE 

4— ARTICLE 

83. .2113 

12. .769 

84. .2109 

13. .1012 

86. .1101 

14. .879 

87. .1103 

15. .925 

88. .1104 

16. .926 

89. .1105 

17. .927 

90. .1105 

18. .856 

91. .1105 

19. .880 

92. . 1106 

20. .881 

93. .2099 

21. .849 

94. .2091 

22. .850 

95. .2092 

23. .1180 

96. .2093 

24. .1220 

97. .2096 

26. .830 

98. .2097 

27. .773 

99. .2098 

28. .826 

100. . 1951 

29. .902 

101. . 1042 

30. .903 

102. . 1250 

31. .904 

103. . 1043 

33. .905 

104. . 1038 

34. .906 

105. . 1953 

35. .907 

106. . 1954 

36.. 908 

107. . 1955 

37. .909 

108. . 1950 

38. .911 

109. . 1045 

39. .912 

110. .2017 

40. .933 

111 . . 1996 

41. .934 

112. . 1041 

42. .788 

113. . 1977 

43. .928 

114. . 1036 

44. .935 

115. . 1976 

45. .948 

116. .2038 

46. .953 

117. .2047 

47. . 1014 

118. .2054 

48. .1282 

119. .2055 

49. .939 

120. . 1081 

50.. 1973 

121. . 1082 

51. .857 

122. . 1083 

52.. 882 

123. . 1092 

53.. 883 

124. . 1091 

54.. 884 

125. .2209 

55. .871 

9— ARTICLE 

56. .887 

126. .1126 

57..  851  10— ARTICLE 

58. . 878  131. .531 

5 9..  889  12— ARTICLE 

60..  827,  1875  141.. 539 

61..  1829  13— ARTICLE 

62..  520  142.. 543 

Income  Tax 

Supplementary  Page  109 


T.ID.  AND  SPECIAL  MATTER  FINDER. 


REGULATIONS  NO.  33.  REVISED— Continued. 


Article  and  Our 

Paragraph  Paragraph 

Number  Number 

14— ARTICLE 

151. . 1164 

152. . 1181 

153..  1130 

154..  744,  1139 

156..  1140 
' 20— ARTICLE 

162..  842 
r 22— ARTICLE 

165..  1159,  1502,  1508 

23—  ARTICLE 

166. . 1146 

24—  ARTICLE 

167. . 759 
‘25— ARTICLE 

168. . 1634 

26—  ARTICLE 

169. . 1145 

170. . 1137 

171. . 760 

172. . 1528 

174. . 1529 

175. . 1462 

176. . 1466 

177. . 1467 

178. . 992 

179. . 1223 

180. . 1224 

181. . 1243 

182. . 1157 

183. . 1156 

184. . 1226 

27—  ARTICLE 

185. . 1160 

186. . 1197 

28—  ARTICLE 

187. . 545 
[29— ARTICLE 

188. . 1266,  1268 

189. . 1170 

190. . 1171 

191. . 1172 

192. . 1222 

193. . 1219 

194. . 1245 

195. . 1221 

197. . 1225 

198. . 1182 

199. . 1257 

200. . 544 

201. . 938 

202. . 1202 

203. . 1163 

204. . 1201 

205. . 1161 

206. . 1229 

207. . 1230 

208. . 1232 

209. . 1246 

210. . 940 

30— ARTICLE 

211.  .1284 

212. . 1286 

213. .1287 


Article  and  Our 

Paragraph  Paragraph 

Number  Number 

31—  ARTICLE 

214..  1293,  1299 

215. . 1300 

32—  ARTICLE 

219..  495 

220..  528 

221..  563 

222. . 733 

33—  ARTICLE 

232. . 1397 

34—  ARTICLE 

233..  1323 

234. . 1327 

235. . 1343 

35—  ARTICLE 

236..  5ee  T.  D.  2759 

237..  5ee  T.  D.  2759 

238. . 5ee  T.  D.  2759 

239. . 5ee  T.  D.  2759 

36—  ARTICLE 

240. . 1372 

37—  ARTICLE 

241. . 1377 

38—  ARTICLE 

243. . 2368 

244. . 2369 

245..  2592 

39—  ARTICLE 

247. . 2353 

248. . 2464 

41—  ARTICLE 

251. . 2427 

252. . 2399 

253. . 2366 

42—  ARTICLE 

254. . 639 

256. . 639 

257. . 640 

260. . 702 

261. . 643 

262..  651 

263. . 654 

264. . 657 

265. . 629 

266. . 630 

267. . 631 

268. . 632 

269. . 633 
46— ARTICLE 

273. . 699 

48—  ARTICLE 

276. . 1380,  1390,  1392 

49—  ARTICLE 

277. . 591 

50—  ARTICLE 

278. . 593 
52— ARTICLE 

284. . 1579 

285. . 1569 

286. . 2395 

287..  1478 
54— ARTICLE 

291..  1562 


Income  Tax 

Supplementary  Page  110 


T.  D.  AND  SPECIAL  MATTER  FINDER. 


REGULATIONS  NO.  33,  REVISED— Continued. 
Article  and  Our  Article  and  Our 

Paragraph  Paragraph  Paragraph  Paragraph 

Number  Number  Number  Number 


292. . 1563 

294..  1565 

295. . 1580 

57—  ARTICLE 

299..  1687 

58—  ARTICLE 

300. . 1688 

60—  ARTICLE 

303. . 1705 

61—  ARTICLE 

304..  1731 
63— ARTICLE 

306. . 1271 

66—  ARTICLE 

309. . 2288 

310. . 2289 

311. . 2312 

67—  ARTICLE 

312. . 1757 

68—  ARTICLE 

313. . 1759 

314. . 1760 

69—  ARTICLE 

316..  1765 

70—  ARTICLE 

317. . 1766 

71—  ARTICLE 

318. . 1767 

319. . 1768 

72—  ARTICLE 

320. . 1769 

321. . 1770 

322. . 1771 

73—  ARTICLE 

323. . 1772 

324. . 1773 

74—  ARTICLE 

325. . 1776 

75—  ARTICLE 

326..  1777 

327. . 1778 

76—  ARTICLE 

328. . 1784 

329. . 1785 

77—  ARTICLE 

330. . 1786 

78—  ARTICLE 

331. . 1758 

79—  ARTICLE 

332..  1761 

333..  1762 

80—  ARTICLE 

334. . 1763 

335..  1764 

81—  ARTICLE 

336. . 590 

82—  ARTICLE 

339. . 1708 

83—  ARTICLE 

341. . 968 

84—  ARTICLE 

342. . 970 

85—  ARTICLE 

343. . 978 

344. . 979 


86—  ARTICLE 

345. . 1793 

346. . 1794 

347. . 1795 

87—  ARTICLE 

348..  997 

88—  ARTICLE 

349. . 1789 

89—  ARTICLE 

350. . 2297 

90—  ARTICLE 

351. . 1790 

352..  1791 

91—  ARTICLE 

353. . 1796 

92—  ARTICLE 

354. . 1797 

355. . 1798 

93—  ARTICLE 

356. . 1799 

94—  ARTICLE 

357. . 1838. 1840 

358. . 1839. 1840 

95—  ARTICLE 

359. . 1828 

96—  ARTICLE 

360. . 1834 

97—  ARTICLE 

361..  1830 

362. . 1831 

98—  ARTICLE 

363. . 1832 

99—  ARTICLE 

364. . 1833 

101—  ARTICLE 

366. . 1901 

367..  1902 

102—  ARTICLE 

368. . 1716 

369. . 1717 

103—  ARTICLE 

370. . 1836 

104—  ARTICLE 

371. . 1837 

105—  ARTICLE 

372. . 1835 

107—  ARTICLE 

374. . 804 

375. . 805 

108—  ARTICLE 

378. . 1803 

109—  ARTICLE 

379. .  1815 

110—  ARTICLE 

380. . 1805 

111—  ARTICLE 

381..  1876 

112—  ARTICLE 

382. . 1877 

383..  1878 

113—  ARTICLE 

384..  1816 
114^ARTICLE 

385. . 1792 


Income  Tax 
Supplementary  Page  111 


T.  D.  AND  SPECIAL  MATTER  FINDER. 


REGULATIONS  NO.  33,  REVISED— Continued. 


Article  and  Our 

Paragraph  Paragraph 

Number  Number 

115—  ARTICLE 

386. . 2104 

116—  ARTICLE 

387. . 1872 

388. . 1873 

117—  ARTICLE 

390. . 1890 

391. . 1888 

392. . 1889 

118—  ARTICLE 

393. . 1903 

119—  ARTICLE 

394. . 1904 

120—  ARTICLE 

395. . 1891 

396. . 1892 

397. . 1893 

121—  ARTICLE 

398. . 1800 

399. . 1801 

400. . 1802 

122—  ARTICLE 

401. . 1824 

402. . 1825 

403. . 1826 

123—  ARTICLE 

404. . 913 

405. . 914 

406. . 915 

407. . 916 

408. . 917 

409. . 918 

124—  ARTICLE 

410. . 1905 

411. .  1905 

412. . 1906 

413. . 1907 

414. . 1908 

125—  ARTICLE 

415. . 1718 

416. .  1719 

126—  ARTICLE 

418. . 1924 

419. . 1925 

420. .  1926 

127—  ARTICLE 

421. . 1927 

422. . 1934 

423..  1935 

424. . 1936 

128—  ARTICLE 

425. . 1937 

426. . 1938 

427. . 1939 

129—  ARTICLE 

428. . 1956 

429. . 1957 

130—  ARTICLE 

430..  1958 

431. . 1959 

131—  ARTICLE 

432. . 1966 

132—  ARTICLE 

433. . 1026 


Article  and  Our 

Paragraph  Paragraph 

Number  Number 

133—  ARTICLE 

434. . 2011 

134—  ARTICLE 

435. . 2014 

436. . 2015 

135—  ARTICLE 

437. . 2012 

136—  ARTICLE 

438..  2008 

439. . 2009 

137—  ARTICLE 

440. . 2010 

138—  ARTICLE 

441. . 1997 

442. . 1998 

443. . 1999 

139—  ARTICLE 

444. . 2003 

140—  ARTICLE 

445. . 1972 

446. . 1974 

447. . 1975 

141—  ARTICLE 

448. . 2021 

449. . 2022 

142—  ARTICLE 

450. . 2023 

143—  ARTICLE 

451. . 2026 

144—  ARTICLE 

452. . 2018 

145—  ARTICLE 

453. .  1948 

454. . 1949 

146 —  ARTICLE 

455. . 2019 

456. . 2020 

147—  ARTICLE 

457. . 2064 

458. . 1874 

148—  ARTICLE 

459. . 2067 

460. . 2068 

149—  ARTICLE 

461. . 2072 

150—  ARTICLE 

462. . 2075 

463. . 2076 

464. . 2077 

151—  ARTICLE 

465..  2094 

466. . 2095 

152—  ARTICLE 

467. . 2079 

468. . 2080 

469. . 2081 

470. . 2082 

153—  ARTICLE 

471. . 2071 

154—  ARTICLE 

472. . 910 

155—  ARTICLE 

473..  2084 

156—  ARTICLE 

474. . 2085 


Income  Tax 

Supplementary  Page  112 


r 

\ 


Q 


( 


( 


T.  D.  AND  SPECIAL  MATTER  FINDER, 


REGULATIONS  NO.  33,  REVISED— Continued. 
Article  and  Our  Article  and  Our 

Paragraph  Paragraph  Paragraph  Paragraph 

Number  Number  Number  Number 


157—  ARTICLE 

475. . 2086 

158—  ARTICLE 

476. . 2087 

159—  ARTICLE 

477.  .211-0 

478. . 2111 

479. . 2112 

480. . 2114 

160—  ARTICLE 

« 481. .2133 

161—  ARTICLE 

482. . 2157 

483. . 2158 

484. . 2159 

162—  ARTICLE 

485. . 2139 

486. . 2140] 

487. . 2123 

163—  ARTICLE 

488. . 2124 

164—  ARTICLE 

489. . 2152 

490. . 2153 

165—  ARTICLE 

491. . 2151 

166—  ARTICLE 

492. . 2162 

493. . 2163 

167—  ARTICLE 

494. . 2130 

168—  ARTICLE 

495. . 2132 

169—  ARTICLE 

496. . 2134 

170—  ARTICLE 

497. . 2172 

498. . 2173 

499. . 2174 

500. . 2175 

501. . 2176 

502. . 2177 

503. . 2178 

504. . 2179 

505. . 2180 

506. . 2181 

507. . 2182 

508. . 2183 

509. . 2184 

510. . 2185 

511. . 2186 

512. . 2187 

513. . 2187 

514. . 2187 

515. . 2187 

516. . 2187 

517. . 2187 

518. . 2187 

519. . 2187 

520. . 2187 

521. . 2187 

522. . 2187 

523. . 2187 

524. . 2187 

525. . 2187 


171—  ARTICLE 

526. . 2188 

527. . 2189 

528. . 2190 

529. . 2191 

172—  ARTICLE 

530. . 2192 
531.  .2193 

532. . 2194 

533. . 2195 

534. . 2196 

535. . 2197 

536. . 2198 

537. . 2199 

538. . 2200 

539. . 2201 

540. . 2202 

541. . 2203 

542. . 2204 

543. . 2205 

544. . 2206 

545. . 2207 

546. . 2208 

173—  ARTICLE 

547. . 2210 

548. . 2211 

549. . 2212 

550. . 2213 

551. . 2214 

174—  ARTICLE 

552. . 2135 

175—  ARTICLE 

553. . 2088 

176—  ARTICLE 

554. . 2089 

177—  ARTICLE 

555. . 2136 

178—  ARTICLE 

556. . 2137 

179—  ARTICLE 

557. . 2138 

186—  ARTICLE 

571. . .2034 

187—  ARTICLE 

572. . 2029 

188—  ARTICLE 

573. . 2030 

574. . 2031 

575. . 2032 

576. . 2033 

189—  ARTICLE 

577. . 1814 

190—  ARTICLE 

578. . 2035 

192—  ARTICLE 

581. . 2050 

582. . 2051 

583. . 2052 

584. . 2053 

193—  ARTICLE 

585. . 2062 

194—  ARTICLE 

586. . 2042 

587. . 2043 


Income  Tax 

Supplementary  Page  113 


T.  D.  AND  SPECUL  MATTER  FINDER. 


REGULATIONS  NO.  33.  REVISED— Continued. 


Article  and  Our 

Paragraph  Paragraph 

Number  Number 

195— ARTICLE 

588. . 2048 

197—  ARTICLE 

590. . 2306 

198—  ARTICLE 

591. . 2323 

199—  ARTICLE 

593. . 2338 

594..  2329 

201—  ARTICLE 

602..  732,  2324 

202—  ARTICLE 

603. . 658 

604..  2316 

605..  2317 

203—  ARTICLE 

606. . 1401 

608..  1402 

609..  1492 

610..  1489 

204—  ARTICLE 

611. . 1490 

205—  ARTICLE 

612. . 1403 

206—  ARTICLE 

613. . 1404 

208—  ARTICLE 

617. . 1710 

618. . 1711 

209—  ARTICLE 

621. . 1430 

622. . 1431 

623. . 1432 

210—  ARTICLE 

624..  1434 

625. . 1439 

211—  ARTICLE 

626. . 1488 

212—  ARTICLE 

627..  1491 

213—  ARTICLE 

628..  1493 

214—  ARTICLE 

629..  1494 

215—  ARTICLE 

630. . 1495 

216—  ARTICLE 

631..  1436 

632. . 1437 

633..  1438 

217—  ARTICLE 

634. . 1496 

218—  ARTICLE 

635. . 1475 

219—  ARTICLE 

636..  1476  ' 

220—  ARTICLE 

637..  1477 

221—  ARTICLE 

638..  2367 

639..  2350 

222—  ARTICLE 

640. . 1504 

223—  ARTICLE 

641. . 1505 


Article  and  Our 

Paragraph  Paragraph 

Number  Number 

224—  ARTICLE 

642..  1509 

225—  ARTICLE 

643. . 1564 

644. . 1566 

645. . 1567 

226—  ARTICLE 

646..  1642 

227—  ARTICLE 

647. . 1643 

228—  ARTICLE 

648. . 1559 

649. . 1560 

650. . 1561 

229—  ARTICLE 

651. . 2648 

230—  ARTICLE 

655..  2355 

231—  ARTICLE 

656. . 2412 

233—  ARTICLE 

658..  2370 

659. . 2371 

660. . 2390 

234—  ARTICLE 

661. . 239^ 

236—  ARTICLE 

664. . 1029 

237—  ARTICLE 

665. . 1394 

666. . 1395 

239—  ARTICLE 

671. . 2276 

672. . 2277 

673. . 2231 

674. . 2232 

675. . 2237 

676. . 2278 

677..  2233 

678. . 2234 

679. . 2235 

680..  2236 

681..  2227 

682. . 2228 

683. . 2229 

684. . 2226 

240—  ARTICLE 

685. . 2238 

686. . 2239 

687. . 2240 

688. . 2241 

689. . 2242 

690. . 2243 

691. . 2244 

692. . 2245 

693. . 2246 

694. . 2250 

695. . 2251 

696. . 2247 

697. . 2248 

241—  ARTICLE 

698..  2262 

699. . 2263 

700..  2257 


Income  Tax 

Supplementary  Page  114 


T.  D.  AND  SPECIAL  MATTER  FINDER. 


REGULATIONS  NO.  33,  REVISED— Concluded. 


Article  and  Our 

Paragraph  Paragraph 

Number  Number 

701..  2258 

702. . 2259 

703. . 2260 

242—  ARTICLE 

705. . 2268 

706..  2269 

707. . 2270 

708. . 2271 

709. . 2272 

243—  ARTICLE 

710. . 2266 

244—  ARTICLE 

711. . 2273 

712. . 2274 

245—  ARTICLE 

713. . 2255 

246—  ARTICLE 

714. . 2275 

247—  ARTICLE 

715. . 2540 

248—  ARTICLE 

716. . 2541 

717. . 2542 

718. . 2543 

249—  ARTICLE 

719. . 2544 

720. . 2545 

721. . 2546 

722. . 2547 

723. . 2548 

724. . 2549 

725. . 2550 

250—  ARTICLE 

726. . 2551 

251—  ARTICLE 

727. . 2552 

252—  ARTICLE 

728. . 2553 

253—  ARTICLE 

729. . 2554 

254—  ARTICLE 

730. . 2555 

255—  ARTICLE 

731. . 2556 

256—  ARTICLE 

732. . 2557 

258— ARTICLE 

734. . 2499 

735. . 2500 

736. . 2501 

737. . 2502 

738. . 2503 

739. . 2504 


Article  and  Our 

Paragraph  Paragraph 

Number  Number 

259—  ARTICLE 

740. . 2505 

741. . 2506 

260—  ARTICLE 

742. . 2507 

261—  ARTICLE 

743. . 2508 

262—  ARTICLE 

744. . 2509 

263—  ARTICLE 

745. . 2510 

264—  ARTICLE 

746. . 2511 

747. . 2512 

748. . 2513 

265—  ARTICLE 

749. . 2514 

750. . 2515 

266—  ARTICLE 

751. . 2516 

752. . 2517 

267—  ARTICLE 

753. . 2522 

754. . 2523 

268—  ARTICLE 

755. . 2524 

269—  ARTICLE 

757. . 2525 

270—  ARTICLE 

758. . 2526 

271—  ARTICLE 

759. . 2527 

272—  ARTICLE 

760. . 2528 

273—  ARTICLE 

761. . 2529 

762. . 2530 

763. . 2531 

764. . 2532 

765. . 2533 

766. . 2534 

767. . 2535 

768. . 2536 

769. . 2537 

770. . 2538 

771. . 2539 

274—  ARTICLE 

772. . 2521 

275—  ARTICLE 

773. . 2642 

774. . 2643 

775. . 2644 


1918  INCOME-TAX  PRIMER 


Question  Paragraph 

22. . 847 
43^.  .843 

46. . 1031 

48. . 1037 

49. .  1039 

51. . 1040 

52. . 1044 


Question  Paragraph 

54. . 1046 

57. .  1035 

62. . 2045 

80. . 2144 

86. . 1113 

87. . 1116 

104. .642 


Income  Tax 

Supplementary  Page  115 


T.  D.  AND  SPECIAL  MATTER  FINDER. 


SPECIAL  LETTERS  AND  TELEGRAMS 

Paragraph 

Numbers 


January  7,  1914 — To  the  Central  Trust  Company  of  New  York 667-668 

January  12,  1914 — To  Frederick  L.  Allen 955 

February  17,  1914 — To  Frederick  A.  Howland 954 

March  4,  1914 — To  Diplomatic  and  Consular  Officers 488 

March  5,  1914 — To  Robert  Lynn  Cox 959 

April  23,  1914 — To  National  Park  Bank 664 

September  18,  1914 — To  the  Corporation  Trust  Company 676 

November  23,  1914 — Special  Letter 685 

December  22,  1914 — To  The  Corporation  Trust  Company 1883 

December  22,  1914 — To  a Collector 2049 

December  23,  1914 — To  The  National  Park  Bank 679 

January  19,  1915 — To  Oudin,  Kilbreth  & Schackno 789 

January  29,  1915 — To  Clinton  H.  Scovell  & Co 1449 

February  2,  1915 — To  Industrial  Association  of  Cincinnati 1543 

February  9,  1915 — To  Wm.  S.  Lare  (Extract) 921 

February  18,  1915 — To  Beekman,  Menken  & Griscom  (in  part) 923 

February  18,  1915 — To  Beekman,  Menken  & Griscom  (extract) 855 

February  26,  1915 — To  The  Corporation  Trust  Company 920 

March  1,  1915 — To  Carey,  Piper  and  Hall  (in  part) 853 

March  2,  1915 — To  The  Corporation  Trust  Company  (extract) 1255 

March  16,  1915 — To  Central  Trust  & Safe  Deposit  Company  of  Cin- 
cinnati (extract) 1010 

March  25,  1915 — To  Carey,  Piper  & Hall 2013 

March  31,  1915 — To  Beekman,  Menken  & Griscom  (extract) 924 

April  7,  1915 — To  The  National  Bank  of  Commerce  of  St.  Louis 

(in  part) 673 

July  10,  1915 — To  a Subscriber 1806 

October  19,  1915 — To  Bowers  and  Sands 1235 

January  5,  1916 — To  White  & Case 684 

January  11,  1916 — To  Herbert  M.  Teets 1812 

February  1,  1916 — To  Carter,  Ledyard  & Milburn 1205 

February  3,  1916 — To  The  Corporation  Trust  Company 1204 

February  10,  1916 — To  Charles  J.  McDermott 1058 

February  18,  1916 — To  Curtis,  Mallet-Prevost  & Colt 1261 

February  28,  1916 — To  Green,  Hinckley  & Allen 1285 

March  10,  1916 — To  The  Corporation  Trust  Company 571 

April  1,  1916 — To  The  Corporation  Trust  Company 2413 

April  5,  1916 — To  The  Corporation  Trust  Company 687 

April  10,  1916 — To  The  Corporation  Trust  Company 560 

April  11,  1916 — To  a Subscriber 683 

June  6,  1916 — To  The  Corporation  Trust  Company 2307 

June  13,  1916 — To  The  Corporation  Trust  Company 1369 

June  30,  1916 — To  The  Corporation  Trust  Company 1297 

July  18,  1916 — To  The  Corporation  Trust  Company 2294 

November  1,  1916 — To  The  Central  Trust  Company  of  New  York 2282 

November  21,  1916 — To  The  Corporation  Trust  Company 1857 

December  6,  1916 — To  the  Corporation  Trust  Company  (Bonds  pur- 
chased by  trustee) 688 

December  6,  1916 — To  The  Corporation  Trust  Company  (Foreign 

exempt  corporations) 2284 

December  6,  1916 — To  The  Corporation  Trust  Company  (Non-resident 

alien  partnerships) 522 

December  28,  1916 — To  The  Corporation  Trust  Company 546 

February  3,  1917 — To  Ropes,  Gray,  Boyden  & Perkins 1183 

February  8,  1917 — To  W.  W.  Bacon 949 

February  9,  1917 — To  William  Beverly  Winslow 1242 

March  3,  1917 — To  a Subscriber 1899 

March  10,  1917— To  a Subscriber 1900 

March  31,  1917 — To  The  Corporation  Trust  Company 552 

April  11,  1917 — To  a Subscriber 2083 

June  22,  1917 — To  Kenefick,  Cooke,  Mitchell  & Bass  (in  part) 848 

June  30,  1917 — To  Lee,  Higginson  & Company 785 

October  8,  1917 — To  Lee,  Higginson  & Company 980 

October  25,  1917 — To  Palmer  & Series 1345 

November  10,  1917 — To  Lee,  Higginson  & Company 2319 


Income  Tax 

Supplementary  Page  116 


S-49-19. 


T.  D.  AND  SPECIAL  MATTER  FINDER. 


SPECIAL  LETTERS— Concluded. 


Paragraph 

Numbers 

November  13,  1917 — To  Sackett,  Chapman  & Stevens 628 

November  16,  1917 — To  First  National  Bank,  Cleveland 2150 

November  19,  1917 — To  Harris,  Forbes  & Company 1051 

November  21,  1917 — To  Simpson,  Thatcher  & Bartlett 621 

November  23,  1917 — To  The  Corporation  Trust  Company 1200 

November  27,  1917 — To  The  Corporation  Trust  Company 1198,  1348 

November  30,  1917 — To  Greenbaum,  Wolff  & Ernst 2001 

December  14,  1917 — To  The  Corporation  Trust  Company 1107 

January  28,  1918 — To  Lee,  Higginson  & Company 653 

January  30,  1918 — To  Lee,  Higginson  & Company 652 

February  5,  1918 — To  Kennedy  M.  Thompson 1340 

February  11,  1918 — To  Lee,  Higginson  & Company 665 

February  18,  1918 — To  S.  W.  Straus  & Co 611 

February  27,  1918 — To  A.  Iselin  & Co 1117 

February  28,  1918 — To  M.  F.  Frey,  Guaranty  Trust  Co 669 

March  5,  1918— T.  F.  W.  Denio 941,  1349 

March  8,  1918 — To  Hutchins  & Wheeler 1262 

March  14,  1918 — To  The  Corporation  Trust  Company 844 

March  22,  1918 — To  The  Corporation  Trust  Company 1 147 

March  25,  1918 — To  Lee,  Higginson  & Company 1149 

March  26,  1918 — To  The  Columbia  Trust  Company 660,  670,  675 

March  27,  1918 — To  Kenefick,  Cooke,  Mitchell  & Bass 1346 

March  28,  1918 — To  The  Corporation  Trust  Company 1341 

March  30,  1918 — To  The  Columbia  Trust  Company 671 

April  17,  1918 — To  Henry  W.  Beal 551 

April  20,  1918 — To  Brower,  Brower  & Brower 2299 

April  30,  1918 — To  Certified  Audit  Company  of  America 858 

May  1,  1918 — To  Greenbaum,  Wolff  & Ernst 1433 

May  3,  1918 — To  the  Southern  Pacific  Company 1515 

May  13,  1918 — To  Smith,  Robertson  & Moorhouse 808 

May  14,  1918 — To  Hornblower  and  Weeks 801 

May  20,  1918 — To  First  National  Bank,  Cleveland,  Ohio 680 

May  23,  1918 — To  The  Corporation  Trust  Co 672 

May  23,  1918 — To  The  Corporation  Trust  Company 1296 

May  27,  1918 — To  Arthur  Young  & Company 809 

June  6,  1918 — To  The  Central  Trust  Company  of  Illinois 1522 

June  25,  1918 — To  Internal  Revenue  Agents 2115 

July  12,  1918— To  E.  G.  Shorrock  & Co 2148 

July  13,  1918 — To  The  Equitable  Trust  Company 1525 

October  1,  1918 — To  The  Corporation  Trust  Company  (in  part) 521 

October  14,  1918 — To  First  National  Bank,  Cleveland,  Ohio 1358 

November  2,  1918 — To  Flerbert  J.  Lyall 2496 

November  12,  1918 — To  Ropes,  Gray,  Boyden  & Perkins 787 

November  26,  1918 — To  E.  G.  Shorrock  & Co 1827 

November  28,  1918 — To  The  Corporation  Trust  Company 1381 

December  17,  1918 — To  George  E.  Holmes 1933 

January  3,  1919 — To  Clark  J.  Milliron 990 

January  8,  1919 — To  The  Corporation  Trust  Company 2059 

January  13,  1919 — To  The  Corporation  Trust  Company  (in  part) 829 


DEPARTMENT  LETTERS  TO  COLLECTORS 

Paragraph 

Numbers 

January  16,  1915 — Mimeograph  letter  No.  1148  to  Collectors 

1450,  1486,  1487,  1542 


January  28,  1915 — Mimeograph  letter  No.  1255 2520 

February  9,  1915 — Mimeograph  letter  No.  1160  to  Collectors 1541 

February  10,  1915 — To  Collectors 1498 

March  24,  1915 — Mimeograph  letter  No.  1192  to  Collectors 2387,  2391 

June  22,  1915 — Mimeograph  letter  No.  1232  to  Collectors 1545 

July  8,  1915 — Mimeograph  letter  No.  1242 644 

September  23,  1915 — Mimeograph  letter  No.  1265  to  Collectors .....1570 


Income  Tax 

Supplementary  Page  117 


T.  D.  AND  SPECIAL  MATTER  FINDER. 


DEPARTMENT  LETTERS  TO  COLLECTORS— Concluded. 

Paragraph 

Numbers 

October  19,  1915— Mimeograph  letter  No.  1271 930,  1273,  1734,  1738 

November  1,  1917 — Mimeograph  letter  to  Collectors 603 

November  1,  1917 — Mimeograph  letter  to  Collectors  No.  1663 1322 

November  3,  1917 — L.  Mimeograph  letter  No.  1675  to  Collectors. . 1581,  1606 

January  10,  1918 — Statement  to  Collectors 811 

February  25,  1918 — IT — CLS.  Mim.  1795 2492 

March  18,  1918— SBC.  Mim.  1836— See  901 


SPECIAL  MATTERS 

July,  1917 — Oral  word  to  The  Corporation  Trust  Company.  Re:  ProoFof 

receipt  by  mail  of  Form  17 2407 

Second  Liberty  Loan  Act  (Sec.  7) 976 

Act  Supplementing  Second  Liberty  Bond  Act  (Sec.  1) 981 

. Fourth  Liberty  Bond  Act  (Sec.  3) 991 

Surtax  rates  for  1913,  1914,  and  1915 841 

Surtax  rates  for  1916  and  1917 ! 842 

Executive  Order:  Inspection  of  Returns 1648 

Sample  Letter:  Offers  in  Compromise 1613 

Section  989  Revised  Statutes 2640 

Section  3167  Revised  Statutes 2645 

Section  3172  Revised  Statutes 1621 

Section  3176  Revised  Statutes ‘ 1501,  1549,  1558 

Section  3218  Revised  Statutes 2540 

Section  3220  Revised  Statutes 2497 

Section  3224  Revised  Statutes 2579 

Section  3225  Revised  Statutes 2590 

Section  3226  Revised  Statutes 2613 

Section  3227  Revised  Statutes 2614 

Section  3228  Revised  Statutes 2615 

Section  3229  Revised  Statutes 1605 


Income  Tax 

Supplementary  Page  118 


12-4-iy. 

T.  D.  AND  SPECIAL  MATTER  FINDER. 


TABLE  OF  CASES  Paragraph- 

Allen:  Altheimer  & Rawlings  Investment  Co.  vs.  (248  Fed.  688) 1819 

Allen:  National  Bank  of  Commerce  in  St.  Louis  vs.  (223  Fed.  472) ....  1571,  2057 

Altheimer  & Rawlings  Investment  Co.  vs.  Allen  (248  Fed.  688) 1819‘ 

Anderson:  Brady  vs.  (240  Fed.  665) 1184 

Anderson:  Jacobs  and  Davies  (Inc.)  vs.  (228  Fed.  505) 2000 

Anderson:  Mail  & Newspaper  Transportation  Company  vs.  (234  Fed.  590). 2616. 

Anderson:  Thorne  vs.  (240  U.  S.  115) 2715 

Anderson:  Tyee  Realty  Company  vs.  (240  U.  S.  115) 2715 

Baldwin  Locomotive  Works  vs.  McCoach  (221  Fed.  59) 2078- 

Baltic  Mining  Co.:  Stanton  vs.  (240  U.  S.  103) 2722 

Benowitz:’  U.  S.  vs.  (T.  D.  2952) 3647 

Brady  vs.  Anderson  (240  Fed.  665) 1184 

Brady:  Dodge  vs.  (240  U.  S.  122) 2719 

Brushaber  vs.  U.  P.  Railroad  Company  (240  U.  S.  1) 2685 

Bryce  et  al.  vs  Keith  (257  Fed.  133) 3497 

Camp  Bird  (Ltd.)  vs.  Howbert  (249  Fed.  27) 2594 

Carter:  Union  Hollywood  Water  Company  vs.  (238  Fed.  329) 1727,  2024- 

Chicago  & Alton  Railroad  Co.  vs.  U.  S.  (53  C.  of  C.  41) 2073' 

Cohen  vs.  Lowe  (234  Fed.  474) 745,  2141 

Coulby:  U.  S.  vs.  (Circuit  Court  of  Appeals,  Jan.  7,  1919.)  (T.  D.  2858) . 3409 

Crocker,  et  a!..  Trustees:  Malley  vs.  (5  Dept.  Reports  of  Mass.  1011) 1689 

U.  S.  Supreme  Court  decision  (249  U.  S.  223) 3264 

DeGanay  vs.  Lederer  (250  L^.  S.  376) 3456 

Digest  of  Recent  Decisions  of  the  Supreme  Court  (Acts  of  1909  and  1913).  .2742 
(The  opinions  in  the  cases  involving  the  1909  Act  are  not  included 
herein.  But  see  the  Digest,  paragraph  2742.) 

Dodge  vs.  Brady  (240  U.  S.  122) 2719 

Dodge  vs.  Osborn  (240  U.  S.  118) 2580 

Doyle:  Grand  Rapids  and  Indiana  Railway  Co.,  vs.  (245  Fed.  792) 2025 

Eliot  Nat.  Bank  vs.  Gill  (218  Fed.  600) 2056 

Eisner:  Macomber  vs.  (Jan.  23,  1919) 815 

Eisner:  Peabody  vs.  (247  U.  S.  347) 2802 

Eisner:  Prentiss  vs.  (T.  D.  2933) 3595 

Eisner:  Towne  vs.  (245  U.  S.  418) 2738 

Fink:  Northwestern  Mutual  Life  Insurance  Company  vs.  (248  Fed.  568).. 2605 

General  Inspection  & Loading  Co.:  U.  S.  vs.  (192  Fed.  223) 1729 

General  Inspection  & Loading  Company:  U.  S.  vs.  (204  Fed.  657) 2406 

Gill:  Eliot  Nat.  Bank  vs.  (218  Fed.  600) 2056 

Gould  vs.  Gould  (245  U.  S.  151) 2732 

Grand  Rapids  & Indiana  Railway  Company  vs.  Doyle  (245  Fed.  792).... 2025 

Grand  Rapids  & Indiana  Railway  Company:  U.  S.  vs.  (239  Fed.  153) 2372 

Gulf  Oil  Corporation  vs.  Lewellyn:  Example  of  procedure 2621 

Supreme  Court  Decision  (248  U.  S.  71) 2820 

Haiku  Sugar  Co.  et  al.  vs.  Johnstone  (249  Fed.  103) 1272 

Heller,  Hirsh  & Co.;  In  re  (258  Fed.  208) 3613 

Hornby:  Lynch  vs.  (247  U.  S.  339) 2763 

Howbert:  Camp  Bird  (Ltd.)  vs.  (249  Fed.  27) 2594/ 

Insurance  Company  of  America:  McCoach  vs.  (244  U.  S.  585) 2252 

Irwin:  Rensselaer  & Saratoga  Railroad  Company  vs.  (239  Fed.  739) 

(249  Fed.  726) 1720 

Jacobs  and  Davies  (Inc.)  vs.  Anderson  (228  Fed.  505) 2000 

Johnstone:  Haiku  Sugar  Co.  et  al.  vs.  (249  Fed.  103) 1272 

Keith:  Bryce  et  al.  vs.  (257  Fed.  133) 3497 

Kohlhamer  vs.  Smietanka  (239  Fed.  408) 2589 

Lederer:  De  Ganay  vs.  (250  U.  S.  376) 3456 

Lederer:  Penn  Mutual  Life  Insurance  Company  vs.  (247  Fed.  559) 2261 

U.  S.  Supreme  Court  (T.  D.  2899) 3514 

Lederer:  Philadelphia,  Harrisburg  & Pittsburgh  Railroad  Company  vs.  (242 

Fed.  492). 2635 

Lewellyn:  Gulf  Oil  Corporation  vs.  (Example  of  procedure) 2621 

Supreme  Court  Decision  (248  U.  S.  71) 2820 

Lowe:  Cohen  vs.  (234  Fed.  474) 745,  2141 

Lowe:  Peck  vs.  (247  U.  S.  165) 2754 

Lowe:  Roberts  vs.  (236  Fed.  604) 2633 

Lowe:  Southern  Pacific  Company  vs.  (247  U.  S.  330) 2804 

Income  Tax 

Supplementary  Page  119 


T.  D.  AND  SPECIAL  MATTER  FINDER. 


TABLE  OF  CASES.— Concluded. 

Paragraph 

Lynch  vs.  Hornby  (247  U.  S.  339) 2763 

Lynch  vs.  Turrish  (247  U.  S.  221) 2776 

McCoach:  Baldwin  Locomotive  Works  vs.  (221  Fed.  59) 2078 

McCoach  vs.  Insurance  Company  of  America  (244  U.  S.  585) 2252 

Macomber  vs.  Eisner  (Jan.  23,  1919) 815 

Mail  & Newspaper  Transportation  Company  vs.  Anderson  (234  Fed.  590).  ,2616 
Malley  vs.  Alvah  Crocker,  et.  al..  Trustees  (5  Dept.  Reports  of  Mass.  1011).  1689 

U.  S.  Supreme  Court  decision  (249  U.  S.  223) 3264 

Malley:  West  End  Street  Railway  Company  vs.  (246  Fed.  625) 1726 

Marion  Hotel  Company:  Urquhart  vs.  (194  S.  W.  1) 622 

Maryland  Casualty  Co.  vs.  U.  S.  (Feb.  12,  1917)  (T.  D.  2451) 2253 

Mohawk  Mining  Company  vs.  Weiss  (Nov.  3,  1919) 3635 

Muenter:  Southern  Pacific  R.  R.  Co.  vs.  (T.  D.  2944) 3639 

Nashville,  Chattanooga  & St.  Louis  Railway:  U.  S.  vs.  (249  Fed.  678) 2379 


Northwestern  Mutual  Life  Insurance  Company  vs.  Fink  (248  Fed.  568) 2605 

Oregon- Washington  R.  & Nav.  Co.:  U.  S.  vs.  (251  Fed.  211) 1811 

Osborn:  Dodge  vs.  (240  U.  S.  118) 2580 

Peabody  vs.  Eisner  (247  U.  S.  347) 2802 

Peck  vs.  Lowe  (247  U.  S.  165) 2754 

Penn  Mutual  Life  Insurance  Company  vs.  Lederer  (247  Fed.  559) 2261 

U.  S.  Supreme  Court  Decision  (T.  D.  2899) 3514 

Philadelphia,  Harrisburg  & Pittsburgh  Railroad  Company  vs.  Lederer 

(242  Fed.  492) 2635 

Pittaro:  U.  S.  vs.  (U.  S.  District  Court.)  (T.  D.  2874) 3465 

Prentiss  vs.  Eisner  (T.  D.  2933) 3595 

Rensselaer  & Saratoga  Railroad  Company  vs.  Irwin  (239  Fed.  739) 

(249  Fed.  726) 1720 

Roberts  vs.  Lowe  (236  Fed.  604) 2633 

Smietanka:  Kohlhamer  vs.  (239  Fed.  408) 2589 

Southern  Pacific  Company  vs.  Lowe  (247  U.  S.  330) 2804 

Southern  Pacific  R.  R.  Co.  vs.  Meunter  (T.  D.  2944) 3639 

Stanton  vs.  Baltic  Mining  Co.  (240  U.  S.  103) 2722 

Thorne  vs.  Anderson  (240  U.  S.  115) 2715 

Towne  vs.  Eisner  (245  U.  S.  418) 2738 

Turrish:  Lynch  vs.  (247  U.  S.  221) 2776 

Tyee  Realty  Company  vs.  Anderson  (240  U.  S.  115) 2715 

Union  Hollywood  Water  Company  vs.  Carter  (238  Fed.  329) 1727,  2024 

U,  P.  Railroad  Company:  Brushaber  vs.  (240  U.  S.  1) 2685 

U.  S.  vs,  Benowitz  (T.  D,  2952) 3647 

U.  S.:  Chicago  & Alton  Railroad  Co.  vs.  (53  C.  of  C,  41) 2073 

U.  S.  vs.  Coulby  (U.  S.  Circuit  Court  of  Appeals,  Jan.  7,  1919.)  (T.  D. 

2858) 3409 

U.  S.  V8.  General  Inspection  & Loading  Co.  (192  Fed.  223) 1729 

U.  S.  vs.  General  Inspection  & Loading  Company  (204  Fed.  657) 2406 

U.  S.  vs.  Grand  Rapids  & Indiana  Railway  Company  (239  Fed.  153) 2372 

U.  S.:  Maryland  Casualty  Co.  vs.  (Feb.  12,  1917)  (T.  D.  2451) 2253 

U.  S.  vs.  Nashville,  Chattanooga  & St.  Louis  Railway  (249  Fed.  678) 2379 

U.  S.  V8.  Oregon-Washington  R.  & Nav.  Co.  (251  Fed.  211) 1811 

U.  S.  vs.  Pittaro  (U.  S.  District  Court.)  (T.  D.  2874) 3465 

Urquhart  vs.  Marion  Hotel  Company  (194  S.  W.  1) 622 

Weiss:  Mohawk  Mining  Company  vs.  (Nov.  3,  1919) 3635 

West  End  Street  Railway  Company  vs.  Malley  (246  Fed.  625) 1726 


Income  Tax 

Supplementary  Page  120 


4 21-19. 


RUNNING  TABLE  OF  CONTENTS. 

PART  11—1919. 


(Page  301  (f2825)  et  seq.) 


Regtdations,  Special  Rulings,  Decisions,  etc..  Issued  since  February  12,  1919. 


Regulations  No.  45,  Revised  and  Enlarged — Parts  I,  II-A,  III,  and  IV. 

(Dated  April  17,  1919:  released  April  21,  1919.) 


Part  I.  Individuals  (Table  of  Contents,  page  301) ^[2825 

Part  II-A.  Corporations  (Table  of  Contents,  page  306) ^[3181 

Part  III.  Administrative  (Table  of  Contents,  page  307) ^[3031 

Part  IV.  General  (Table  of  Contents,  page  309) 1(3073 


T.  D. 
Special 

Feb. 

Date 

13,  1919 

2792 

i€ 

19, 

<( 

2793 

€i 

20, 

a 

2794 

ti 

21, 

€t 

2795 

ti 

26, 

t€ 

2796 

it 

27, 

Law 

Mar. 

3, 

44 

Special 

« 

3, 

44 

Special 

4< 

11, 

44 

2797 

« 

11, 

44 

2798 

« 

11, 

44 

2799 

<€ 

12, 

44 

2800 

« 

12, 

44 

2801 

« 

12, 

44 

2802 

(4 

12, 

44 

2803 

44 

12, 

44 

2804 

44 

13, 

44 

2805 

44 

14, 

44 

Special 

44 

14, 

44 

Special 

44 

14, 

44 

IT-Mim 
No.  2077 

13, 

44 

Decision 

44 

17, 

44 

2806 

44 

15, 

44 

2807 

44 

18, 

44 

2808 

44 

18, 

44 

2809 

44 

21, 

44 

2810- 

44 

21. 

44 

2811 

44 

22. 

44 

Subject  Paragraph 

Extension  of  time  for  filing  returns 3138 

Extension  of  time  for  Hawaii 3146 

(Denatured  Alcohol.) 

Meaning  of  ‘‘nonresident  alien” 3147 


(Synopsis  of  decisions. — War  Tax  Service.) 
Extension  of  time  for  filing  returns  of  information 
at  the  source  and  for  certain  fiscal  year  returns, 
nonresident  aliens,  foreign  corporations,  and 


citizens  residing  or  traveling  abroad 3165 

Amendment  to  T.  D.  2796 3246 

Victory  Liberty  Loan  Act 3169 

Supplementary  returns  and  additional  tax  pay- 
ments for  fiscal  years  ended  in  1918 3180a 

Modification  of  the  ruling  relative  to  apportion- 
ing the  personal  or  family  exemptions  because 
of  changes  in  marital  or  family  status  during 
the  year 3245 


Time  of  payment  of  tax  where  a corporation  has 
filed  a return  for  a fiscal  year  ending  in  1918. . 3246 

(Bond  for  extending  date  of  payment  of  floor 
taxes. — Distilled  Spirits,  etc.,  and  tobacco, 
etc.) 

(Floor  taxes  on  cigars,  cigarettes,  tobacco  and 
snuff.) 

(Liability  of  railroads  under  Federal  control  to 
Capital  Stock  Tax. — War  Tax  Service.) 

(Floor  taxes  on  distilled  spirits,  wines,  liqueurs, 
cordials,  etc.) 

(Liberty  Bonds  in  payment  of  Estate  Taxes. — 

War  Tax  Service.) 

(Adulterated  butter.) 

Extension  of  time  for  filing  returns  of  partner- 


ships whose  fiscal  year  ended  in  1918 3254 

Amended  returns  may  be  accepted  so  that  the 
taxable  year  of  affiliated  corporations  will 

coincide 3256 

Forms  for  making  returns  by  nonresident  aliens  3258 
International  reciprocal  personal  specific  exemp- 
tion allowances 3259 

Specific  penalty  will  not  be  asserted  if  delin- 
quent returns  are  filed  by  May  1 3260 

U.  S.  Supreme  Court.  Act  Oct.  3,  1913.  A cer- 
tain Massachusetts  Trust  held  not  to  be  an 

association 3264 

(Distilled  Spirits  in  Bond.) 

(Taxes  on  cigarette  papers  and  tubes.) 

(Salaries  of  Collectors  of  Internal  Revenue.) 
(Narcotics.) 

Extension  of  time  for  Alaska 3272 

International  reciprocal  personal  specific  exemp- 
tion allowances 3273 


Income  Tax 

Supplementary  Page  121 


RUNNING  TABLE  OF  CONTENTS.— Continued. 

PART  11—1919. 

(Page  301  (12825)  et  seq.) 

Regulations,  Special  Rulings,  Decisions,  etc,,  Issued  since  February  12,  1919. 

Subject  Paragraph 

Substantial  loss  because  of  material  reduction  of 

value  of  inventory  for  taxable  year  1918 3276 

Manner  of  determining  amount  of  exempt  interest 

from  Liberty  Bond  holdings 3277 

Manner  of  determining  amount  of  exempt  interest 

from  Liberty  Bond  holdings 3278 

Correction  in  P'orm  1120 3281 

(Cigars,  Cigarettes,  etc.) 

(Retail  Dealers  in  Leaf  Tobacco.) 

Old  ownership  certificates  acceptable  until  May 

1 or  June  1,1919. 

Releasing  the  2%  tax  withheld  against  non- 
resident foreign  corporations  on  dividends.  . . 
Manner  of  determining  amount  of  exempt 

Interest  from  Liberty  Bond  holdings. 3284 

The  10%  undistributed  profits  tax,  being  con- 
sidered an  income  tax,  is  not  deductible.  . . . 
Returns  of  income  by  and  for  nonresident  alien 

individuals 

Decision,  U.  S.  Supreme  Court.  A certain 
Massacl.uselts  ^’rnst  held  not  lo  be  an  associa- 
tion. (Same  as  ^3264) 

(Stamps  on  playing  cards. — War  Tax  Service.) 

(Dealers  in  leaf  tobacco.) 

(Denatured  alcohol.) 

Substantial  loss  because  of  material  reduction  of 

value  of  inventory  for  taxable  year  1918  3291 

Status  of  undistributed  profits,  unduly  accumu- 
lated, if  invested  in  United  States  bonds 329ii' 

Interrogatories  on  ownership  certificates  to  be 

answered  fully 3293 

Consolidated  returns:  public  service  corpora- 
tions not  excepted . . 3294 

Consolidated  returns:  stock  of  two  corporations 
owned  “by  the  same  interests,’'  the  percentage 
of  holdings  in  the  two  companies  differing.  . . . 
Interest  on  Food  Administration  Grain  Corpo- 
ration notes 

F.xempt  status  of  interest  on  \hctory  Liberty 

Loan  notes 3297 

Extension  of  time  for  completing  corporate  re- 
turns and  for  filing  certain  returns  not  the 

basis  for  assessment  of  tax 3300. 

Extension  of  time  to  June  13,  1919  applies  equally 

to  certain  fiscal  year  corporations. . 33(>3. 

(Denatured  alcohol.) 

(Distilled  spirits — Bonds.) 

Consolidated  returns:  public  service  corpora-! ' -o - 
tions,  including  railroads,  not  excepted. ......  i 3306 


T.  p. 
Special 

Date 
Mar.  3, 

1919 

Special 

12, 

“ 

Special 

20, 

(< 

2812  ' 

22, 

2813' 

( i 

24, 

“ 

28I4_ 

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24, 

it 

Special 

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Special 

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24, 

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Special 

“ 

25, 

Ct 

Special 

April  1, 

a 

2815 

2, 

a 

2816 

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2, 

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2817 

ti 

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2818 

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10, 

it 

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Special 

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3283 


3285 


3286 


3290 


329.> 


3296 


Regulations  No.  43,  Revised  and  Enlarged — Parts  I,  II-A,  III,  and  IV.vp  ■ 
(Datqd  April  17.,  1919:  released  April  21,  1919.)  “■  A ^ 

Part  1.  Indivoduals  (Table  of  Contents,  page  301) 2823  ' 

Part  II-A.  Corporations  ('Table  of  Contents,  page  306) 3181 

Part  III,  Administrative  ('Table  of  Contents,  page  307) 3031 

Part  IV.  General  (Table  of  Contents,  page  309)..  .. .■ 3073' 

- --  — 

(The  foregoing  Regulations,  T.  D.’s,  and  Special  Matters  are  Indexed.)  , 


Income  Tax 

Supplementary  P^igc  122 


6-2S-19.  ...  - - . 

RtrNNING  TABLE  OF  CONTENTS.— Contia?ied. 

PART  11—1919. 

(Page  301  (112825)  et  seq.) 

Regulations,  Special  Rulings,  Decisions,  etc.,  Issued  since  Febrasjy  12,  1919. 


(The  following  T.  D.’s  and  Special  Matters  are  unindexed  temporarily.) 


T.  D. 

Date 

Subject  Paragraph 

Special 

Mar. 

22,  1919 

Claims  for  refund  may  be  filed  with  the  Com* 
missioner  direct  

3309 

Special 

Apr. 

23-, 

Interest  on  Victory  Liberty  Loan  4^%  Notes 
exempt  from  income  tax  on  corporations 

3311 

Special 

21. 

ii 

lixtension  of  time  for  filing  returns  by  corpora- 
tions whose  business  is  transacted  and  whose 
books  are  kept  abroad 

3312 

Special 

15, 

Compensation  as  special  counsel,  received  from 
a municipality,  Is  not  exempt  income 

3313 

Special 

22, 

4i 

Interest,  on  accounts  current  and  on  deposits, 
accruing  to  nonresident  aliens  and  foreign 
partnerships;  withholding  liability  of  debtors 

3314 

2822 

it 

19, 

ii 

IDistiiled  Spirits.) 

2823  \ 

Reg.  46/ 

19, 

(Provisional  Regulations  46  relating  to  tax  on 
employment  of  child  labor.) 

(Excise  Taxes— Sales  by  the  Manufacturer. — 
War  Tax  Service.) 

Reg.  47 

May 

1, 

ii 

Reg.  48 

2, 

(Excise  Taxes — Works  of  Art  and  Jewelry. — • 
War  Tax  Service.) 

Reg.  49 

1, 

ii 

(Transportation. — War  Tax  Service.) 

Reg.  50 

Apr. 

29, 

(Capital  Stock  Tax. — War  Tax  Service.) 

Reg.  51 

May 

9, 

ii 

(Excise  Taxes — Toilet  and  Medicinal  Articles. — 
War  Tax  Service.) 

Reg.  52 

May 

3, 

(Soft  drinks  sold  in  closed  containers.) 

Reg.  53 

<( 

3, 

ii 

(Soft  drinks  sold  at  fountains,  etc.) 

2824 

Apr. 

22, 

ii 

(Containers  for  denatured  alcohol.) 

Special 

23, 

Consolidated  returns;  two  domestic  corpora- 
tions, the  one  owning  a foreign  corporation, 
and  the  other  owned  by  that  foreign  corporation 

3315 

Special 

hi 

28, 

ii 

Old  ownership  certificates  acceptable  covering 
interest  payments  due  Mav  1,  1919 

3316 

Special 

26, 

ii 

Installment  sales:  default  and  inability  to  repossess 

3317 

2825 

(( 

28, 

ii 

(Stamps  on  indemnity  and  surety  bonds. — War 
T’ax  Service.) 

2826 

<i 

28, 

ii 

(Distilled  Spirits.) 

2827 

28, 

(Distilled  Spirits.) 

2828 

May 

2, 

ii 

(Monthly  report  of  Field  Deputies.) 

2829 

a 

5, 

ii 

(Distilled  Spirits.) 

2830 

Apr. 

3, 

ii 

(Reg.  43,  Pt.  II. — Dues. — War  Tax  Service.) 

2831 

17, 

ii 

(Reg.  45,  Pts.  I,  IIA,  III  and  IV  at  pages  301 
and  41 1 herein:  PartllB — WarTax  Service.) 

2832 

May 

1, 

ii 

(Reg.  47.  See  above.) 

2833 

2, 

(Reg.  48.  See  above.) 

2834 

it 

1, 

ii 

(Reg.  49.  See  above.) 

2835^ 

Apr. 

29, 

ii 

(Reg.  50.  See  above.) 

Special 

Apr. 

18, 

Withholding  at  the  source  on  bond  Interest,  tax- 
free  and  otherwise 

3318 

Special 

May 

2, 

ii 

'I'axes  paid  by  vendee  for  the  vendor,  on  profits 
on  sale  of  property 

3322 

Special 

“ 

3, 

Continued  use  of  old  ownership  certificates... 

3323 

Special 

i( 

I, 

(i 

Credits  to  non-resident  aliens,  citizens  of  countries 
which  in  imposing  income  taxes  levy  no  income 
taxes  on  U.  S.  citizens  not  residing  therein. 

3324 

2836 

7, 

ii 

Tax  exemptions  of  Liberty  Bonds  and  Victory 
Notes 

3325 

Special 

i( 

6, 

Advisable  to  make  return  even  thoughno  net  in- 
come If  due  to  deductible  losses  claimed  

3327 

Special 

ii 

6, 

it 

Full  credit  for  all  allowable  deductions  to  be  taken 
in  computing  net  income  subject  to  suitax.  . . . 

3328 

I.  T.  2129  “ 

6, 

ii 

T’entative  returns  by  corporations  with  fiscal 
years  ending  Jan.  31  or  Feb.  28,  1919 

Income  Tar. 

Supplementary  Page  123 

3329 

RUNNING  TABLE  OF  CONTENTS.— Continued. 
PART  11—1919. 


(Page  301  (^2825)  ct  seq.) 

Regulations,  Special  Rulings,  Decisions,  etc.,  Issued  since  February  12,  1919. 


T.  D. 

Date 

Reg.  54 

Alay  14,  191 

2840 

13, 

it 

2841_ 

(( 

15, 

it 

Special 

13, 

ti 

Special 

it 

19, 

“ 

2842 

it 

15, 

it 

2 ''3 

17, 

it 

2841 

a 

17, 

it 

2845 

ti 

19, 

tt 

2846 

<c 

24, 

it 

Special 

it 

21, 

tt 

Special 

it 

20, 

ti 

Special 

23, 

tt 

Special 

<c 

20, 

i€ 

2847 

it 

24, 

tt 

2848 

a 

24, 

tt 

2849 

it 

27, 

tt 

2850 

it 

8, 

tt 

2851 

it 

28, 

tt 

Mim.  ) 

June 

2, 

» 

2143  ) 

2852 

May  31, 

2853 

June 

3, 

tt 

2854 

it 

3, 

2855 

ii 

7, 

ti 

2856 

it 

7, 

2857 

it 

7, 

2858 

it 

9, 

it 

2859 

it 

10, 

tt 

Special 

a 

9, 

ti 

Special 

May  21, 

it 

Special 

“ 

26, 

it 

Special 

“ 

31, 

ti 

Special 

June 

7, 

tt 

2860 

it 

10, 

it 

Special 

it 

9, 

it 

Special 

it 

7, 

“ 

Subject  Paragraph 

(Excise  Taxes — Semi-luxuries. — War  Tax  Ser- 
vice.) 

Due  date  of  second  installment  of  taxes  based 

on  calendar  year  returns 3331 

(Tax  on  prohibited  fermented  liquors.) 

Obligation  to  render  undistributed  profits  tax 
returns  b}^  corporations  with  fiscal  years 

ending  in  1918 3332 

Macomber  vs.  Eisner  case  restored  to  U.  S. 

Supreme  Court  docket 3333 

(Cigars,  cigarettes,  etc.) 

Salaries  of  state  officials  not  liable  to  income  tax  3334 
Payment  of  tax  in  installments  and  without 
interest  in  cases  of  delayed  returns  from 

persons  abroad 3336 

(Distilled  spirits.) 

(instructions  in  connection  with  collection  and 
deposit  of  checks  in  payment  of  internal- 
revenue  taxes.) 


Claims  on  account  of  inventory  losses) 3337 

On  the  use  of  ownership  certificates 3338 

Withholding  on  deposits  of  non-resident 

foreign  corporations 3342 

Consolidated  return  of  fiscal  year  parent  and 

affiliated  calendar  year  public  utility 3343 

Charitable  contributions  by  corporations . 3345,  3385 
(Distilled  spirits.) 

Correcting  item  20,  Schedule  A,  oage  2 of  Eorm 

1120.  . 3352 

Instructions  relative  to  acceptance  of  Certifi- 
cates of  Indebtedness  in  payment  of  Income 

and  Profits  Taxes  due  June  16,  1919 3371 

Authority  of  collectors  to  accept  uncertified 

checks 3380 

Withholding  on  security  interest  when  owner 
Is  unknown 3383 


(Excise  Taxes. — War  Tax  Service.) 

(Completely  denatured  alcohol.) 

(Non-beverage  distilled  spirits  and  wines.) 
(Denatured  alcohol.) 

Extension  of  time  for  1919  fiscal  year  partner- 
ships, personal  service  corporations  and 

corporations 3386,  3388 

Original  subscription  to  Victory  Notes 3389 

Decision — Act  of  1913.  Status  of  dividends  re- 
ceived by  partnership  v/hen  distributed  to 

the  members  thereof 3409 

Dealing  with  the  cost  of  v/ar  facilities  which 

may  be  amortized 3390 

Amortization  claims  for  1918  and  for  1919: 

amended  returns  involving  amortization. . . 3391 
Duties  and  obligations  of  employers,  in  connec- 
tion with  withholding,  in  the  case  of  nonresi- 
dent'aliens  employed  in  the  United  States  3394 
Duties  and  obligations  of  employers,  in  con- 
nection with  withholding.  In  the  case  of  non- 
resident aliens  employed  In  the  United  States  3398 
Constructive  receipt  of  income  during  the 
taxable  year  by  a decedent  prior  to  his  death  3407 
Returns  of  information  as  to  payments  to  em- 


ployees in  board  and  lodging,  etc 3408 

(Excise  taxes. — War  tax  Service.) 

Dividends  received  from  foreign  corporations 
subject  to  income  tax  are  exempt  from  nor- 
mal tax 3427 

Additional  capital  stock  tax  deductible 3428 

Income  Tax. 


Supplementary  Page  124 


9-24-19. 


RUNNING  TABLE  OF  CONTENTS.— Continued. 

PART  11—1919. 

(Page  301  (T[2825)  et  seq.) 

Regulations,  Special  Rulings,  Decisions,  etc..  Issued  since  February  12,  1919. 


T.  D. 

Date 

Subject  Paragraph 

2861 

June  12, 

1919 

(Allowance  for  loss  at  bonded  wineriei.) 

2862 

“ 12, 

ii 

(Prohibiting  collections  from  Treasury  Depart- 
ment field  officers  for  personal  gifts.) 

2863 

“ 14, 

a 

(Denatured  alcohol.) 

2864 

« 14, 

it 

(Distilled  spirits.) 

2865 

“ 14, 

it 

Interest  on  Victory  notes 

3429 

Special 

“ 9, 

(t 

Tax  liability  and  withholding  obligation  on 
bond  interest  collected  and  paid  in  year 
subsequent  to  that  in  which  the  interest  be- 
came due  and  payable 

3431 

2866 

May  1 1, 

it 

(Reg.  54:  Excise  Taxes — Semi-luxuries. — War 
Tax  Service.) 

2867  \ 

Reg.  55  1 

June  11, 

it 

(Stamp  Taxes. — War  Tax  Service.) 

2868 

Reg.  56  j 

^ “U. 

it 

(Motion  Picture  Films. — War  Tax  Service.) 

2869 

“ 20, 

it 

Alien  seamen 

3434 

Special 

“ 12, 

it 

Refund  of  amounts  withheld  from  non-resident 
alien,  on  status  changing  to  that  of  resident. . 

3436 

2870 

“ 20, 

tt 

Exchange  of  stock  for  other  stock  of  no  greater 
par  value 

3432 

2871 

“ 21, 

tt 

Claims  for  refund  or  abatement 

3439 

2872 

“ 20, 

ii 

(Regulations  pertaining  to  administrative 
accounting.) 

2873 

“ 24, 

ii 

Bases  of  computation  of  net  income:  modifica- 
tion of  Article  23,  Regulations  45 

3450 

2874 

• **  23, 

ii 

Simulation  of  income  tax  receipts 

3465 

Special 

“ 24, 

ii 

Separate  ownership  certificates  required  for 

coupons  of  differing  maturity  dates 

(Munition  manufacturers’  tax. — Court  Deci- 
sion.) 

3470 

2875 

“ 26, 

it 

2876 

“ 25, 

it 

Decision:  U.  S.  Supreme  Court,  Act  of  Oct.  3, 
1913.  Income  from  stocks  and  bonds,  lo- 
cated in  the  United  States,  taxable  to  non- 
residing aliens 3456, 

3472 

2877 

“ 27, 

ii 

(Distilled  spirits.) 

Reg.  43  1 
Part  1 J 

, “ 19, 

ii 

(Admissions. — War  Tax  Service.) 

Special 

“ 2, 

ii 

Withholding  at  the  source  on  interest  on  bonds 
having  no  tax-free  covenant 

3471 

2878 

July  2, 

ii 

(Receipt  of  Liberty  Bonds  for  estate  or  in- 
heritance taxes. — War  Tax  Service.) 

2879 

“ 2, 

ii 

(Narcotic  law.) 

2880 

“ ' 3, 

ii 

(Corporation  excise  tax. — Act  Aug.  5,  1909.) 

2881 

“ 3, 

ii 

(Distilled  spirits  and  wines.) 

2882^ 

“ 3, 

ii 

(Corporation  excise  tax. — Act  Aug.  5,  1909.) 

Special 

June  28, 

ii 

Inventories  of  securities  by  a bank  maintaining 
a department  for  the  merchandising  thereof 

3473 

Special 

July  7, 

ii 

The  use  of  Form  1001  by  foreign  governments 

3474 

2883 

“ 9, 

ii 

Extension  of  time  for  filing  returns  by  partner- 
ships and  personal  service  corporations  having 
a fiscal  year  ended  prior  to  May  31,  1919.  . . 

3475 

2884 

“ 9, 

it 

(Traveling  expenses  of  field  deputy  collectors.) 

Special 

“ 9, 

a 

Sale  of  personal  property  on  installment  plan 

3476 

Special 

“ 10, 

ii 

Sale  of  personal  property  on  installment  plan.  . 

3486 

Special 

“ 9, 

Duty  of  employer  to  determine  status  of  alien 
employee 

3492 

2885 

“ 10, 

ii 

(Succession  taxes — Decision  of  court.) 

2886 

“ 10, 

ii 

(Inheritance  taxes — Decision  of  court.) 

2887 

“ 12, 

a 

(Narcotics — Decision  of  court.) 

2888 

“ 14, 

ii 

(Application  for  sacramental  wines.) 

2889 

“ 16, 

a 

(Transportation  tax — War  Tax  Service.) 

2890 

Reg.  57  . 

1 

H 

(Telegraph,  telephone,  radio  and  cable  facilities. 
— War  Tax  Service.) 

Income  Tax. 

Supplementary  Page  125. 

RUNKHCG  TABLE  OF  CONTENTS.— Continued. 

PART  11—1919 
Page  301  (12825)  et  seq.) 

ReguiationSi  Special  Rulings,  Decisions  etc.,  Issued  since  February  12,  1919. 

Subject  ^ ^ Paragraph 

(Stamp  taxes:  Foreign  insurance  policies. — 

War  Tax  Service.) 

Nonresident  aliens  entitled  to  personal  exemp- 
tion and  credit  for  dependents 3495 

(Synopsis  of  decisions:  Excise  taxes. — War 
Tax  Service.) 

(Distilled  spirits.) 

(Special  tax  on  bankers — Decision  of  court — 

Act  of  Oct.  22,  1914.) 

(Corporation  excise  tax — Decision  of  court — 

Act  of  Aug.  5,  1909.) 

(Excise  taxes. — War  Tax  Service.) 

Coupons  of  foreign-owned  domestic  bonds  pur- 
chased by  a domestic  corporation 3496 

Act  of  Oct.  3,  1913.  Stock  losses  as  losses 

incurred  in  trade 3497 

In  determining  value  of  stock  as  of  March  1, 

1913,  the  goodwill  of  the  corporation  is  to 

be  taken  into  consideration 3506 

(Liberty  Bonds  in  payment  of  estate  taxes. — 

War  Tax  Service.) 

Income  Tax. — Decision  of  court.  Life  Insur- 
ance— Dividends ^ 3514 

(Indemnity  bonds  in  connection  with  lost  War 
Risk  Insurance  checks. — War  Tax  Service.) 
Withholding  and  tax  liability  in  connection 
with  credit  and  debit  interest  items  in- 
volved in  transactions  between  domestic 

and  foreign  banks 3507 

(Excess  Profits. — War  Tax  Service.) 

(Salaries  of  Collectors  of  Internal  Revenue.) 

Giving  out,  by  employees  of  the  Bureau  of 
Internal  Revenue,  of  information  contained 

in  returns  filed  by  taxpayers 3508 

(Victory  Notes  in  payment  of  Estate  Taxes.— 

War  Tax  Service.) 

(Victory  Notes  in  payment  of  Estate  Taxes. — 

War  Tax  Service.) 

Non-resident  aliens  entitled  to  personal  exemp- 
tion and  credit  for  dependents 3517 

Acceptance  of  treasury  certificates  of  indebt- 
edness for  income  and  profits  taxes 3518 

Alien  employees — Resident  and  non-resident 

— Withholding  upon  change  of  status 3525 

Compromise  of  penalties  arising  under  In- 
come Tax  laws 3529 

Inventory  losses — Time  for  filing  claim  in 

abatement 3537 

(Beverages — Amends  Art.  6,  Reg.  52.) 

(Excise  Tax. — War  Tax  Service.) 

(Estate  Tax. — War  Tax  Service.) 

(Dealers  in  Leaf  Tobacco.) 

(Wines  for  Saciamental  purposes.)  , 

(Stamp  taxes. — War  Tax  Service.) 

(Denatured  alcohol.) 

(Excise  Tax. — War  Tax  Service.) 

Requests  for  rulings  and  advice  upon  abstract 

propositions — Policy  of  Bureau 3538 

Bond  interest  due  prior  to  March  1,  1913:  No 

withholding 3547 

Articles  234  and  235,  Regulations  45 — Deter- 
mination of  fair  market  value  and  quantity 
of  timber 3548 


T.  D. 

Date 

2891 

July  17,  1919 

2892 

<1 

17, 

2893 

« 

17, 

tt 

2894 

« 

21, 

tt 

2895 

It 

21, 

it 

2896 

it 

21,  . 

it 

2897^ 

« 

22, 

tt 

Special 

n 

22. 

tt 

Decision 

Mar.  26, 

it 

Special 

July  22, 

tt 

2898 

^ €< 

24, 

tt 

2899 

«< 

24, 

tt 

2900 

it 

25, 

ti 

Special 

a 

26, 

i< 

2901 

it 

29, 

ti 

2902 

it 

29, 

tt 

2903 

ti 

30, 

tt 

2904 

ti 

31, 

ti 

2905 

it 

31, 

a 

2906 

Aug, 

, 5, 

tt 

2907 

“ 

7. 

'a 

Special 

tt 

6, 

a 

Att.-Gen. 

June 

3, 

a 

Special 

Aug. 

6, 

a 

2908 

ti 

11, 

it 

2909 

it 

11, 

tt 

2910  ) 

ft 

14, 

it 

Reg.  37  j 

2911 

tt 

18, 

tt 

2912 

ii 

19, 

ti 

2913 

it 

29, 

tt 

2914 

ti 

30, 

tt 

2915^ 

Sept. 

3, 

a 

Special 

Aug. 

26, 

ti 

Special 

a 

26, 

it 

2916 

Sept. 

5, 

tt 

Income  Tax. 

Supplementary  Page  126, 


10-15-19 


RUNNING  TABLE  OF  CONTENTS— Continued. 

PART  11—1919 
(Page  301  (112825)  et  seq.) 

Regulations,  Special  Rulings,  Decisions  etc.,  Issued  since  February  12, 1919. 


T,  D.  ^ Date 
Special  Aug.  14,  1919 

Special  Sept.  4,  “ 


Special  June  21, 
Special  Aug.  19, 


Special  Sept.  11, 

KQ  1 “J 


Reg.  58 

2917 

2918 

2919 

2920 


13, 

8, 

12, 

12, 

15, 


Special 

- 13, 

2921 

“ 15, 

2922 

“ 18, 

Special 

Mira.  2221  Aug.  8, 

2923 

Sept.  24, 

Special 

“ 23, 

2924 

“ 26, 

2925 

“ 26, 

Special 

“ 27, 

Special 

“ 29, 

Special 

“ 18, 

2926 

“ 29, 

2927 

“ 30, 

2928 

Oct.  1, 

2929 

“ 7, 

2930 

“ 7, 

2931 

" 7, 

2932 

“ 7, 

Paragraph 
made  by 
3550 


3551 


3566 


3567 


Subject 

Deductible  charitable  contributions 

means  of  securities 

Tax  liability  and  withholding  obligation  on 
bond  interest  collected  and  paid  in  year  sub- 
sequent to  that  in  which  the  interest  became 

due  and  payable 

Allowance  for  obsolescence  of  good-will,  trade 
marks,  and  trade  brands  in  the  case  of  distillers, 

dealers  in  liquors,  etc 3554 

Allowance  for  obsolescence  of  good-will,  trade 
marks,  and  trade  brands,  in  the  case  of  dis- 
tillers, dealers  in  liquors,  etc 3561 

Continued  use  of  old  ownership  certificates 3564 

(Tax  on  the  issuance  of  insurance  policies. — War 
Tax  Service.) 

(Transportation  Tax. — War  Tax  Service.) 

Acceptance  of  Treasury  certificates  of  indebted- 
ness for  income  and  profits  taxes 3565 

(Stanap  Tax. — War  Tax  Service.) 

Providing  for  relief  of  domestic  corporations 
which  have  assumed  payment  of  income  tax 
with  respect  to  tax-free  covenant  bonds  owned 
by  nonresident  aUens  who  are  entitled  to 
credits  for  personal  exemption  and  depend- 
ents, but  whose  income  from  sources  in  the 
United  States  do  not  exceed  such  credits. . . . 
Amount  of  tax  paid  by  debtor  oa  account  of 
tax-free-covenant  bond  interest  additional 
income  to  creditor  on  whose  account  the  tax 

was  paid 

(Cereal  Beverages.) 

Amending  Art.  307  dealing  with  non-resident 
alien  individuals  entitled  to  personal  exemp- 
tion and  credit  for  dependents. . 3568 

Tax  liability  and  withholding  obligation  on  bond 
interest  collected  and  paid  in  year  subsequent 
to  that  in  which  the  interest  became  due  and 

payable 

Consolidated  returns:  Apportionment  and  pay- 
ment of  tax 

Extension  of  time  for  acceptance  of  old  owner- 
ship certificates . • • •_ ‘ ‘ j 

Tax  liability  and  withholding  obligation  on  bond 
interest  collected  and  paid  in  year  subsequent 
to  that  in  which  the  interest  became  due  and 

payable W ’ ‘ 

Modification  of  Articles  1566  and  1567  of  Reg. 



Bonds  under  Sections  214(a)  (12)  and  234(a) 

(14X  and  1320,  of  the  Revenue^Act  of ; 191 8.  . 
Organization  of  Committee  of  Review  and 
Appeals  to  take  over  work  of  Advisory  Tax 

Board 

Ownership  certificates — Defining  revised  forms 

and  old  forms • • 

Interest  Coupons  without  ownership  certifi- 
cates— Affidavit  required 

(Liquors — Refund  or  abatement  of  Taxes.) .... 
Excise  Tax  on  Corporations  (Act  of  1909) — 

Decision  of  Court 

(Transportation  Tax— War  Tax  Service.) 

Depreciation  of  intangible  property 

(Excise  Tax:  Automobiles.— War  Tax  Service.  . . 

(Excess  Profits  Tax— War  Tax  Service.) 

(Beverages) 

Income  Tax. 

Supplementary  Page  127. 


3569 


3570 


3573 


3576 

3577 
3579 


3587 

3590 


3591 


3592 

3594 


(:p39 15  -i’ij4i.'X) 

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fiqg'i^sTs*!  "oaldfid  aJsti  ^ J-I  ,T 

YcJ  iihiiin  ativ:;  ti’rr'Jnnz?  ■ndafi'r^db  \'i ' ■ i • :-‘"vi'  .C  ,.:?  I ^.ljA  ^iiiDaqiS' 

O&idE  ...........  ,.-  ...  — -, ■ = v. 

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[In  Blank  at  Present] 




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INCOME  TAX 

Supplementary  Page  1 28 


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fy.f 


.<■  ( o 


12-26-19 


RUNNING  TABLE  OF  CONTENTS.— Continued. 

PART  11—1919 
(Page  301  (^2825)  et  seq.) 

Regulations,  Special  Rulings,  Decisions,  etc.,. Issued  since  Feb.  12,  1919. 


D.  T. 

Date 

Subject  Paragraph 

2933 

0«i. 

9, 

1919 

1 New  York  State  transfer  (inheritance)  tax  not 
deductible  as  a tax  (Decision:  Act  of  Oct.  3, 
1913).. 

3595 

2934 

II 

10, 

II 

(Distilled  Spirits.) 

Special 

Sept. 

20, 

Resident  and  nonresident  alien  seamen.  Execu- 
tion of  Form  1078 

3610 

Decision 

May 

14, 

(( 

Income  tax  liability  of  a trustee  in  bankruptcy. . 

3613 

Special 

Oct. 

13, 

Deductibility  of  losses  sustained  by  estates  or 
trusts  and  the  bearing  of  such  losses  on  the 
taxable  income  of  beneficiaries 

3628 

Special 

a 

16, 

it 

Articles  1566  and  1567,  Regulations  45 — Inter- 
pretative. comments 

3627 

2935 

u 

16, 

Article  443,  Regulations  45  amended — Failure 
to  file  final  returns  where  tentative  returns  have 
been  filed 

362C 

2936 

t* 

16, 

II 

(Excise  Taxes — War  Tax  Service.) 

2937 

u 

16, 

II 

Article  133,  Regulations  45  amended — Assess- 
ments for  drainage 

3631 

Special 

1$ 

6. 

fl 

Deduction  for  depreciation  in  computing  net 
income  of  estates  and  trusts  and  the  bearing 
of  such  deduction  on  the  taxable  income  of 
beneficiaries 

3632 

Special 

(( 

24. 

II 

Return  by  corporation  for  taxable  year  during 
which  its  affairs  arc  placed  in  hands  of  receiver, 

etc  , for  purposes  of  dissolution 

(Insurance. — War  Tax  Service.) 

3633 

2938 

(( 

21, 

II 

2939 

Sept. 

6, 

II 

(Reg.  58:  Insurance. — War  Tax  Service.) 

2940 

Oct. 

29, 

Cl 

(Distilled  spirits  and  wines.) 

2941 

'll 

30, 

Cl 

(Stamp  taxes. — War  Tax  Service.) 

2942 

i< 

30, 

1C 

(Exci.se  Taxes:  Toilet  and  Medicinal  articles. — 

War  Tax  Service.) 


All  of  the  foregoing  Regulations,  T.  D’s  and  Special  Matters  are  Indexed. 


The  following  T.  D’s  and  special  matters  are  unindexed  temporarily. 

Subject  P.<iragra,pi) 

Article  1506,  Regulations  45,  amended. — 

Limited  partnerships  as  corporations 3634 

Depletion  allowance  in  the  case  of  operating 

lessees  of  mines 3635 

Deduction  under  Section  38,  Act  of  1909,  of 
discount  on  bonds  sold. — Decision  of  Court. . 3639 
(Excise  Taxes — War  Tax  Service.) 

(Distilled  spirits  and  wines.) 

(Dealers  in  leaf  tobacco.) 

(Excise  taxes. — War  Tax  Service.) 

(Admissions  taxes. — War  Tax  Service.) 

(Luxury  taxes. — War  Tax  Service.) 

Proceeds  of  insurance  policies  paid  to  partner- 
ships on  death  of  the  insured  are  exempt.  . . . 3642 

Verification  of  returns 3645 

Decision  of  Court:  Authority  of  a Commissioner 
of  Deeds  to  administer  oaths  in  connection  with 

verification  of  income  tax  returns 3646 

The  filing  of  Form  1000  by  personal  service 
corporations  in  collecting  interest  on  tax-free- 

covenant  bond  interest 3651 

(Distilled  spirits.) 

(Stamp  taxes. — War  Tax  Senrieo.) 

(Inventories  by  eigar  and  tobaoee  manufacturers. 

Income  Tax 

Supplementary  Page  129 


T.  D. 
2943 

Date 
Nov.  6, 

191! 

Decision 

(1 

3, 

II 

2944 

II 

8, 

II 

2945 

<1 

8, 

II 

2946 

II 

13, 

2947 

15, 

II 

2948 

II . 

15, 

II 

2949 

II 

15, 

11 

2950 

II 

18, 

II 

vSpecial 

II 

18, 

II 

2951 

II 

15, 

II 

2952 

II 

16, 

II 

Special 

M 

20, 

<< 

2953 

II 

29, 

Cl 

2954 

II 

29, 

1C 

2955 

II 

29, 

1C 

RUNNING  TABLE  OF  CONTENTS.— e^ntiaued. 

PART  11—1919 
(Page  301  (112825)  et  5eq.) 

Regulations,  Special  Rulings,  Decisions,  etc..  Issued  since  Feb.  12,  1919. 
T.  D.  Date  Subject  Paragraph 

Special  Oct.  9,  1919  Amended  returns  and  refunds  for  years  prior  to 

1914  3652 

2956  ‘Dee.  2,  “ Depletion  after  discovery  of  oil  and  gas  wells. 

— Ptroven  tract  or  lease — Disproi)ortionate 

value 305i 

Special  Nov.  5,  1919  Re  method  of  computing  tax  in  the  case  of  fiscal 

year  corporations 3063 

2957  Dec.  16,  1919  (Tobacco.) 

2958  “ 23,  “ (Excise  Taxes. — War  Tax  Service.) 


Inoome  Tax 

Supplementary  Page  130 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX 

TO  THE  LAWS  AND  REGULATIONS. 

THE  REFERENCES  ARE  TO  PARAGRAPH  NUMBERS. 

(Revision  of  November  10.  1919.) 


COMMENT. 

This  index  is  planned  to  be  sufficiently  comprehensive  to  lead  the 
reader  to  his  subject;  it  is  not  intended  to  guide  him  through  it. 


I Abatement;  claims  for.. 2499,  3045.  3439 

* Does  not  operate  as  a suspension  of  collection,  necessarily . .2508 

Effect  on  ad  valorem  penalty  and  interest  rate.  .2398,  3033 
Inventories  and  rebates  for  1918..  1119,  2963e,  3291 
Abatement  and  refund  under  second  assessment.  .2498,  2590 

Burden  of  proof  under  statute  prior  to  present  amendment.  .2593 
Absence  a cause  for  securing  extension  of  time  for  filing  returns. . 1501,  3026 
Accident  insurance.  .998,  2864 

Paid  on  death  of  insured . . 1003 
Accident;  reimbursement  of  expenses  due  to  . . 1002 
Accounting  methods.  .1939,  2835,  3450 
Change  of.. 1933.  3452.  3454 
Accounting  period: 

Change  of . .758,  1399,  1479,  2840,  3024."3232 
Corporations . . 1787 
Estates  and  trusts . . 1247 
Fiduciaries . . 1247 
Individuals.  .755,  2833,  2839 
Non-resident  aliens.  .502 
Partnerships . . 1295 
Personal  service  corporations.  .3230 
Return  to  conform  with.  1482.  28.39,  3232 
Accounts  payable.  .1923,  3093,  3450 
p Accounts  receivable.  .768,  2286,  2834.  2906,  3450 
^ Income  for  year  of  creation . .924 

Partnerships . . 1285 

Purchased:  , determination  of  any  subsequent  loss.  .2907 
Valuing  at  fair  market  value  when  received  .2906 
Accrual  basis  In  determining  net  income.. 755,  1923,  2834,  2893,  3450 
Change  from  cash  to  accrual  and  vice  versa.. 1933,  3452,  3454 
Actual  vs.  record  owners  of  stock.  .3016 
Ad  valorem  penalties  attach  to  income.  .1569 
Additions  and  betterments.  .1026,  2967,  3223 
Made  by  tenants . . 1967,  2858,  2891 

Administrative  provisions  of  general  internal  revenue  laws  are  applicable.  .1620,  3126 
.Administrators  (See  “Fiduciaries”  at  1,  Index  Page  10.) 

Advertising  Liberty  bonds  (and'|notes?)  and  war  savings  stamps:  expenses  incurred . .3210 
AdvDorv  Tax  Board  2652,  3124 
Discontinued.  .3587 
Membership.  .3249 
Affidavit;  returns.  , 1451 
Affiliated  corporations.  .1406,  3233,  3570 
3 Apportionment  and  payment  of  tax.. 1407,  3234,  3570 
Deriving  income  from  government  contracts,  . I40€,  3237 
Different  fiscal  years.  .1427,  3240,  3256 
Domestic  and  foreign  corporations,  .1 412,  3238,  3316 
Guaranteeing  dividends.  .3223a 
Public  utility  corporation.  .3294.  3306,  3343 

"Substantially  all  the  stock”;  meaning  of  term . .3235 
"The  same  interests”;  meaning  of  term  . .3235,  3296 
Agent  acting  for  nonresident  alien  . . 543,  591,  3015 
Agent  vs.  fiduciary  .11 73,  3082 
Agent  may  make  return.  .1158,  -3013 

Agents:  foreign  corporations  doing  bueiness  through . .2290 
Agents,  internal  revenue,  duties  of.  1622 
Agricultural  organizations.  .1740,  1771,  3186 
Gifts  to  fairs.  .2013 

Alaska  included  in  "United  States”.  .2281 

Extension  of  time  for  filing  1918  returns.  .3272 
Salaries  of  employees  of  . 764 

Allen  property  custodian;  rules  and  regulations  regarding  property  in  posse' sion  of  and  income 
accruing  to . 1514,  3007 

Allens:  nonresident  (See  at  2.  Index  Page  16.) 

Aliens:  resident.  .489,  2827,  2973 

Establishing  status  as  such.  .189,  493,  2973,  2997,  3147 
Alimony.  .1012,  2864a,  2965 

Allotments  under  War  Risk  Insurance  Art.  2863 
Allowances  government  employees.  .862 
Expenditures  from  1043 

Amanded  returns. . 1938,  2059.  2150  (see  2916),  28.34.  2875e,  2893,  3266,  3.391.  346.3. 
3455 

Not  required  in  certain  rases  .1545 


Index  Page  L 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Amortization  fund;  war  equipment  investments.  .1093.  2164,  2922,  3390,  3391 
Depreciation  of  amortized  property . . 2922 
Amortization  reserve:  retirement  of  bonds.  .2162,  3218 
Ancillary  administrators:  duties  of.  .1224,  3025a 
Annual  report  of  the  Commissioner.  .1661,  3067 
Annuity  contracts.  .946,  2857.  2864 
Appeals:  Committee  of.. 3587 

Apportioning  certain  stock  dividends.  .831,  3098,  3123 
Appraisals:  property  acquired  by  gift.  .931 
Appraisals:  property  acquired  by  inheritance.  .935,  1183 
Appreciation  in  value  of  assets . . 2834 

Stock  dividends  capitalizing.  .800,  826,  3095,  3097 
Architects’  services:  new  buildings . . 1955,  2967 
Army  and  Navy  (See  1,  at  Index  Page  14.) 

Army  Nurse  Corps,  included  in  term  “Military  and  naval  forces”.  .1007 
Assessment  of  tax  in  first  instance.  .2423,  3036,  3042 
Subsequent  adjustment.  .2349,  3036-3037,  3042 
Subsequent  installments. . 3036-37,  3331 
Assessment  of  tax:  suits  to  restrain.  .2579,  3049 
Assessment  of  taxes:  five-year  limitation.  .2360,  3042 
Continuing  effect  of  prior  laws.  .2361 
Prior  3-year  limitation.  .2364 

Assessments  against  local  benefit*. . 1056,  2041,  2899,  3631 
Assessments,  voluntary:  against  capital  stock.  .1834,  1951,  2967,  3203 
Assignees  to  make  returns.  .1429,  3228 
Assistance  from  collectors  in  preparing  returns . . 1497 
Associations  as  corporations.  .1688.  3074 
Distinguished  from  partnerships.  .3076 
Distinguished  from  trusts.  .3076 
Automobile  license  fees  as  taxes . . 2897 
Bad  debts.  .1088,  2090,  2906 

Collected  after  being  charged  off  and  deducted.  .879,  1805,  2862b 
Compromises . . 2099 
Forgiven.  .1806,  2862a,  3203 
Reserves  for.  .1932,  2101 
Bank  deposits,  interest  on: 

Deduction.  .2035,  3211 
Income.  .854 

Withholding.. 59 8.  3314,  3342,  3507 
Bank  discounts.  .1792.  3248,  3455  . 

Bankruptcy  in  relation  to  bad  debts.  .2096.  2906 

Bankruptcy:  returns  by  trustees  in.. 1429,  3022,  3228,  3613 

Banks: 

Depositors’  guaranty  fund.  .2019,  3219 
Cooperative . . 1743 

Foreign:  domestic  debit  and  credit  interest  items.. 3 5 07 

Gross  income  of . . 1790 

Private:  corporate  organization.  .1732 

Distribute  interests  as  dividends.  .792,  1733 
Private:  individual  owner  or  partnership.  .929,  1273 
Shrinkage  in  value  of  securities . . 2068 
Taxes  paid  by  for  stockholders.  .2050,  3213,  3592 
Dividends  to  stockholders.  .796,  3213 
Relation  of  other  taxes  paid  by  bank.  .2062 
Beneficiaries: 

credit  for  income  and  profits  taxes  paid  to  other  jurisdictions  by  estate  or  trust.. 
1063,  3008 

Depreciation  sustained  by  estates  and  trusts.. 3 63 2 

Distributable  income  of  estate  or  trust  to  be  accounted  for  by  beneficiary . .937,  940,  1210, 
2994 

Exemption:  personal  specific.  .2994a 
Inspection  of  returns  made  by  fiduciaries . . 3063 

During  period  of  settlement  of  the  estate.  .1226 
Losses  sustained  by  estates  and  trusts.. 3 62 6 
Returns  by.  .943,  1212 

Surtax:  income  received  through  fiduciaries.  .741 
Dividends  thus  received.  .743,  2994a 
Taxable  year  differing  from  that  of  trust  or  estate.  .1211,  2994 
Bequests  received.  .931,  961,  2864a,  3103 
Betterments.  .1025,  2967,  3223 

Made  by  tenants. . 1967,  2868,  2891 
Bills  receivable  (See  “Accounts  receivable”  at  2,  Index  Page  1.) 

Board:  Advisory  Tax.  .2662,  3124 
Membership . . 3249 
Board  in  lieu  of  rent . . 852 
Board  of  Trade.  .1746,  8195 

Bondholders,  list  of:  not  to  be  supplied  to  corporations  from  information  on  withholding 
returns . . 2650 

Bonds: 

Amortization.  .2162,  3218 

Advance  retirement  of,  within  an  interest  period . . 682 

Discount;  premium;  sale;  redemption.  .2072,  3203a,  3210a 

Foreign  owned;  coupons  belonging  to  domestic  corporations.  .687,  3496 

Foreign  owned;  usufruct  belonging  to  citizen  or  resident . . 686 

Legatee;  bonds  received  by . .936 

Index  Page  2, 


11-10-19 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Bonds: — Conc'uded. 

Liberty  (See  1 at  Index  Page  25.) 

Penal:  U.  S.  bonds  as  security ..  2220.  3583 
Purchase  and  sale  between  interest  dates.  .684 
Purchased  between  interest  dates;  interest.  .925 

Purchased  by  trustee  under  mortgatre  deed  of  trust  but  not  retired.  .688 
Sinking  fund  for  retirement  of.  .2162 
Worthless . .2909 

Bonuses  paid  employees  . 1996,  2889 
Book  values:  Shrinkage  in . . 1 074.  2125,  2904 
Bookkeepinn:  no  particular  method  required.  .1939,  2835 
Books: 

Accrual  basis.. 755,  1923.  2834.  2893.  3450 

Changing  from  cash  to  accrual  and  vice  versa.. 1933,  3452.  3454 
Examination  of,  by  Advisory  Tax  Board.  ,2656 
Examination  of,  by  Commissioner.  .1631 
Jurisdiction  of  District  Courts.  .1632 
Keeping  of,  by  indivudials.  .755,  2833 

Brokers;  returns  oy,  of  information  relative  to  customers’  transactions,  .1396,  3053 

Building  and  loan  associations;  domestic,  are  exempt.  .1743,  1766,  3189 

Building  and  loan  associations;  amounts  credited  to  shareholders  by.  .856 

Buildings:  volurxtary  removal  of.  .2084,  2902 

Business  expenses  vs.  personal  expenses.  .1031,  2881a,  2965 

Business:  gross  income  from .. 2842c 

Business  leagues.  .1746,  3195 

Business:  person  may  be  engaged  in  more  than  one.  .1072 
Business  trusts  as  corporations . . 1687 
Campaign  contributions.  .2026,  3210 
California  special  partnerships.  .3077 

Capital  account:  charges  against  vs.  expenses.  .1948,  2837,  2967,  3223a 
Professional  men.  .1032,  2881a 

Redemption  of  stock  on  stipulated  premium  basis..  .2083 
Service  connections  by  public  utilities.  .2024 
Capital  assets;  profit  or  loss  from  sale  of.  .1872,  3204 

IVhen  paid  for  in  stock  or  bonds  of  purchasing  corporation.  .1901,  1906 
Capital  investment:  interest  on.  .1962,  202rf,  2896 

Capital  stock  of  one  corporation  acquiied  by  another  corporation  through  purchase  from 
stockholders.  .1905,  3108 
Capital  stock:  proceeds  from  sale  of..  1830,  3202 

Commissions  paid  in  connection  with  sale  of. . 1950 
Discount:  stock  sold  at.  .1946,  1949,  3202 
Expenses  in  connection  with  sale  of.  .1948 
Redemption  on  stipulated  premium  basis.  .2083 
Treasury  stock.  .1832,  1833,  3202 
Voluntary  assessments  on.  .1834,  1951.  2894.  3203 
Capital  stock  tax:  additional  tax  imposed  by  Revenue  Act  of  1918  as  a deduction.  .3428 
Car-trust  certificates.  .2030 
Cases:  Supreme  Court.. 2668 

(For  “Table  of  Cases”  see  Supplementary  Page  119.) 

Cemetery  companies.  ,1744,  1767,  3190 
Certificates;  ownership,  etc.: 

Exemption  claims.  .638,  641,  2997,  3000 
List  of  forms.  .Supplementary  Page  2. 

May  be  printed  in  two  languages . . 695 

Ownership  certificates ..  643.  650,  2998,  3060.  3470 

Continued  use  of  o’.d  forms,. 3282,  3316,  3323,  3564.  3573,  3590 
Privately  printed  . . 692 
Size  and  style  of . . 689 
Substitution.  .629,  3001 
Foreign  items.  .3061 

Certificates  of  indebtedness:  Treasury ..  2428  3128,  3371.  3518,  3565 
Chambers  of  Commerce.  .1746,  3195 
Change  of  accounting  period.  .738,  1399,  1479,  2840,  3024 
Change  of  corporate  name..  1404 

Change  of  ownership  during  year:  affiliated  corporations.  .3236 
Charitable  contributions  (See  “Gifts  Made”  at  2,  Index  Page  11.) 

Charitable  organizations.  .1745,  3191 
Charter  m oney:  nonresident  aliens.  .2877 

.Checks:  uncertified  in  payment  of  taxes..  2428,  3130,  3380 
Chicken  farms  or  ranches  (See  “Farms  and  Farmers”  at  2.  Index  Page  9.) 

Citizens  of  United  States:  tax  is  on  income  from  all  sources.  .2827 
Citizenship:  fixing  for  income  tax  purposes.  .485,  2828 
Civic  leagues.  .1747,  3196 

Claims  for  abatement  (See  “Abatement  Claims”  at  1,  Index  Page  1.) 

Claims  for  credit  for  excess  taxes  paid.  .2489,  3045,  3047a 
(Bee  “Refund  Claims”  at  1,  Index  Page  19.) 

Claims  for  refund  (See  “Refund  Claims”  at  ll  Index  Page  19.) 

Clearing  house  associations.  .3195 

Clergymen;  voluntary  offerings  received  by.  .886,  2842 
Qubs.  .1748,  1769,  3197 

Coast  Guard,  included  in  term  “Military  and  Naval  Forces”.  .1007 
Collection  of  tax  (See  “Tax:  payment  of”  at  1.  Index  Page  23.) 

Collection  of  tax  by  distraint.  .8039 

Collection  of  taxes:  five-year  limitation.  .2360,  8038 


IndexlPage  3. 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Collection  of  Taxes: — Concluded. 

Prior  3-year  limitation.  .2364 
Prior  laws:  continuing  effect  of.  .2361 
Collector:  defined . .763 

Collectors  may  make  returns,  .1549,  3032,  3034 

Collectors  to  make  inquiry  concerning  persons  liable  to  tax.  .1621,  3080 
Collectors  to  report  violations  of  law.  .2651 
Commercial  men’s  associations.  .1704 
“Commissioner”  defined.. 752 
Annual  report  of.  .1661,  3067 
May  make  return. . 1649,  3032,  3034 

Tax  not  to  be  paid  in  installments  in  such  case.  .2359 
To  call  for  returns  and  to  make  rules  and  regulations.  1620,  1630,  2591,  3126 
Policy  as  to  rulings  on  abstract  questions.  .3538 
Commissions.  .880,  2004,  2842 

Determined  and  credited  but  not  drawn.  .858 
Expenses  of  salesmen  working  on  commission  basis.  .1040 
Foreign  corporations . . 2299 
On  policy  insuring  life  of  agent,  .888 
On  renewal  premiums . . 887 
Salaries:  commissions  plus.  .884 
Securities:  sale  and  purchase  of.  .1950,  2967 
Cojnmittee  for  incompetent.  .1163,  3020 
Committee  of  review  and  appeals.  .3587 

Common  law  partnerships.  .1269  (See  “Partenrships”  at  2,  Index  Page  16.) 

Common  law  trusts.  .3074 
Common  stock  as  bonus.  .933 
Commutation  of  quarters,  etc.,  as  income . . 863 
Commuters  expenses.  .1044 

Compensation  (See  “Salaries’*  at  1,  Index  Page  21.) 

Compromise  of  indebtedness . . 1806,  2099 
Compromises  for  personal  injuries  received  . .998 
Compromises  of  penalties.  .1605,  3041,  3261.  3529 
Consolidated  returns.  .1405,  3234,  3233,  3295,  3570 

Apportionment  and  payment  of  tax.. 1407.  3234,  3570 
Different  fiscal  years  of  affiliated  companies.  .1427,  3240,  3256 
Foreign  corporations.  .3234,  3238,  3315 
Personal  service  corporations.  .3234 

Public  service  corporations  not  excepted.  ,3294,  3306,  3343 
Consolidations:  exchange  of  stock  or  securities.  .1910,  3107,  3432,  3578,  3627 
Constitutionality  of  Act.  .2667 
Supreme  Court  Cases.  .2668 

Constructive  vs.  actual  receipt  of  income.  .857,  919,  2834,  2862c 
By  decedent  during  taxable  year  prior  to  his  death.. 3407 
Interest  on  corporate  obligations.  .2862d,  3431,  3470,  3551,  3569,  3576 
Contracting  corporations;  gross  income.  .1800 
Contracts,  cancelled:  claims  for  compensation  under.  .2862b 
Contracts;  Government  (See  “Government  Contracts”  at  1,  Index  Page  12  ) 

Contracts;  uncompleted.  .847,  1800,  2843 
Contributions  (See  “Gifts  Made”  at  2,  Index  Page  11.) 

Cooperative  banks.  .1743  • 

Cooperative  dairies.  .1784,  3199 

Cooperative  marketing  organizations.  .1750,  1777,  3199 
Copyrights:  gain  or  loss  from  sale  of . .2847 
Copyrights  and  plates:  amounts  expended  for.  .1953,  2967 
Depreciation  of.. 2912,  2917,  3594 
Corporations .,  1662,  3181 

Accounting  methods:  change  of.. 1933,  3452,  3454 
Accounting  period:  change  of.  .1399,  1479,  2840,  3282 
Affiliated  corporations.  .1405,  3233,  3570 
Fiscal  years:  different . . 1427,  3240,  3256 
Foreign  and  domestic  corporations.  ,1412,  3238,  3315 
Government  contracts;  income  derived  from.  .1406,  3237 
Public  service  corporations.  .3294,  3306,  3343 
Amortization;  bonds.  .2162,  3218 

Amortization  fund  (war  equipment  Investments). . 2164  (3209),  2922,  3390.  3391 
Assessments;  voluntary,  against  capital  stock.  .1834,  1951,  2894 
Bad  debts . . 2090,  (3209),  2906 
Banks,  private:  status  of . . 1732 

Bonds,  sale  and  redemptjon:  at  oar,  at  discount,  at  premium.  .2072,  3203a,  3210a 
Books  kept  abroad.  .1533,  3312 

Capital  account;  charges  against  vs.  expense.  .1948,  2837,  2967,  3223a 
Capital  assets:  sale  of.  .1872,  3204,  3210a 
Capital  stock;  proceeds  from  sale  of.  .1830,  3202,  3210a 
Expenses  in  connection  with  sale . . 1948 
Capital  stock:  redemption  of,  on  stipulated  premium  basis.  .2083 

Capital  stock  tax:  additional  tax  imposed  by  Act  of  1918  as  a deduction.  .3428 
Change  of  name.  .1404 

Consolidated  returns. . 1405,  3234.  3239,  3294.  3295.  3306.  3315,  3570 
Different  fiscal  years  of  affiliated  companies.  .1427,  3240,  3256 
Contributions  are  not  deductable  generally.  .1118.  2012,  3209,  3345.  3385 
Exceptions.  .2014,  3210 

Credit  for  foreign  ta?ea  paid  or'accrued . . 2332,  3226 


Index  Page  4. 


CON8ULV  THB  FINK  SHBBT. 

GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Corporations: — Concluded. 

Credits  against  income  of  corporations . . 2325,  3224 

Excess-profits  tax  for  same  taxable  year.  .2327,  3224 
Fiscal  year  corporations.  .2328,  3119 
Government  and  War  Finance  Corporation  bond  interest.  .2326,  3224 
Specific  exemption  of  $2,000.  .2330,  3224 
Deductions  allowed . . 1922,  3209 
Defined.  .1685,  3073 
Depletion.  .2167,  (3209),  2929 
Depreciation . .2105,  (8209),  2910 
Dissolved  corporations.  .1402,  1709,  1729,  3106a,  3227 
Prior  to  passage  of  Revenue  Act  of  1918.  .1731,  3227 
Dividends  paid  (See  “Dividends”  at  1,  Index  Page  7.) 

Dividends  received  are  deductible.  .2102,  3209 

Doing  business  in  foreign  country:  tentative  return.  .1440 

Domestic  corporations  defined . .2331 ) 

Exenopt  corporations  and  otherwise.  .1739,  3185 

Cor_porations  owned  by  exempt  organization . . 17l4 
Exemption  claims  from  withholding  of  tax  at  the  source.  .654,  3000 
Expenses  deductible.  .1943,  (3209),  2878 
Expenses  not  deductable.  .1944,  3210,  3232.  3345,  3385 
Expenses  vs.  charges  against  capital  account . . 1948,  2837,  2967,  3223a 
Family  corporation,  to  hold  property . .1713 
Farming  corporations.  .913  ' 

(See  “Farms  and  Farmers”  at  2,  Index  Page  9.) 

“Final”  returns.  .1403,  1709 

First  returns  on  fiscal  year  basis . . 1482,  2839,  3232 

Fiscal  year  with  parts  of  calendar  years  with  different  rates.  .1666,  3117 

Fiscal  year  ending  in  1918:  extension.  .3167,  3300,  3305 

Fiscal  years  ending  in  1919:  extensions.  .3329,  3386 

Fiscal  year  ending  in  1918 — rettirn  and  tax  paid  under  1917  Act:  supplemental  return 
and  tax  payments  under  1918  Act.  .3180a,  3246 
Foreign  corporations.  .572,  610,  2279,  3208,  3222 
Defin^..2280 

Gifts  made  by.. 1118,  2012.  2014.  2962,  3209.  3345.  3385 

Gross  income.  .1788,  3201  , 

Incomplete  corporations.  .1705,  3227 

Insurance  companies. . 2225,  3206.  3220,  3514 

Interest  deductible  and  otherwise.  .2027,  2895,  (3209),  3211 

I^essee  and  lessor  corporations.  .1716,  1836,^1967,^8206 

Liability  to  tax.  .8183 

Liberty  bond  interest ..  989  f ' 

(See  “United  States  Bonds”  at  1.  Index  Page  25.) 

Life^nsurance;  premiums  paid.  .1028,  2842a,  2967a,  3223. 

Life  insurance  proceeds  paid  to.  .3201 

LiQuidating  corporations.  .1403,  1728,  3106a,  3205a,  3241,  3633 
Loss  due  to  depreciated  x918  inventory  or  to  1919  rebate  payments  on  1918  salee  on  1918 
contracts..  2 21 5.  2963  (3209).  3291.  3337,  3356,  3637 
Loss  vs.  depreciation.  .2065 
Losses  deductible . . 2063,  2901,  (3209),  3210a 
Net  income. . 1787,  3200 
Net  losses.  .1913,  3114,  3119 
New  corporations . . 1706,  3232 
Organization  expenses . . 1945,  322oa 
Principal  place  of  business . . 1532 

Profits  allowed  to  accumulate  to  avoid  surtax  to  stockholders.  .746,  2996,  3292 
Rentals  deductible  and  not  deductible.  .2036,  289 f,  (3209),  8212 
Returns  by . . 1398,  1434,  8227,  3241 

(See  “Returns”  at  2,  Index  Page  19.) 

Specific  credit  of  $2,000.  .2330,  8224 

Apportioning  when  accounting  period  changes.  .1485,  3232 
Subsidiaries  as  agents  or  branches  merely . . 1710 
Subsidiaries:  earnings  of . .2104 
Surtax;  none.. 742 
Tax;  payment  of . .2339,  3031 

(See  “Tax:  payment  of”  at  1.  Index  Pago  23.) 

Taxes  paid:  deductible  and  otherwise. . 2036,  2897  (3209),  3212,  3428 
As  credits.  .2327,  2332,  3224,  3226 
Tentative  returns.  .1439,  3017a 

Special  for  1918.  .3138,  3158,  3241 
Penalty  for  failure  to  file  final  return.. 3630 
Special  for  1919:  fiscal  year  corporations.  .3329 
Treasury  stock:  defined,  for  Income  tax  purposes.  .1832,  3202 
Proceeds  from  sale  of.  .1832,  1833,  3202 

Undistributed  profits  of  certain  corporations.  .746,  2995.  3292  ' 

Undistributed  profits  tax:  fiscal  years  ending  in  1918.. 3332 
Undistributed  profits  tax  not  deductible.  .8285 
Correction  of  returns  at  suggestion  of  collectors.  .1540 
Reasonable  time  to  be  granted . . 1642 

“Cost”  of  property  in  connection  with  profit  or  loss  from  disposition  thereof.  .1880 
Of  manufactured  products . . 1960 
Of  merchandise . . 1956 
Of  raw  material.  .1958,  2879 
Costumea;  depreciation  of ..  1091,  2911 


Index  Page  5. 


CONSULT  THE  J»INK  SHEET. 

GENERAL  INDEX. 

The  references  are  to  paragraph  nunbcr  • 


Cotton  exchanges:  incorporated.  .8195 

Coupon  interest  accruing  prior  to  incidence  of  tax.. 613,  1010.  2875d,  3431,  3547,  3551, 
3569,  3576 

Coupons  (See  “Ownership  Certificates”  at  1,  Index  Page  16.) 

Coupons  exchanged  for  bonds . . 927 

Coupons  matured:  constructive  receipt. . 2 86 2d.  2875d,  3431,  3547,  3551,  3569,  3576, 
3470 

Coupons  purchased. . 687,  3496 
Court  costs:  expenses  of  administration.  .1250,  2967 
Courts:  jurisdiction  of  District  Courts.  .1632 
Credit  for  taxes  erroneously  collected.  .2489,  3047a 
Credits  against  income . . 1124,  2325,  2968 

Dividends  as  credit  for  normal  tax  to  individuals.  .1125,  2968 

Estates  and  trusts.  .1258,  2991,  2994a 

Income  subject  to  rates  for  different  years.  .1679,  3119 

Interest  on  Government  and  War  Finance  Corporation  bonds  included  in  gross  income  by 
corporations.  .2326,  3224 

Interest  on  government  bonds,  etc.,  included  In  gross  income  as  credit  for  nonna  tsy 
individuals.  .1127,  2968. 

Members  of  partnerships.  .1289,  2978a 
Members  of  personal  service  corporations.  .1289,  2986 
Nonresident  aliens.. 538,  2972,  2973,  3259,  3273,  3324 
Profits  tax  imposed  for  same  taxable  year . . 2327,  3224 
Fiscal  year  corporations . . 2327 
Members  of  partnerships.  .2980 
Stockholders  of  personal  service  corporations.  .2988 
Specific  credit  of  $2000:  corporations.  .2330,  3224 

Apportioning  when  accounting  period  changes.  .1485,  3232 
Specific  personal  exemption:  individuals.  .1128,  2969 
Estates,  trusts  and  beneficiaries . . 1258,  2994a 
Credits  against  amount  of  tax  otherwise  due: 

Income  and  profits  taxes  paid  or  accrued  to  other  jurisdictior  s 1059,  2332.  3008,  3226 
Members  of  partnerships.  .2978b 
Stockholders  of  personal  service  corporations.  .2986 
Tax  withheld  at  the  source.  .731,  2322,  2338,  3007a 
Customs  duties  (taxes)  are  deductible ..  2048,  2898 
Dairies  (See  “Farms  and  Farmers”  at  2,  Index  Page  9.) 

Cooperative . . 1784 
‘‘Damages’* . . 1838,  2860 

For  personal  injuries  or  sickness.  .998,  2864 
Paid:  as  a deduction.  .2087 
Dealers  in  securities:  inventories.  .1864,  1870,  3113 
Banks  as  dealers.  .3473 
Death  between  March  1 and  Oct.  3,  1913.  .1184 
Death  during  taxable  year.. 1140,  1180,  2971a,  3019 

Constructive  receipt  of  income  prior  to  death.. 3 4 07 
Delay  in  payment  of  tax.  .2397,  2413,  3036 
Liability  for  the  tax.  .1182 
Debtors  defined . . 589,  623 

Debts:  bad  or  worthless  (See  “Bad  Debts”  at  1,  Index  Page  2.) 

Deceased  persons;  returns  and  tax  liability ..  1140,  1180,  2971a 
Delay  in  payment  of  tax.  .2397,  2413,  3036 
Liability  for  the  tax.  .1182 
Deductions: 

Corporations.  .1922,  3209 
Foreign  corporations ..  2300,  3222 

When  income  is  derived  wholly  from  stocks  and  bonds..  2307 
Income  subject  to  rates  for  different  years.  .1679,  3119 
Individuals..  1019,  2878 
Insurance  companies.  .2238,  3220 
Nonresident  aliens.  .529,  2964,  2973 

Offset  against  dividends  as  well  as  against  other  income.. 3328 
Deed  of  trust  to  be  irrevocable.  . 1245,  2991 

Dependents:  personal  specific  exemption  because  of.. 1138.  2971.  3245 

Nonresident  aliens.. 537,  2972,  3274,  3288.  3324.  3495,  3517,  3568 

Depletion: 

Lessees.  .1100,  2171,  2932 
Mines.  .1096,  2167,  2188,  2929 

Properties  discovered  by  the  taxpayer ..  1098.  2169,  2947 
Reserves:  dividends  from.  .830,  3101 
Timber.  .1096,  2167.  2209.  2955,  3548 
Wells . . 1096,  2167,  2172,  2929 
Depositors’  guaranty  fund.  .2019,  3219 
Depreciation  . . 1089,  2105,  2838,  2910 

Amended  returns:  adjusting  deductions  of  prior  years.. 2150,  2916 

Amortization  funds  and  depreciation  . .2922 

Business  vs.  non-business  property.  .2911 

Capital  sum  returnable.  .2914 

Charged  off:  depreciation  must  be.  .2114,  2919 

Closing  depreciation  account . . 2920 

Copyrights.  .2912,  2917,  3594 

Costumes. . 1091,  2911 

Drawings  and  models.  .2918 

Estates  and  trusts ..  1 253,  1257  (see  2913),  3632 


Index  Page  6. 


11-10-19 


CONSULT  THE  PINK  SHEET. 

GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Depreciation: — Concluded. 

Expenditures  in  restoring  property  or  making  good  the  exhaustion ..  1027,  2967 
, Farms  and  farmers.  .907,  1090,  2921 
Franchises.  .2912,  3594 
Good  will.. 1092.  2130,  2912,  3594 

Special:  distillers,  dealers  in  liquors,  etc.. 3554,  3561 
Improvements  in  connection  with  mines  and  wells.. 1095,  2167,  2952 
Intangible  property .. 2912,  3554,  3594 
Lessees.  .1968,  2891 
Licenses.  .2912,  '3594 
Loss  vs.  depreciation.  .2065 
Method  of  computing.  .2915 
Mineral  deposits.  .2911 
Modification  of  method  of  computing.  .2915 
Patents..  1816,  2912.  2917,  3594 
Rates.  .2139 
Real  estate.  .2123,  2911 

Reserves:  manner  of  handling  the  fund.  .2152 
Diversion  of  fund.  .2159 
Dividends  from . .3101 

Secret  formulae  and  processes. . 2912,  3594 
Securities;  shrinkage  in  book  values.  .1074.  2123,  2125, 

Trade  marks  and  brands.  .2130,  2912,  3594 

Special:  distillers,  dealers  in  liquors,  etc., 3554,  3561 
Designs:  successful  and  unsatisfactory:  cost  of.. 2088,  2918 
Devises  received . .931,  961,  3103 
Discount  for  cash . . 1827 

Dis'*ount  on  bonds  sold  and  redeemed . .2072,  3203a,  3210a 
Discounts:  bank.. 1792,  3248,  3455 
Dissolved  corporations.  .1402,  1709,  1729,  3227 

Prior  to  passage  of  Revenue  Act  of  1918.  .1731,  3227 
Dissolved  partnerships.  . 3108a 

Distillers  and  liquor  dealers:  obsolescence  of  good  will,  trade  marks,  etc.. 3554,  3561 
Distraint:  collection  of  tax  by.  .3039 
District  of  Columbia  included  in  ''United  States” . .2281 
Salaries  of  employees  of.  .764 
Dividends.. 770,  3094 

Appreciation  in  value  of  assets:  capitalizing.  .800,  826,  3095,  3097 

Beneficiaries:  dividends  received  through  fiduciaries.  .743,  1262,  2994a 

Capitalizing  good  will,  increase  in  book  values,  etc.  .800,  826,  3095,  3097 

Constructive  receipt  of.  .2862d 

Credit  to  individuals  for  normal  tax.  .1125,  2968 

Declaration  merely  does  not  constitute  payment.  .3094 

Deduction  allowance  to  corporations.  .2102,  3209 

Depletion  reserves:  dividends  from.  .830,  3101 

Dividends  of  corporations  that  are  taxed  in  Porto  Rico  or  the  Philippines.  .617,  3070 
Earnings  and  profits  prior  to  March  1,  1913,  distributed  free.  .810,  3095 
Earnings  and  profits  of  prior  years  if  distributed  in  first  sixty  days  of  taxable  year.  .846. 
3094 

Earnings  and  profits  of  the  taxable  year  in  which  the  distribution  is  made.  .845,  3094 
Earnings  and  profits  to  be  distributed  first.  .800,  3094a 

And  those  accumulated  since  March  1,  1913,  first.  .802,  3094a 
Even  though  invested  in  U.  S.  obligations.  .809 
Estate  of  decedent  stockholder . . 1235 
Federal  reserve  bank  stock . . 1793,  2867 
Fiduciaries:  dividends  apportionable  to  prior  years.  .1262 
Foreign  corporation  dividends: 

Returns  of  information . . 1352,  3059 

When  corporation  derives  income  from  United  States  sources.  .791,  1370,  2968, 
3427 

Good  will:  capitalizing.  .800,  826,  3095,  3097 

Guaranteeing  on  stock  of  subsidiaries  by  holding  company.  .3223a 
Lessee  and  lessor  corporations.  .1716,  1836,  3205 
Life  insurance  policies:  dividends  paid  on.. 798,  2857,  3514 
Liquidating  dividends.  .828,  3100,  3101,  3106a 
Non-resident  aliens;  dividends  as  taxable  income.  .605,  2876 
Case  under  Act  of  1913.. 3456,  3472 

Paid  In  funds  received  by  the  corporation  as  interest  on  state,  etc.,  bonds.  .788,  3094 
Paid  in  Liberty  bonds.  .774 
Cash  value  of.  .786 
Paid  in  property.  .3096 

Paid  in  securities  of  other  corporations.  .773,  3096 
Partnerships.  .1289,  2978b 

Under  Act  of  1913.  .3409 

Personal  service  corporations:  certain  distributions  made  by,  considered  dividends.. 
772,  3094 

Personal  service  corporations:  dividends  received  by.  .1289,  1305,  2986 

Received  by  corporations:  deductible.  .2102,  3209 

Relation  of  income  and  profits  tax  payments  to  dividends.  .806,  3094a 

Returnable  as  i icome  for  year  of  receipt.  .923,  2841,  3094 

Returns  of  information  regarding  payments.  .1393,  3062 

Sertp. .789,  3096 

Sixty  days;  dividends  distributed  during  or  after  first  sixty  days  of  taxi  bleyear.  .846,  S094a 


Index  Page  7, 


CONSULTj^THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Dividends : — Concluded. 

Stock  dividends. .811,  3097 

Allocation  to  prior  years.. 831,  3098,  3123 
Dividends  of  foreign  corporations . . 844 
Imposing  the  tax  in  such  cases.  .1678,  3123 
Case  testing  constitutionality  of  Revenue  Act  of  1916. .815,  3333 
Determination  of  profit  on  disposition  of  stock  received.  .818,  3099 
Effect  of  Towne  vs.  Eisner  decision . .812 
Macomber  vs.  Eisner..  815.  3333 
Refund  of  taxes  paid  on  stock  dividends.  .2492,  2496 
'i'axable  at  rates  of  year  of  receipt  by  stockholder.  .2841,  3094 
Exception . . 2841,  3098,  3123 
Withholding  at  the  source;  none.  .560,  2997 
Releasing  amounts  withheld  in  1918.  .3283 
“Domestic  corporation*’ defined.  .2331,  3080 

“Domestic  partnership”  defined . .2331,  3080  , 

Donations  (See  “Gifts”  at  2,  Index  Page  11.) 

Draft  boards:  salaries  of  members  of.  .2876c 
Drawings:  successful  and  unsatisfactory:  cost  of.  2088 
Depreciation  of.  .2918 
Educational  organizations.  .1745,  3191 
Effective  date  of  the  Act.  .2823 
Effective  date  of  Treasury  Decisions.  .2592 
Embezzlement,  loss  from:  when  deductible.  .2893 
Endowment:  return  of  premiums.  .946,  2864 
Enemies  and  allies  of  enemies.  .1514,  3028 
Equipment  trust  notes.  .616,  2030 
Estate  taxes  not  deductible.  .2900 
Estates  and  trusts.  .1217,  2991 

Credits  allowed . . 1258,  2991,  2994a 
Deed  of  trust  to  be  irrevocable.  .1245,  2991 
Depreciation — 1253,  1257  (see  2913),  3632 
Estate  taxes  not  deductible.  .2900 
Expenses  deductible  and  not  deductible.  .1250,  2967 
Gam  or  loss  from  sale  of  property  devised.  .935,  1183 
Gifts  to  Government  and  certain  organizations.  .1248,  2962,  2991 
Income  accumulated  in  trust . . 1227,  2991 
Income  held  for  future  distribution.  .1231,  2991 
Income  of  estates  or  trusts  is  taxable . . 1217,  2991 
How  to  be  computed.  .1247,  2991,  3626 
Inheritance  taxes . . 1266,  2900 
Intestate's  real  estate  .2991 
Liberty  bond  interest. . 983,  2873 

(5ee  “United  States  Bonds”  at  1,  Index  Page  25.) 

Losses,  etc.,  sustained.  .1247,  2991,  3626 
Net  losses.  .1921 

Returns  by  fiduciaries  of  income  accruing  to.. 1175,  1215,  1234,  2991 
Widow’s  statutory  allowance  paid  out  of  corpus.  . 2991a 
Estates  during  period  of  settlement. . 1218,  2991 

Amounts  properly  paid  to  legatees  during  period  of  settlement.  .1294,  2991,  2994 
Expenses  deductible  and  otherwise . . 1250,  2967 
Final  return  on  final  accounting . . 1225,  3025a 
Liability  of  administrator  or  executor  for  tax . . 1225,  2993 
Examination  of  persons,  books  and  papers.  .1631 
Jurisdiction  of  District  Courts  . . 1632 
Excess  amounts  paid:  credit  for . .2489,  3045,  3048 
(See  “Refund  Claims”  at  1.  Index  Page  19.) 

Excess  profits  taxes  deductible.  .1054,  1057,  2038,  2060 
Excess  profits  taxes  not  deductible  (United  States) . . 1053,  2037 
Excess  profits  taxes  paid  to  other  jurisdictions.  .1059,  2332,  3008,  3226 
Excess  profits  tax  payments  in  relation  to  dividends . .806,  3094a 

Excess  profits  taxes  (U.  S.)  as  credit  against  income  for  income  tax  purposes . . 2327,  3224 
Fiscal  year  corporations ..  2328,  3119 
Members  of  partnerships.  .2980 

Stockholders  of  personal  service  corporations.  .2988 
Exchange:  prevailing  rates  at  tim.e  income  is  credited,  govern.  .1812 
Exchange  of  property.  .1909,  3104 

To  a corporation  for  its  stock.  .3106a,  3577,  3627 
Exchange  of  securities  in  connection  with  reorganization ..  1910,  3107,  3432,  3578 
Excise  taxes  are  deductible.  .2046,  2898 
By  banks . .2052 

Executors  (See  “Fiduciaries”  at  1,  Index  Page  10.) 

Executors’  commissions;  expenses  of  administration.  .1260,  2967 
Exempt  income.. 944,  2863,  3313 

Expenses  incurred  in  earning.  .1030 
Nonresident  aliens.  .528,  2877 
Exempt  organizations.  . 1739,  3185 

Corporations  operating  properties  and  turning  entire  proceeds  over  to  exempt  organiza- 
tions. . 1751 

Foreign  corporations . . 2282 
Owning  another  corporation.  .1714 
Returns  of  information . . 1326 
Salaries  paid  by . . 861 
Withholding  tax  at  the  source . . 590 


Index  Page  8. 


11-10-19 


CONSULT  THB  PINK  SHBIT, 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Exemption:  personal  specific.  .1128,  2969,  3245 
1 Decedent  dying  during  taxable  year.  .1140,  1180,  2971a 
Dependents.  .1138,  2971,  3246 
Estates  and  trusts . . 1258,  2994a 
Head  of  famUy . .1129,  2969,  3245 

Husband  or  wife  dying  during  taxable  year.  .1140,  1180,  2971a 
Married  persons.  .1129,  2970,  3245 

Nonresident  aliens.. 537.  2972,  3259.  3273.  3288.  3324.  3495.  3517.  3566.  3568 
Prorating  between  husband  and  wife.  .673,  1136 
Resident  aliens:  husband  and  wife.  .1133,  2970 
Single  persons.  .1128,  3245 

Status  at  time  of  making  claim  or  at  end  of  taxable  year  govern. . 1141,  2971a,  3245 
Surtax;  relation  of  sp^'ific  exemption  to.  .744,  1139,  2829,  29683 
Exemption:  withholding  at  the  source.. 650.  654.  2997.  3000.  3225 
Cicixens  and  residcsnts . . 638,  654,  2997,  3000 
Domestic  corporations.  .664,  3000 
Fiduciaries.  .680,  3000 
Foreign  corporations.  .676,  654,  8000,  8226 
Foreign  governments  ..3474 

Nonresident  aliens.. 641,  641.  2973,  2977.  2997.  3275,  3394.  3398.  3436.  3492 
Partnerships  (other  than  tax-free-covenant  interest).  .654.  3000 
Prorating  between  husband  and  wife.. 673 
Exhaustion  (See  “Depreciation”  at  2.  Index  Page  6.) 

Expatriation:  presumption  of.. 486.  2828 
Expenses  deductible  and  otherwise.  .1020,  1943,  2878,  3210 
Accruing.  .766,  1923,  2834,  2893 
Army  officers.  .2965 
Business  vs.  personal.  .1031,  2965 

Charges  against  capital  account  vs.  expenses.  .1948,  2837,  2967.  3228a 

Charitable  contributions  by  corporations.  .3345.  3385 

Commuters . . 1044 

Estates  and  trusts . . 1250,  2894 

Non-deductible  items.  .1023,  2965 

Professional . . 1031,  2881a,  2965 

Reimbursement  for  expenses  paid.  .1002,  1041 

Rental  property . .1048,  2891 

Salesmen  working  on  commission  basis.  .1040 

Traveling  men.  .2966 

Expenses  due  to  accident:  reimbursement  of..  1002 
Extension  of  time  for  filing  returns: 

By  collector.  .1501,  3026,  3241 
By  commissioner.  .1507,  3026a 

Special  for  1918  complete  returns.  .3188,  3158,  3241,  3300,  8308 
Special  blanket  extension  for  Alaska.  .3272 
Special  blanket  extension  for  Hawaii  for  1918.  .8146 

Special  for  1918:  returns  of  information,  including  partnerships  on  calendar  year 
basis,  and  fiduciaries.  .3165,  3300,  8808 

Special  for  1918;  partnerships  with  fiscal  years  ending  in  1918  with  unexpired  prior 
extensions.  .8167,  3254,  3300,  3308 

Special  for  1918:  corporations  with  fiscal  years  ending  in  1918  with  unexpired  prior 
extensions.  .3167,  3800,  3305,  3308 

Special  for  1919:  fiscal  year  corporations  and  partnerships.  .3329,  3386.  3475 
Citizens  residing  or  traveling  abroad.  .1512,  3027,  3168,  3336 
Corporations  with  records  kept  and  business  transacted  abroad.. 3312 
Enemies  and  allies  of  enemies. . 1514,  3028 
Foreign  corporations.  .1510,  3027.  3168,  3336 

Interest  runs  on  first  installment  of  tax  if  extension  is  at  request  of  taxpayer,  .2346,  3038 
Nonresident  alien  individuals.  .1510.  3027.  3168.  3336 

Payment  of  tax;  bearing  of  extension  of  time  for  filing  returns. . 2345.  3031,  3336 
Soldiers  and  sailors  abroad.  .1512.  3027,  3168,  3336 
Failure  to  file  returns  on  time.  .1649,  1572,  3028a,  3034,  3051,  3260 
All  of  tax  due  on  notice  and  demand.  .1549,  2359,  3032 
Compromises.  .1605,  8041,  8261 
Specific  penalty  not  asserted  in  certain  cases.  .1581 
When  tentative  return  has  been  filed.. 3629 
**Falr  market  value”  as  of  March  1,  1913:  manner  of  determining.  .1856,  3102 
Mineral  deposits.  .2196 
Stock.. 1857.  3506 
Timber..  2214 

False  returns.  .1549.  1572,  2356,  2358,  3030,  3035,  3051 

No  time  limitation  on  collection  of  tax  in  such  cases.  .2360,  3038 
What  constitutes  a “false”  return.  ,1571 
Family  expenses.  .1024,  2965 

Farm  Loan  Act:  interest  on  securities  issued  under.  .964,  2866 
Return  of.  .967,  8013a 

Farmers*  mutual  associations:  exempt.  .1749 
Farmers*  mutual  selling  associations.  .1750,  1777 
Farms  and  farmers.  .890,  2845,  2892,  2905 
2 Depredation ..  907,  1090,  2921 

Gentlemen  farmers.  .908,  2845,  2892,  2905 
Federal  land  banks.  .1752 
Federal  reserve  bank  stock . . 1703,  2867 
Fee:  determination  of,  after  service  is  rendered .. 882,  2842 
Fees:  notaries,  when  commissioned  by  States.  .2875b 

Index  Page  9. 


CONSULT  THE  PINK  SHEET, 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Fidelity  bond:  premium  on.  .1047 
Fiduciaries.  .1168.  2991 
Agents.  .1173,  3082 
Defined. .1169 

Distributable  income  taxable  to  beneficiaries.  .1208,  2994 
Dividends  apportionable  to  prior  years . . 1262 
Estates  during  period  of  settlement.  .1218,  2991 
(See  at  2,  Index  Page  8.) 

Exemption  claims  against  withholding . . 680.  3000 

Guardian  of  infant:  income  to  be  held  or  distributed  as  court  may  direct . . 1207 
Income  of  estates  and  trusts:  how  computed.  . 1247,  2991,  3626 
Indemnifying  of  fiduciaries . . 1246 
Joint  fiduciaries.  .1265,  3019 

Law  provisions  applicable  to  individuals  apply  to  fiduciaries . . 1267,  2991  • ‘‘ 

More  than  one  trust  or  estate.  .1201,  3021 
Ownership  certificates.  .661,  3006 
Power  of  attorney  does  not  create  fiduciary  relationship.  .1172 
Receiver  for  an  individual.  .1168,  1242,  3022 
Returns  by  fiduciaries: 

As  attorneys  in  fact.  .1158,  1213,  3020 

Covering  amounts  paid  to  beneficiaries  under  will  or  trust.  .1196,  3019 
Contents  of . . 1259 

Estate  during  period  of  settlement.  .1219,  3019 
Final  return.  .1225,  3025a 

Extension  of  time  for  filing  1918  returns.  .3165,  3304 

For  decedent  from  beginning  of  year  to  date  of  death.. 1180,  2971a,  3019,  3407 

For  estate  or  trust  of  income  accruing  to  it . . 1175,  1215,  1234,  3019 

For  nonresident  alien  beneficiary.  .1215,  3023 

Information  at  the  source.  .1348,  3019,  3055a 

Joint  fiduciaries . . 1265,  3019 

More  than  one  trust.  .1201,  3021 

Taxable  year  differing  for  estate  or  trust  and  beneficiary.  .1211,  2994 
Taxes  to  be  paid  by  beneficiaries.  .1207,  2994 
Taxes  to  be  paid  by  fiduciaries . . 1244,  2991 
Term  defined . .1169,  3081 

Undistributed  distributable  income.  .1203,  2994 
Final  returns: 

Corporations.  .1403,  1709 
Fiduciaries . . 1225,  3025a 

Fire  insurance  on  residence:  premiums  not  deductible.  .1045 
Fire  losses . . 1 086,  2063.  2901 

••First  return”  on  fiscal  year  basis.  .1482,  2839,  3232 

First  taxable  year.  .479,  1665,  2839 

Fiscal  year:  defined.  .478,  1664,  2839 

Fiscal  year  ending  in  1918;  extensions.  .3167,  3300,  3305 

Fiscal'year  ending  in  1919:  extensions.  . 3329 

Fiscal  year  ending  in  1918:  supplementary  returns  and  tax  payments  by  corporations  under 
1918  Act.. 3180a,  3246 

Fiscal  year;  return  may  be  made  on  basis  of.  .755,  2839 
Corporations . . 1787 
Estates  and  trusts.  .1247 

First  return  on  fiscal  year  basis.  .1482,  2839,  3232 
Individuals.. 755,  2839 
Nonresident  aliens.  .502 
Partnerships . . 1298,  1299 
Personal  service  corporations.  .3230 
Fiscal  year  with  different  rates.  .1666,  3117 

1917- 1918. .1666,  3118 

Income  tax  paid  under  prior  laws  credited.  .1670,  3118 
Personal  service  corporations.  .1669,  2984,  3117 

1918- 1919. .1671,  3121 

Partnerships ..  1290,  1674,  2979,  2981,  3117 
Personal  service  corporations.  .1669,  1677,  2987,  2989,  3117 
Fixed  or  determinable  annual  or  periodical  income  defined.  .2996a 
Food  Administration  Grain  Corporation:  interest  on  notes.  .3296 
Foreclosure  sale  in  relation  to  bad  debts.  .2097 
Forgiven  debts.  .1806,  2862a 

Foreign  corporations  affiliated  with  domestic  corporation.  .3238 
Consolidated  returns  not  required.  . 3234.  3315 
Foreign  corporations  deriving  income  from  United  Slates  sources:  dividends.  . 791.  1370, 
2968.  3427 

Foreign  corporations  engaged  in  business  in  United  States  to  disclose  fact  to  prevent  with- 
holding..  576,  654,  3000,  3225 

Foreign  corporations  in  relation  to  personal  service  corporations.  .1309,  3084 
Foreign  corporations:  tax  on.  .2279,  3183 
Agents:  business  done  through  . .2290 
Banks:  debit  and  credit  interest  items.. 3507 
Charter  money . .2877 
Commissions.  .2299 

Credit  for  amount  of  tax  withheld  at  the  source.  .2322 
Deductions  allowed.  .2300,  3222 

When  income  is  derived  solely  from  stocks  and  bonds.  .2307 
Defined.  .2280,  3080 
Exempt  organizations.  .2282 

Exemption  claims  from  withholding  of  tax  at  the  source . . 654,  3000,  3225 

Index  Page  10. 


(. 


.4 


I 


11-10-19 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Foreign  Coriwrations: — Concluded. 

Gross  income  of.  .2286,  2296,  2298,  3208 
Liberty  bond  interest.  .991,  2877a,  3180 

(See  “United  States  Bonds’’  at  1,  Index  Page  25.) 

Net  income  of.  .2285 
Returns.  .2312,  3231 

Extension  of  time  for  filing  returns.  .1512,  3027,  3168,  3336 
Special  for  1918  for  resident  foreign  corporations.  .3138,  3158 
Form  to  be  used.  .2319,  3231 
Tentative . . 1440 

Special  for  1918  for  resident  foreign  corporations.  .3138,  3158 
Where  filed.  .540,  3029,  3231,  3241 
Source  within  the  United  States:  meaning  of.  .2288 
Steamship  companies.  .2294,  2877 
Stocks  and  bonds,  domestic:  income  from.  .2296 
Deductions  allowed.  .2307 

War  finance  corporation  bond  interest.  .991,  2877a,  3180 

Withholding  the  tax  at  the  source.. 572,  610,  2996,  3225,  3318,  3342,  3507 

If  engaged  in  business  in  United  States  to  disclose  fact  to  prevent  withholding . . 
576,  654,  3000,  3225 

. Releasing  amounts  withheld  on  dividends  in  1918.  .3283 

Foreign  countries  imposing  or  not  imposing  income  taxes  and  credits  to  nonresident  aliens. . 

2972a.  3274,  3495,  3517,  3568 
Foreign  governments:  income  of.  .996,  2875 
Use  of  Form  1001.. 3474 
Foreign  items.  .655,  1352,  3059,  3068 
License  requirements.  .1378 

Name  and  address  of  recipient  of  income  to  be  furnished  . .1371,  3060 
“Foreign  partnership”:  defined.. 2280 
Liberty  bond  interest.  .991 
(See  “U.  S.  Bonds’’  at  1,  Index  Page  25.) 

Foreign  pensions:  no  license  for  collecting.  . 1388 
Foreign  taxes.  .1057,  1059,  2060,  2332,  3008,  3226 
Nonresident  aliens.  .533,  2964 
Form  1120:  correction  in..  3281.  3352 
Form  A (Mining)  and  Form  N (Oil  and  Gas).. 33 5 2 
Forms  (For  list  of  prescribed  forms  see  Supplementary  Page  2.) 

Fractional  part  of  cent  in  connection  with  tax . .2426 
Franchise  taxes  are  deductible.  .2046 
By  banks.  .2052 

Franchises:  depreciation  of.. 2912,  3594 
Fraternal  beneficiary  associations.  .1742,  3188 

Fraud:  burden  of  proof,  in  suits  to  recover  taxes  under  second  assessment.  .2498,  259  0 
Prior  to  present  amendment  of  Revised  Statutes  Section  3225.  .2593 
Freight  payments  received  by  foreign  owners  of  ships.  .2877 
Fruit  farms  (See  “Farms  and  Farmers’’  at  2.  Index  Page  9.) 

Fruit-growers’  mutual  selling  associations.  .1750.  1777 
Gain  or  loss:  basis  for  determining.  .1854,  3102,  3204 
I Exchange  of  property.  .1909,  3104 

For  stock  in  a corporation .. 31 06a.  3577,  3627 
Gifts.  .931,  3103 
Inheritances.  .935,  1183 

Sale  of  capital  assets  of  a corporation.  .1901,  3210a 
Sale  of  good  will.  .2848 

Sale  of  patents  and  copyrights.  .1815,  2086,  2847 
Sale  of  property  acquired  for  nominal  sum  merely..  .1877 
Sale  of  property  acquired  for  stock  of  excessive  par  value.  .1876 
Sale  of  property  in  general . . 1872,  3102 
Sale  of  real  estate.  .1879,  2850 
Installment  sales.  .2851 
Subdivisions.  .1888,  2850 

Sales  on  installment  plan.. 1890,  2819.  3317,  3476.  3486 
Stock  2846 

C'apital  stock  by  corporation.  .1830,  3202,  3210a 
Good  will  of  corporation  to  bo  taken  into  consideration ..  3,506 
Sold  from  different  lots.  .827,  1875,  2846 
Stock  received  as  bonus.  .933,  2846 
Stock  received  as  gift.  .934 

Stock  repossessed  by  corporation:  treasury  stock.  .1832,  1833,  3202 
Timber  and  lumber.  .1899 

Gains:  taxes  paid  by  vendee  for  vendor  on  profits  resulting  from  sale  of  property.  .3322 
Gas  wells;  Depletion  of  (See  “Depletion”  at  1,  Index  Page  6.) 

Gentlemen  farmers.  .908,  2845,  2892,  2905 
fJifts  made:  allowance  for.  .1102,  2962 

o Xot  an  allowab'e  deduction  for  corporations ..  1 1 1 8,  2012,  2962,  3209,  3345,  3385 

^ Orfain  gifts  are  deductible.  .2014 

h ot  an  allowable  deduction  to  estates  and  trusts.  .2962 
Exce'-tion.  1248,  2991 

h ot  an  allowable  deduction  to  partnerships.  .1295,  2962,  2978 
Gredited  by  members.  .1296 

S curities  donated:  values  thereof  enhanced  in  donor’s  hands.. 3550 
Gifts  received.  .931,  961,  2864a,  3103,  3201 

Gifts  to  government  and  certain  organizations  by  terms  of  will  or  trust.  .1248,  2991 


Index  Page  1 1. 


CONSULT  TBS  PINK  SHEBV« 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Good  will: 

Depreciation  of.. 1092,  2130,  2912,  3594 

Distillers,  dealers  in  liquors,  etc.:  obsolescence.  .3554,  3561 

Included  In  value,  in  determining  value  of  outstanding  stock  on  March  1,  1913.. 3506 
Profit  and  loss  from  sale  of.  .2848 

Stock  dividend  resulting  from  capitalization  of , . 800,  826,  3095,  3097 
Governmest  bonds  (See  “U.  S.  Bonds”  at  1,  Index  Page  25.) 

“Government  contract”  defined.  .1313,  3080a 
I Affiliated  corporations  deriving  income  from  . . 1406,  3237 

Inspection  of.  .3136,  3080a 
Personal  service  corporations.  .1312,  3084 
Unenforceable;  subsequently  ratified.  .3080a 
Government  emplo5'ees:  salaries  and  equivalent.  .764,  868,  2842 
“Headquarters” . . 872 
Per  diem  in  lieu  of  subsistence.  .871 

Governmental  function:  income  arising  through  exercise  of  essential , .1004 
Gross  income  consists  of: 

Corporations.  .1788,  3201 

Foreign  corporations ..  2286,  2296,  2298,  3208 
Exemptions . . 944,  2863 
Individuals.  .763,  2841 
Nonresident  aliens.  .503,  2876 
Ground  rents:  Maryland  or  Pennsylvania . .2895 
Guardian: 

Of  infant,  the  income  to  be  held  or  distributed  as  court  may  direct.  .1207 
Parent  as  natural  guardian:  as  legal  guardian.  .938 
Returns  by.  .1158,  3020 
Hawaii  included  in  “United  States”.  .2281 

Blanket  extension  for  filing  1918  returns.  .3146 
Salaries  of  employees  of . .764 
Hawaiian  partnerships . . 1272 
Head  of  family:  exemption.  .1129,  2969,  3245 
Definition..  1130,  2969 
Returns.  .1145 

“Headquarters”  of  government  employees.  .872 
Health  insurance . . 998,  2864 

Holding  companies  (See  “Affiliated  corporations”  at  3,  Index  Page  1.) 

Holding  companies  guaranteeing  dividends.  .S228a 
Holding  corporation:  family  affair.  .1713 

Holidays  in  connection  with  “last  due  date”.  .1476,  3031,  3242 
Horticultural  organizations.  .1740,  1771,  3186 
Husband  and  wife: 

S One  dying  during  taxable  year.  .1140,  1180,  2971a 
Returns.  .1143,  1150,  3013 
Specific  personal  exemption.  .1129,  2970,  3245 
What  constitutes  “living  together” . . 1132,  2970 
Illegal  transactions:  losses.  .2901;  gains.  .2887 
Illinois  limited  partnerships.  .3077 
Import  taxes  (duties)  are  deductible . . 2048,  2898 
“In  trade”  defined.  .1071 
Income  paid  in  Liberty  bonds . . 848 

Income  subject  to  rates  for  different  years.  .1678,  3119,  3122 
Income  tax  as  debt  to  United  States.  .2464 

Income  tax  on  profit  on  sale,  paid  by  vendee  for  vendor,  is  additional  income  to  ven- 
dor. .3322 

Income  tax  law:  intent  and  purpose  of.  .691 

Income  tax  paid  for  1917-1918  fiscal  year  under  prior  laws  credited . .1670,  3119 
Income  tax  payments  in  relation  to  dividends . . 806,  3094a 
Income  taxes  deductible.  .1054,  1057,  2039,  2060 
Income  taxes  not  deductible  (United  States) . .1053,  2037,  2897 
Income  taxes  paid  to  other  jurisdictions;  credit  for.  .1059,  2332,  3008,  3226 
Does  not  relieve  from  paying  United  States  tax.  .470 
Partnerships  and  personal  service  corporations.  .1063,  2978b,  2986,  3008 
Incomplete  corporations.  .1705,  3227 
Indebtedness:  compromise  of.  .1806,  2099 
Indebtedness  forg-iven.  .1806,  2862a,  3203 

Indebtedness  to  purchase  or  carry  tax-free  obligations  or  secuiities.  .1050,  2028,  2895 
To  purchase  dividend  paying  stock.  .1051 
Information  at  the  source.  .1314,  3054 

$1,000  payments  (or  over)  . .1314,  3055 

Brokers:  of  customers'  transactions.  .1396,  3053 

Corporate  obligation  interest.  .643,  1350,  3005,  3067 

Dividend  payments.  .1393,  3062 

Exempt  organizations  to  make  returns . . 1326 

Extension  of  time  for  filing  1918  returns.  .3165,  3304 

Fiduciaries.  .1348,  3019,  3066a 

Foreign  items . . 1362,  3059 

Government  obligation  interest.  .1876,  3066 

Nonresident  aliens.  .3058 

Partnerships.  .1314,  8055a 

Payee  other  than  actual  owner.  .3062 

Payments  for  which  no  returns  are  necessary , . 1828.  3056 

Payments  made  other  than  in  cash.. 2842a,  3055,  3408 

Penalties.  .1672,  3061 

Personal  service  corporations.  .8055a 

Index  Page  12. 


11-10-19 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Information  at  the  source: — Concluded. 

Registered  interest.  .645,  8067 

Inheritance;  sale  of  property  acquired  by:  valuation.  .936,  1183 
Interest  on  bonds  received  by  legatee.  .936 
Inheritance  taxes  not  deductible. . 1058,  1256,  2900,  3595 
Insane  persons;  estates  of:  delay  in  payment  of  tax.  .2397,  2413,  3036  > 

Insolvent  corporations:  worthless  stocks  and  bonds  of.  .2909,  3036 
Insolvent  persons;  estates  of:  delay  in^paymentjof  tax.  .2397,  2413,13036 
Inspection  of  returns.  .1636,  1642,  3063 
State  officers ..  1638,  1658,  3064 
Stockholders:  corporation  returns.  .1639,  1654,  3065 
Inspectors;  internal  revenue:  duties  of ..  1622 
Installment  plan  purchases  of  Libertv  bonds . . 990 
Installment  sales.. 1890,  2849,  3317,  3476,  3486 
Installments:  tax  payments  made  in.  .2339,  3031 

(See  “Tax:  payment  of’’  at  1,  Index  Page  23.) 

Insurance,  business:  method  of  handling  expense  of  advance  premium  payments.  .2017 
Insurance  companies:  tax  on.. 2225,  3206.  3220,  3514 
Defined. .3079a 
Returns  by.  ,2275,  3229 
Insurance:  Ufe. .945,  2864,  2875d 

Insurance  on  lives  of  officers  and  employees . . 1028,  2967a,  3223 
Insurance  on  own  life  or  residence:  premiums  not  deductible.  .1045 
Insurance  reservelby  taxpayer  against  loss  on  own  property,  .2018 
Intangible  proper^:  depreciation  of.. 2912,  3554,  3594 
Interest  accrued  on  bonds  purchased  between  interest  dates.  .925 

Interest  accruing  prior  to  incidence  of  tax.. 613,  1010.  2875d  3431,  3547,  3551,  3569, 
3576 

Interest  allowed  on  advance  payments  of  1917  income  and  profits  taxes.  .1828 
Interest  credited  on  savings  bank  deposits . . 2862d 
Interest  deductible . . 1049,  2027,  2895,  3211 
On  deposits:  banks.  .2035,  3211 
On  indebtedness  as  rental . .2034 
Interest  on  bonds  received  by  legatee.  .936 
Interest  on  capital  invested  in  business.  .1962,  2029,  2896 
Interest  on  domestic  obligations:  income  to  foreign  corporation.  .2296 
Interest  on  domestic  obligations:  income  to  nonresident  alien.  .505,  2876 
Case  under  Act  of  1913.. 3456,  3472 
Interest  on  Farm  Loan  Act  securities.  .964,  2866 

Interest  on  Governmest  obligations  (See  “U.  S Bonds”  at  1,  Index  Page  25.) 

Interest  on  State,  etc.,  obligations.  .963,  2865 

Interest  on  tax-free  covenant  obligations:  manner  of  accounting'for . .1824 
Interest  received  and  paid  by  brokers  in  connection  with  customers’ .business . .1819 
Interest  runs  for  delay  in  payment  of  tax.  .2397,  3033 
When  claim  for  abatement  is  pending.  .2398,  3033 

When  extension  of  time  has  been  granted  for  filine  return  at  taxpayer’s  request . . 2346,  3033 
Interest:  wlthhoMing  at  the  source.. 553.  2996,  3314,  3342 
Corporate  obligation  interest. . 601.  2996,  3060,  3318 

Interest  paid  and  collected  in  year  subsequent  to  that  in  which  due  and  payable.. 
3431.  3470,  3551.  3569.  3576 
Internal  revenue  laws  applicable.to  income  tax.  .1620,  3126 
Intestate’s  real  estate.  .2991 
Invalidating  clause.  .2667 
Inventories.  .1861,  2836,  3109,  3451 
Dealers  in  securities.  .1864,  1870,  3113 
Banks  as  dealers. . 3473 

For  1918:  cost  or  market,  regardless  of  past  practice.  .31 10 

For  1918:  loss  due  to  depreciation  of  since  taking.  .Ill  9,  2215,  2963,  3276.  3291. 
3337,  3356.  3537,  3579 
Investment  certificates.  .617 
Irrigation  bonds:  shrinkage  inJvaUie  of.  .2071 
Joint  adventures.  .8079 
Joint  fldaciarles  126.6.  »01 9 
Joint  owners  of  bonds.  .661,  3006 
Joint  returns  of  husband  and  wife.  .1150,  3013 
Joint  stock  companies  defined  . .1688,  3074 
Judges  of  U.  S.  courts:  salaries  of.  .764 
Retired  pay  of.  .578,  2842 
Judgments.  .2087,  2862b,  2893 
Jurisdiction  of  District  Courts.  .1632 
Labor  organizations.  .1739,  1771 
Last  due  date.  .1475,  3028a 
Leased  line  certificates:  income  from  . . 1837 
Leasehold:  purchase  of.  .1977 
Leaves  of  absence  of  internal  revenue  men.  .2657 
I.«gacles  . 932,  961,  3103 

Legal  holidays  in  connection  with  last  due  date.  .1476,  3028a,  3242 
Lessees  and  lessors.  .1716,  1836,  1967,  2858,  2891,  3205 

Depiction  allowance  on  mines,  wells,  etc.  .1100,  2171,  293‘2 
Liberty  Bonds  and  notes  (See  “U.  S.  Bonds”  at  1,  Index  Page  25.) 

Expense  of  advertising  sale  of . .3210 

Interest  on.  all  Issues:  taxable  status.. 975,  2869,  3169,  3277,  3278,  3284,  3311, 
3325.  3389.  3429 


IndcK  Page  13. 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


l.iberty  Bonds  and  Xotes:— Concluded. 

Tabulation  of  exemption  status.. 3325  i 

License  for  collecting  foreign  items  1378,3068 

Penalty  for  failure  to  obtain  . . 1391  ' 

License  taxes  are  deductible  . .2046.  2898  i 

Licenses:  depreciation  of.. 2912,  3519  , ^ 

Liens,  tax:  enforcement  of . .3040 
Life  insurance:  return  of  premiums .. 946,  2864 

Life  insurance  on  lives  of  officers  or  employees.  .1028,  2967a,  3223  . , . 

Life  insurance  on  own  life:  premiums  not  deductible ..  1045 
Life  insurance  policies: 

Commissions  on  policies  insuring  lives  of  agents.  .888 
Commissions  on  renewal  premiums . . 887 
Dividends  paid  on.  .798,  2857 
Proceeds  of.  .945,  2864 

Paid  to  corporations.  3201 
Surrender  value  as  of  March  1,  1913..2875d 
Limited  partnerships  ..  1274,  3077 
Illinois  type . .3077 
Michigan  type . .3077 
New  York  type.  .1277,  3077 
Pennsylvania  type.  .1274,  3078 
Liquidating  corporations.  . 1403,  1728,  3205a,  32-11,  3633 
Liquidating  dividends.  .828,  3100,  3101,  3106a 
Lists  of  individuals  making  returns  to  be  posted.  .1641 
Living  expenses.  .1024,  2966 
Living  quarters  as  part  of  salary.  .862 
Lobbying  expenses.  .2026,  3210 

Local  benefit  taxes  or  assessments ..  1056,  2041,  2899,  3631 
L'Local”  organizations  in  connection  with  exempt  organizations.  . 1749,  3198 
Lodges. .1742,  1786,  3188 
Lodging  in  lieu  of  rent . . 852 

Loss:  basis  for  determining  (See  “Gain  or  Loss:  basis  for  determining”  at  1,  Index  Page  11.) 
Loss  due  to  depreciated  1918  inventorv  or  to  1919  rebate  payments  on  1918  sales  on  1918 
contracts.  .1119,  2215.  2963,  3276,  3291,  3337,  3356,  3537,  3579 
Disallowed  abatement  claims:  interest.  .3033  >■ — 

Losses  deductible: 

Corporations.  .2063,  3209,  3210a 

“Damages”  recovered  less  than  damages  sustained.  .1839 

Depreciation  vs.  loss.  .2065 

Estates  and  trusts ..  1 247,  2991,  3626 

Illegal  transactions.  .2901 

Individuals.  .1066,  1084,  1085,  2901 

Stock  losses  as  losses  incurred  in  trade:  Case  under  Act  of  1913.. 3497 
Property  requisitioned  for  war  or  other  uses,  or  lost  through  war  hazards  or  other 
casualties ..  1 840,  2860 
Reserves  for.  .1932,  2101 

I.K)sses,  net:  (See  “Net  Losses’’  at  1,  Index  Page  15.) 

Lunches. . 1044 

Macomber  vs.  Eisner . . 8 1 5 , 3333 
Mailing  returns.  .1477 

Manufacturing  corporations;  gross  income ..  1796 

March  1,  1913:  manner  of  determining  value  as  of.  .1856,  3102 

Mineral  deposits . . 2196  ' ' : 

Stock.. 1857,  3506 
Timber.  .2214 

March  1,  1913:  property  held  on  this  date  is  capital . .2875d 
Marine  Corps  included  in  term  military  and  naval  forces.  .1007 
Market  value,  fair:  manner  of  determining ..  1856 
In  the  case  of  stock.. 1857,  3627 
Mineral  deposits.  .2196 
Timber.  .2214 

Market  value  of  stock  received  in  exchanges  for  property ..  3577,  3627 
Marriage  settlement.  .2864a 

Married  persons:  personal  specific  exemption.  .1129,  2970,  3245 
Returns. .1143,  1150,  3013 
Maryland  ground  rents.  .2895 
Massachusetts  trusts.  .1689,  3076.  3264,  3290 
Masses  for  the  dead:  sum.s  paid  for.  .2842 
Material  (raw)  and  supplies:  cost  of.  .1958,  2879 
Mercantile  corporations:  gross  income  of ..  1797 
Merchandise:  obsolescence  of .. 2133,  2903,  2911 

Mergers:  exchange  of  stock  or  securities.  .1910,  3107,  3432,  3578,  3627 
Michigan  limited  partnerships.  .3077 
Michigan  partnership  associations.  .3078 
Mileage:  government  employees  and  others.  .863,  2966 
“Military  and  naval  forces  of  the  United  States”:  term  includes.  .1007 
tmpensation  received  during  the  war.  .1006 
E lension  of  time  for  filing  returns  in  certain  cases.  .1512,  3027,  3168 
W It  re  returns  are  to  be  filed  . . 1529 
Mines:  tpletion  of  (See  “Depletion”  at  1,  Index  Page  6.) 

Mines:  d predation  of  improvements.  .1096,  2167,  2952  • »; 

( ee  “Depreciation  at  2,  Index  Page  6.) 


Index  Page  14. 


11-10-19 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Mines,  sale  of:  maximum  surtax.  .738,  2831 
Minors: 

Allowances  to,  by  parents.  .1038 
Employment  of,  by  parents.  .1037 

Income  accruing  to  through  natural  guardians.  .938,  3014 
Returns  by.  .1142,  3014 
Returns  for . . 1158,  3014 

Miscellaneous  corporations:  gross  income.  .1799 
Models,  drawings,  etc.;.. 2088,  2136,  2918 
Monthly  returns:  corporate  security  interest.  .702,  3002,  3005 
Municipal  bonds.  .963,  968,  2865 
Return  of . . 967 

Municipal  employees:  salaries  of.. 1013,  2863,  3334 
Municipal  taxes  deductible.  .1055,  2897 

,•  utuai  organizations  of  specified  kinds  are  exempt.  .1749,  1765,  3198 
Mutual  savings  banks.  .1741,  3187 

National  farm  loan  associations.  .1752 
Income  from  . .964,  2866 

Navy  Nurse  Corps,  Female,  included  in  term  “Military  and  Naval  Forces”. . 1007 
Net  income  means  in  the  case  of 
Corporations.  .1878,  3200 
Estates  or  trusts . . 1247 
Foreign  corporations.  .2285 
Individuals.  .754,  2832 
Nonresident  aliens.  .501 
Partnerships . . 1295 

Net  loss  on  line  J,  Form  1040  is  offset  against  income  subject  to  surtax  only.. 3328 
1 Net  losses..  1913,  3114,  3119 
Partnerships.  .1287,  1921 
Trusts  and  estates.  .1921 

New  buildings:  amounts  expended  for.  .1025,  2967,  3223 
Tenants . ; 1967,  2858,  2891 
New  corporations.  .1706,  3232 

New  York  type  of  limited  partnerships  . . 1277,  3077 

“No  greater  aggregate  par  or  face  value”:  application  of  the  limitation .. 3628 

Nonresident  aliens.. 492,  2973 

2 Accounting  period . . 502 

Agents  acting  for.  .543,  591,  3015 
Beneficiaries.  .544,  1215 
Brokers  vs.  agents . . 551 
Charter  money.  .2877 
Deductions  in  general . . 529,  2964 

Deductions  and  credits  allowed  conditionallv . . 538,  2973 

Dependents:  allowance  for.. 537,  2972,  3274,  3288,  3324,  3495,  3517,  3568 
Distraint:  property  subject  to.  .542 

Dividends  on  domestic  stock  as  income.. 505.  (Case  under  1913  Act.. 3456,  3472.) 
Exception.  .2877 
No  withholding.  .560,  2997 

Establishing  status  as  resident  aliens.. 491,  493,  2973,  2997,  3147,  3394,  3398, 
3436,  3492,  3525 
Execution  of  Form  1078. .3612 
Refund  of  amounts  withheld,  . 3406,  3436.  3525 
Seamen.  ,3435,  3611 
Exempt  income.  .528,  2877 

Exemption:  personal  specific. . 537,  2972,  3259,  3273,  3288,  3324.  3495.  3517, 
3566.  3568 

Claiming  at  the  source.  .541,  641,  2973,  2977,  2997,  3275 
Fiduciaries:  domestic.  .544,  3019,  3023 
Fiduciaries:  foreign.. 54 6 

Foreign  items:  claiming  exemption.  .1357,  1369,  3060 
Foreign  partnerships:  income  received  through  . .521 
Freight  payments:  foreign  owned  ships.  .2877 
Gifts  made  by  . . 536,  2964 
Gross  income.  .503,  2876 

Information  at  the  source  relative  to  payments  to,  .3058 
Interest  deductible.  .531,  2964 

Interest  on  domestic  obligations  as  income.. 505.  (Case  under  1913  Act.. 3456, 
3472.) 

Exception . . 2877 
Leaving  country.  .2425,  3043 
Liberty  loan  bond  interest.  .991,  2877a,  3180 

(See  “U.  S,  Bonds”  at  1,  Index  Page  25.) 

Losses.  .534,  535,  2964 

Manufacture  and  disposition  of  goods  within  the  United  States.  .508 
Net  income  of.  ,501,  2964 
Normal  tax.  ,497,  591,  2826 
Payment  of  tax:  medium  . . 552 

(See  “Tax:  payment  of”  at  1,  Index  Page  23.) 

Reciprocal  credits  by  country  of  citizenship.  .2972a,  3274 
Rentals  on  foreign  property.  .563,  2877 
Representatives  of.  .543,  591,  3016 


Index  Page  15. 


CONSULT  THB  PINK  an* 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Nonresident  aliens — Concluded. 

Returns  by  . .638,  2973,  3015,  3268,  8286 
Distraint:  property  subject  to . . 642 
Extension  of  time  for  filing.. 1512,  3027.  3168.  3SS6 
Form.. 301 6,  8258,  3286 
Where  filed . . 540,  3029 
Returns  for . .643,  691,  3015,  3286 
Royalties  received  by.  .504,  671 

Salary  for  services  rendered  abroad.  .663,  1339,  1346,  2877 

Seamen.  .3433.  3609 

Stock:  actual  vs.  record  owner  of.  .3016 

Stock:  sale  of . . 620 

Surtax.  .500,  591,  2829 

Stock  actually  owned  by  nonresident  alien  but  otherwise  recorded.  .3016 
Taxes  deductible . . 633,  2964 

War  Finance  Corporation  bond  interest.  .991,  2877a,  3180 
Wife  of . . 492 

Withholding  of  tax  at  the  source.. 553.  609.  2976.  2996.  3314.  3394,  3398,  3436 
Exemption  claims.. 541,  641,  2973,  2977.  2997.  3275 
Income  exempt  from  withholding.  .563 
Tax-free-covenant  bond  Interest.  .641,  2997,  3566 
Normal  tax.  .471,  2826 

Nonresident  aliens.  .497,  2826 
Rates.. 472,  2826 

Lower  rates  on  first  $4,000  apply  to  each  separate  individual . . 2826 
Notaries’  fees.  .2875b 
Notes  in  lieu  of  cash:  withholding.  .597 

Notice  and  demand  for  first  installment  of  tax.  .2423,  3036.  3042 
For  other  installments. . 2399,  3036-3037.  3042,  3331 
Oaths:  officers  who  may  administer.  .1452,  3017 
Obligations  of  corporations  defined . .615 
Obsolescence.  .1089,  2103,  2137,  2903 

Good  will,  trade  marks,  etc.,  of  distillers,  dealers  in  liquors,  etc... 3554,  3561 
Merchandise  or  materials.  .2133,  2903,  2911 
Models,  drawings,  etc. . .2136,  2918 
Old  buildings.  .2084,  2902 
Patents.  .2136,  2917 
When  no  depreciation  is  taken . . 2138 
Oil  wells:  Depletion  of  (See  “Depletion”  at  1,  Index  Page  6.) 

Operation  and  maintenance  expenses.  .1956 
Organization  expenses.  .1945.  3223a 

Owner  not  known:  withholding. . 602,  612,  651,  2996.  3001a,  3321,  3383,  3591 
Ownership  certificates.  .643,  650.  2998,  3060,  3338 

1 Alien  property  custodian . . 1515,  3007 

Different  maturities  of  same  issue  of  bonds.. 660.  3470 

Each  separate  issue  of  bonds . . 659,  2998 

Foreign  items.  .1356,  3060,  3068 

Information  at  the  source.  .3057,  3060 

Instructions  for  filling  in.  .663,  2998 

Interrogatories  to  be  answered  ftilly . . 669,  2999,  3293 

Joint  owners.  .661,  3006 

List  of  forms . . Supplementary  Page  2 

May  be  printed  in  two  languages.  695 

None  accompanying  coupons.  .602,  612,  651,  2996,  3001a,  3321,  3383,  3591 
Numbers  of  bonds  . .663 

Old  forms:  use  of.. 3282.  3316,  3323,  3564.  3573.  3590 
Ownership  unknown. . 602,  612,  651,  2996,  3001a.  3321,  3383,  3591 
Privately  printed . . 692 
Size  and  style  of . . 689 

State  and  municipal  bond  interest . . 993,  2998 
Substitution . . 629,  3001,  3061 
Tax  not  to  be  paid  at  the  source.  .654,  3000,  8060 
Tax  to  be  paid  at  the  source.  .651,  2999,  8060 
United  States  bond  interest.  .993,  2998 

“Paid”;  “paid  or  accrued”;  “paid  or  incurred”  meaning  and  construction  of.  .1923,  3093 
Parent  as  natural  guardian:  as  legal  guardian.  .938 
Partnerships . . 1269,  2978 

2 Accounting  period  changed.  .8018 

Accounting  period  of  member  differing  from  that  of  firm . . 1281,  2978a 
Accounts  receivable . . 1285 
Banks:  private.  .1273 
California  special . .3077 
Contributions  made  by.  .1295,  2978 
Credited  by  members.  .1296 

Credits  for  income  asd  profits  taxes  paid  to  other  jurisdictions.  .1063,  2978b,  3008 
Dissolution  of.  .3108a 
Dividends  received  by . . 1289,  2978b 
Under  Act  of  1913.. 3409 

Exemption  claims  from  withholding  tax  at  source.  .654,  3000 
Fiscal  year  with  different  rates.  .1290,  1674,  2979,  2980,  31JT 
Foreign:  income  of  nonresident  aliens  received  through . .Un 
Hawaiian . . 1272 
niincds  limited . .3077 


ladez'Pftft  16. 


CONSULT  THE  PINK  SHEET. 

GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Partnerships: — Concluded. 

Income  of:  manner  of  computing.  .1295,  2978 
Information  at  the  source.  .1314,  3055a 

Insurance  on  lives  of  members:  premiums  paid.  .1028,  1286,  2967a 
Proceeds . . 945 

Liberty  bond  interest.  .985,  1289,  2874,  2978b 

(See  “U.  S.  Bonds”  at  1,  Index  Page  25.) 

Limited ..  1274,  3077 
Illinois..  3077 
Michigan.  .3077 
New  York  type.  .1277,  3077 
Pennsylvania  type.  .1274,  3078 
Profits  of  considered  as  dividends.  .797,  1275 
Members:  distributive  shares  taxable.  .1280,  2862d,  2978a 
Credits  allowed.  .1239,  2978b 
1917  profits  tax.  .1294,  2980 
Contributions . . 1296 

Parts  of  income  subject  to  rates  for  different  years.  .1678,  2979,  2981,  3122 
Dividends  under  Act  of  1913. .3409 

Undistributed  interest  not  taxed  again  when  distributed.  .1288 

Michigan  limited . .3077  

Michigan  partnership  associations.  .3078 
Net  losses.  .1287,  1921 
Participation  of  profits  agreement.  .1297 
Readjustment  of  partnership  interests.  .3108a 
Receiver  for.  .3018 

Reorganizing  into  a corporation.  .3106a 
Returns  by.  .1298,  2978,  3018 

Extension*’of  time  for  filing:  special  for  1918.  .3165,  3254,  3304 
Special  for  fiscal  year  ending  in  1919.. 3386.  3475 
Virginia  partnership  associations.  .3078 

Withholding  on  tax-free  covenant  bond  Interest.  .609,  2996,  3320 
Parts  of  income  subject  to  rates  for  different  years.  .1678,  2989 
Patents: 

Depreciation  of.. 1816.  2135.  2912,  2917.  3594 
Infringement:  recovery  because  of.  .2862b 
Obsolescence  of.  .2135,  2917 
Paid  for  with  stock  or  securities.  .2917 
Profit  and  loss  from  sale  of.  .1815,  2086,  2847 
Royalties  from  patent  rights.  .1816,  2858 
Paying  agents:  appointment  of.  .624 

Payment  of  taxes  (See  “Taxes:  payment  of”  at  1,  Index  Page  23.) 

Payment  of  taxes  withheld  at  source.  .720,  3002 
Penal  Bonds:  U.  S.  bonds  as  ftecurity . . 2220.  3583 
Penalties..  1572,  3016 

Ad  valorem  penalties  attach  tc  income.  .1569 
Compromises.  .1605,  3041,  3261,  3529 
Disclosing  contents  of  returns. . 2645,  3066,  3508 
Effect  of  waivers,  under  prior  laws,  on  ad  valorem  penalties.  .2396 
Pailure  to  file  returns  on  time.  .1549,  1572,  3028a,  3034,  3051,  3260 
Compromises.  .1605,  3041,  3261 
Reasonable  cause  for  failure.  .1555,  1562,  3034 
Specific  penalty  will  not  be  asserted  in  certain  cases  i .1581,  3260 
When  tentative  return  has  been  filed.. 3630 
False  returns.  .1549,  1.572,  2357,  2358,  3035,  3051 
License  for  collecting  foreign  items:  failure  to  obtain.  .1391 

Payee  other  than  actual  owner  of  income, ^refusing  to  supply  name  and  address  of  actual 
owner. . 1572,  3062 

Specific  penalties  (fines  and  imprisonment)  . .1572,  3051 
Attach  to  the  person.  .1579 

Not  asserted  under  certain  circumstances.  .1581,  3260 
Suits  to  enjoin  collection  of.  .2589 
Taxpayer  planning  to  leave  jurisdiction.  .2425,  3043 
Tax  payments:  delay  in  making.  .1572,  2347,  2397,  3033,  3036 
When  claim  for  abatement  is  pending.  .2398,  3033,  3036 
Understatements  in  return.  .1399,  1538,  3030,  3035 

Due  to  negligence  on  part  of  taxpayer.  .2357,  3033,  3035 
Not  due  to  fault  of  taxpayer.  .2356 
Wilfully  on  part  of  taxpayer.  .1549,  1572,  2358,  3036 
Warrant  of  distraint:  $5  penalty  if  necessary  to  serve.  .2424,  3036 
Pennsylvania  ground  rents.. 2895 
Pennsylvania  type  of  partnership.  .1274,  3078 
Pension  funds.  .2009,  2890 
Pensions.  .939,  2008,  2842,  2890 

Foreign:  no  license  for  collecting.  .1388 
Per  diem  allowance  in  lieu  of  subsistence:  government  employees, »8T1 
Permanent  improvements.  .1025,  2967,  3223 

Under  lease  or  rental  contract.  ,1967,  2858,  2891 
“Person"  defined.  .762,  1686,  3073 
Personal  expenses. .1024,  1031,  2965 
Personal  service  corporations.  .1305,'1308,^2983,  3083 
Change  in  accounting  period  . .3230 
Consolidated  returns  notlrequired  . .8234 


IndcK  Page  17. 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Personal  service  corporations: — Concluded. 

Corporations  failing  to  distribute  profits.  .746,  2995 

Credit  for  income  and  profits  taxes  paid  to  other  jurisdictions . . 1063,  2986,  3008 
Defined ..  1308,  3083 

Dividend  distributions  made  by.  .772,  2103,  3094,  3095 
From  most  recently  accumulated  profits.  .803 
Dividends  received  by.  .1289,  1305,  2986 
Exempt  from  taxation.  .1305,  1753,  2983 
Exemption  claims  from  withholding  at  the  source.  .654,  3000 
Fiscal  year  ending  in  1918.  .2984 
Taxation  of  stockholders.  .2987 
Fiscal  year  ending  in  1919.  .2989 

Extension  of  time  for  filing  returns.  .3386,  3475 
Taxation  of  stockholders . . 2989 

Fiscal  year  with  different  rates  for  parts  thereof.  .1669,  1677,  2988,  2990,  3117 
Government  contracts.  .1312,  3084 

Income  of:  distributed  or  otherwise.  .1307,  2862d,  2983,  2985 
Information  at  the  source.  .3055a 
Liberty  bond  interest.  .985,  1289,  2874,  2986 
(See  “U.  S.  Bonds”  at  1,  Index  Page  25.) 

Partial  personal  service  corporations.  .2983 

Partnerships:  personal  service  corporations  treated  as,  generally.  .1306,  2983 
Returns  by.  .1398,  2983,  3227,  3230 

Extension  of  time  for  filing:  special  for  1918.  .3165,  3304 
Stockholders  of:  how  taxed.  .1305,  1307,  2985 
Credits  allowed . . 1289,  2986 

Parts  of  income  subject  to  rates  for  different  years.  .1678,  2987-2990,  3122 
Philippines:  income  derived  from.  .515,  516,  3071,  3072 
Philippines:  income  taxes  in.  .511,  1534,  3070 
In  relation  to  dividends.  .517,  3070 
Plantations  (See  “Farms  and  Farmers”  at  2,  Index  Page  9.) 

Political  subdivisions  of  State:  definition.  .970 
Porto  Rico:  income  derived  from.  .515,  516,  3071-3072 
Porto  Rico:  income  taxes  in.  .511,  1534,  3070 
In  relation  to  dividends.  .517,  3070 
- Possessions  of  United  States:  defined.. 3010 
• Citizens  of:  how  taxed.  .509,  3069,  3071 

Income  accruing  to.  .1004 

Porto  Rico  and  the  Philippines ..  511,  515,  516,  1534,  3070-3072 
Taxes  imposed  by  authority  of  are  deductible.  .1054,  2897 

Income  and  profits  taxes  to  be  credited.  .1060,  1061,  2334,  3008,  3226 
Postage  is  not  a tax.  .2897 

Poultry  farms  (See  “Farms  and  Farmers”  at  2.  Index  Page  9.) 

Power  of  attorney  does  not  create  fiduciary  relationship . .1172 
Preferred  stock:  interest  payments  on.  .3211 
Premium  on  bonds  sold  and  redeemed.  .2079,  3203a,  3210a 
Premiums  paid  on  insurance  for  employees.  .2842a 

Premiums  paid  on  life  insurance  of  officers  or  employees.  .1028,  2967a,  3225 
“Present  war”  defined.  .1008 

Termination  of,  for  purposes  of  Act.  .1009 
President  of  United  States:  salary  of.  .764 
Principal  place  of  business  of  a corporation.  .1532 
Prior  laws:  continuing  effect  of.  .2361 
Privilege  taxes  are  deductible.  .2047,  2898 
Professional  men:  expenses  of.  .1032,  2881a,  2965 
Profit  (See  “Gain  or  loss,  etc.,”  at  1,  Index  Page  11.) 

Promissory  notes  in  settlement  of  accounts . . 853 
Salary . . 2842b 

Property  requisitioned  for  war  or  other  uses  or  lost  or  destroyed  through  war  hazards  or  other 
casualties . . 1840, 2860 

Property  sold  for  stock  in  a corporation.  .3106a 

Public  service  corporations:  conso’.idated  returns.  . 3294,  3306,  3343 
Public  utility  income  from  accruing  to  State,  etc.  .1004 
Deductible  as  expense  to  public  utility.  .2023,  2875a 
Public  utility  intrusted  with  use  meiely  of  property  owned  by  State.  .1727 
Public  utility:  service  connections,  etc.  .2024 
Purchase  money  mortgage:  foreclosure  of.  .2908 
Quarters  as  part  of  salary . . 862 
Railroads: 

Consolidated  returns.  .3294,  3306 

Expenses  deductible  and  otherwise.  .2025 

How  taxed  when  under  Government  control.  .1684,  3184 

I.,essee  and  lessor . . 1718 

Ranches  (See  “Farms  and  Farmers”  at  2,  Index  Page  9.) 

Real  estate:  depreciation.  .2123,  2911 
Real  estate:  profit  or  loss  from  sale  of.  .1879,  2850 
“Cost”  of  the  real  estate,  .1880 
Subdivisions.  .1880,  2850 
Installment  plan  sales . . 1890,  2851 

Reasonable  cause  for  failure  to  file  returns  on  time.  .1555,  1562,  3034 

Rebate  payments  In  1919  on  1918  sales  on  1918  contracts.  .1120,  2216,  2963,  3364, 
3579 


Index  Page  18. 


n-10-19 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Receipt  of  income;  actual  vs.  constructive.  .857,  919,  2834,  2862c 
Decedent  prior  to  death  during  taxable  year.. 3 4 07 
Receipts  for  taxes.  .2465,  3044 

Simulation  of  receipts.  .3465 
Received  vs.  accrued.  .755,  768,  1923,  2834,  2893 

Change  from  cash  to  accrual  basis.. 1913,  3452,  3454 
Receiver  for  an  individual.  .1168,  1242,  3022 
Receiver  of  corporation  privileged  to  examine  its  return.  .3063 
Receivers  for  part  of  property  only . . 1433,  3022,  3228 
Receivers;  returns  by.. 1429,  3022,  32()5a,  3228,  3613,  3633 
For  partnerships.  .3018,  3022 

Reciprocal  credits  to  nonresident  aliens  of  foreign  countries.  .2972a,  3274 

Record  vs.  actual  owners  of  stock.  .3016 

Records  to  be  kept.  .593,  2835 

Recoveries  for  damages.  .1838 

Recoveries  of  bad  debts.  .879,  1805,  2862b 

Recovery  of  taxes  by  suit.  .2613,  2614 

Second  assessments.  .2498,  2590,  2593 
Redemption  of  bonds;  discount  and  premium.  .2077,  2079,  3203a,  3210a 
Redemption  of  stock  on  stipulated  premium  basis.  .2083 

Refund  of  taxes  or  penalties  erroneously  paid.. 2497,  2514,  2615,  3048,  3439 

1 Amounts  withheld  at  source.  .2318 
Discovered  on  examination  of  return.  .2488,  3045 
Filed  with  Commissioner  direct:  claims  may  be.. 3309 
Five-year  limitation  for  making  claim . . 2489 
Inventories  and  rebates  for  1918.  .1123,  2963e 
Rejected  claims;  reopening  of.  .2490 

Second  assessments.  .2498,  2590 

Burden  of  proof  under  statute  before  present  amendment.  .2593 
Stock  dividends  under  1913  Act.  .2492 
Stock  dividends  under  1916  and  1917  Acts.  .2496 
Refunds: 

Change  of  status:  nonresident  to  resident.  .3406,  3436,  3525 
Excess  amounts  withheld  at  source.. 73 3,  3004,  3283 

In  connection  with  deferred  collection  of  bond  interest.  .3431,  3551,  3569,  3576 
Taxes  other  than  income  and  profits  taxes  erroneously  paid  in  prior  years  2059 
Registered  interest  on  registered  bonds.  .645,  3001b,  3057 
Regulations:  commissioner  authorized  to  make.  .2591 
Effective  date . . 2592 

Policy  as  to  rulings  on  abstract  Questions.  .3538 
To  be  complied  with.  .1620,  3126 

Regulations  No.  45:  promulgation  and 'prior  regulations  revoked.  .3137,  3243 
Religions  organizations.  .1745,  3191 
Removal  of  buildings.  .2084,  2902 

Rent  paid  by  paying  dividends  and  interest.  .1716,  3205 

Rent  paid  by  paying  taxes  or  making  repairs.  .851,  2891 

Rent;  residential  property;  professional  men.  .1035,  1036 

Rentals:  as  an  expense. . 1022,  2016,  2878,  3209 

Rentals  on  foreign  property  owned  by  nonresident  alien.  .1048,  2891 

Rentals:  permanent  improvements  made  by  lessee.  .1968,  2858,  2891 

Rentals  received:  manner  of  reporting  on  annual  return.  .1148 

Reorganizations;  exchange  of  stock  or  securities.  .1910,  3107,  3432,  3578,  3627 
Repairs:  incidental.  .1966,  2880 
Tenants.  .851,  2891 

Repairs:  permanent  improvements.  .1025,  2967,  3223 

Replacement  fund:  special  on  account  of  compensation  for  property  requisitioned  for  war  or 
other  uses,  or  for  property  lost  or  destroyed  through  war  hazards  or  other 
casualties.  .1840,  2860 

Requisitioned  property:  compensation  for.  .1840,  2860 
Reserves:! 

Bad  debts,  shrinkage  in  values,  contemplated  losses,  etc..  .1932,  2101 
Depletion;  dividends  from.  .830,  3101 
Depreciation . . 2152 

Diversion  of  fund.  .3159 
Dividends. .3101 
Expenses,  etc.:  accruals.  .1928 
Income  and  excess  profits  taxes.  .3095 
Insurance  on  own  property.  ,2018 
Retirement  of  bonds,  .2162,  3218 
Trading  stamps.  .2021,  2875e 

Residence  defined  in  connection  with  aliens.. 489,  493,  2973,  2997,  3147,  3394,  3398, 
3436,  3492,  3525 

Residence;  loss  by  sale  of  taxpayer’s  own.  .2901 
Residents:  tax  is  on  income  from  all  sources.  .2827 
Retired  pay  of  army  and  navy  officers.  .878,  2842 
Retired  pay  of  U.  S.  judges.  .878,  2842 
Returns. . 1434,  8013,  3227 

2 Accounting  methods. . 1939,  2835,  3450 

Change  of.. 1933,  3452,  3454 
Accounting  period  changed.  .758,  1399,  1479,  2840,  3024,  3232 
Accounting  period;  returns  to  conform  with.  .1482,  2839,  3232 
Affidavit.  .1451,  3017 
Agents  may  make.  .1158,  3013 


Index  Page  19. 


CONSULT  _THE_P1NK_SHEET. 

GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Returns : — Continued. 

Amended  returns.  .1938,  2059,  2150  (see  2916),  2834,  2875e,  3256,  3391,  3453, 

3455 

Not  necessary  in  certain  cases  where  additional  tax  liability  has  been  revealed  1545 
Assistance  from  collector  in  preparing.  .1497 
Collector  may  make  return.  .1549,  3032,  3034 

Tax  may  not  be  paid  in  installments  in  such  case.  .2359,  3032 
Commissioner  may  make  return.  .1549,  3032,  3034 

Tax  not  to  be  paid  in  installments  in  such  case.  .2359,  3032 
Commissioner  prescribes,  and  may  call  for  a return  from  any  person  1620,  1630 
Consolidated  returns  by  corporations. . 1405,  3234,  3239,  3315,  3570 

Different  fiscal  year  of  affiliated  corporations.  .1427,  3240,  3257.  3343 
Public  service  corporations. . 3294,  3306,  3343 
Contents  of,  in  case^of  corporationsjparticularly . .1443 
Corporations.  .1398,  1434,  3227 

Books  kept  abroad. . 1533,  3027,  3312,  3336 
Consolidated  returns.  .1405,  3234,  3239,  3315,  3570 
Public  service  corporations.  .3294,  3306,  3343 
Extension  of  time  for  filing  1918.  .3138,  3158,  3165,  3241  3300,  3308 
Final  returns.  .1403,  1709 
Undisturbed  profits.. 749,  2995,  3332 
Correction  of  returns  at  suggestion  of  collector.  .1540 
Reasonable  time  to  be  allowed . . 1542 
Death  during  taxable  year.. 1140,  1180,  2971a,  3019,  3407 
Disposition  of  returns  filed.  .1634 
Enemies  and  allies  of  enemies.  .1514,53028 
Extension  of  time  by  Collector.  .1501,  3026,  3241 

Extension  of  time  by  Commissioner.  .1507,  3026a.  3312,  3336 

Special  for  1918  for  complete  returns  generally.  .3138,  3158,  3241,  3300,  3308 
Special  for  1918:  Alaska.  .3272 
Special  for  1918:  Hawaii.  .3146 

Special  for  1918:  corporations  with  fiscal  years  ending  in  [1918  with  unexpired  prior 
extensions.  .3165,  3300,  3305,  3308 

Special  for  1918:  Information  returns,  including  partnerships  on  calendar  year  basis 
and  fiduciaries.  .3165,  3304 

Special  for  1918:  partnerships  with  fiscal  years  ending  in  1918  with  unexpired  prior 
extensions.  .3167,  3254,  3300,  3308 

Special  for  1919:  fiscal  year  corporations  and  partnerships.  .3329,  3886.  3475 

Failure  to  file  on  time.  .1549,  1572,  3028a,  3034  3051,  3260 
All  of  tax  due  on  notice  and  demand . . 1549,  2359,  3032 
Compromises.  .1605,  3041,  3261 
Due  to  reasonable  cause.  .1555,  1562,  3034 

Specific  penalty  will  not  be  asserted  in  certain  cases.  .1581,  3260 
When  tentative  return  has  been  filed,. 3630 

False  returns.  ,1549,  1572,  2358,  3030,  3035,''3051 

No  time  limitation  on  collection  of  tax  in  such  cases.  .2360,  3038 
What  constitutes  a false  return.  .1571 
Fiduciaries.  .1175,  3019 

Extension  of  time  for  filing  1918  returns.  .3165,  3304 
Final  returns.  .1225,  3025a 
Final  returns: 

Corporations.  .1403,  1709 
Fiduciaries.  .1225,  3025a 

“First  return”  on  fiscal  year  basis . . 1482,  2839,  3232 

Fiscal  year  accounting  period;  return  must  conform  to.  .1482,  2839,  3232 
Fiscal  year  ending  in  1918:  supplemental  under  1918  Act.  .3180a,  3246 
Foreign  corporations.  .2312,  3231 
Forms.  .1434,  3013 

Failure  to  receive  from  collectors . . 1437 
(For  list  of  forms  see  Supplementary  Page  2.) 

Husband  and  wife.  .1143,  1150,  3013 
Individuals.  .1142,  1434,  3013 

List  of  those  making  returns  to  be  posted . .1641 
Information  at  the  source.  .1314,  3054 
Brokers.  .1396,  3053 

Corporate  obligation  interest.  .1350,  3057 
Dividends..  1393,  3052 

Extension  for  filing  1918  returns.  .3165,  3304 
Fiduciaries.  .1348,  3019,  S055a 
Foreign  items.  .1352,  3061 
Miscellaneous  income.  .1314,  3054,  3408 
Partnerships . . 1314,  3055a 
Personal  ser\ice  corporations.  .8055a 
Inspection  of  returns.  .1636,  1642,  8063 
Insurance  companies.  .2275,  3229 
Last  due  date.  .1475,  3028a 
Lists  of  individuals  making,  to  be  posted . .1641 
Mailing  in  time  or  too  late.  .1477 
Minors..  1142,  1158,  8014 

No  taxable  Income;  return  advisable  even  then  in  certain  cases.. 3827 


Index  Page  20, 


11-10-19 


CONSULT  THE  PINK  SHEET, 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Betnrns : — Concluded. 

Nonresident  aliens:  by.. 538,  2973.  3015,  3258,  3286 
Extension  of  time.. 1510,  3027,  3168,  3336 
Nonresident  .aliens:  for.. 543,  591,  3015,  3286 
Extension  of  time.. 1510,  3027,  3168,  3336 
Notice  of  failure  to  file . . 719,  1474 
Partnerships.  .1284,  1298,  3018 

Extension  of  time  for  filing  1918  returns.  3165,  3167,  3254,  3304 
Personal  service  corporations. , 1398,  2983,  3227  3230,  3304 
Profits  and  losses.  .1149 
Public  records.  .1636,  3063 

Receivers,  trustees  In  bankruptcy,  and  assignees ..  1429,  3022,  3228,  3613,  3633 

Rentals  received ..  1 1 4 8 

Secrecy  of.. 1637.  2645.  3063,  3066.  3508 

Soldiers  and  sailors. . 1512.  1529,  3027.  3168,  3336 

State  ofiRcers  may  inspect.  .1638,  1658,  3064 

Stockholders  may  inspect  return  of  corporation.  .1639,  1664,  3065 
Supplementary  statements  on  returns.  .1447,  3017a 
Tax-free  covenant  bond  interest.  .1147 
Taxable  years:  fiscal  or  calendar.  .765,  2833,  2839 
Corporations . . 1787 
Estates  and  trusts.  .1247 
Fiduciaries.  .1247 
Individuals.  .756,  2833,  2839 
Nonresident  aliens.  .502 
Partnerships . . 1295 
Personal  service  corporations.  .3230 
Tentative  returns.  .1439,  3026,  3017a 
Special  for  1918.  .3138,  3158,  3241 
Penalty  for  failure  to  file  final  return.. 3 630 
Special  for  1919:  fiscal  year  corporations.  .3329 
Understatements;  increases  by  collector.  .1399,  1538,  3030,  3036 
Appeal  from  collector’s  decision.  .1639,  3030 
Undistributed  profits  tax:  corporations  with  fiscal  years  ending  In  1918.. 3332 
United  States  bonds  967,  992,  3013 
Verification  of  correctness  of  any  return.  .1631 
Jurisdiction  of  district  courts.  .1632 
When  filed . . 1471,  3025,  3241 
Where  filed.  .1526,  3029,  3241 
Withholding  at  the  source.  .698,  8002 
Bond  interest.  .702,  3002 
Miscellaneous  income.  .700,  3002 
“Revenue  Act  of  1916”;  meaning  of.  .480,  481 
Porto  Rico  and  the  Philippines.  .519 
“Revenue  Act  of  1917”;  meaning  of.  .482,  483 
“Revenue  Act  of  1918”:  meaning  of.  .484 
Rights:  proceeds  from  sale  of.  .1828,  2846  , 

Royalties:  889,  1816,  1817,  2858 

Received  by  nonresident  aliens.  .504,  571 
Rulings:  policy  as  to  the  making  of  rulings  on  abstract  questions.  .3588 

Sailors: 

Alien.. 3343,  3609 

Allotments  under  War  Risk  Insurance . . 2864 
Commutation  of  quarters . . 863 

Compensation  from  Government  during  war.  .1006,  2876c 

Extension  of  time  for  filing  returns  if  abroad.  .1512,  3027,  3168,  3336 
Salaries  continued  by  employers,  while  in  the  service.  .2007,  2890 
Where  returns  are  to  be  filed . . 1529 
Salaries  paid.  .1021,  1978,  2882 

After  service  is  rendered.  .882,  1988,  2842,  2884 

Aliens:  resident  and  nonresident.  .491,  493,  2973,  2997,  3147,  3394,  3398,  3438, 
3492,  3525 

Bonus,  special  compensation,  etc.  .869,  1979,  2889 
Commissions:  salary. plus.  .884 
Deductible  item  of  expense.  .1021,  1978,  2882 
Exempt  organizations;  paid  by.  .861 

Government  employees;  quarters,  mileage,  light,  heat,  etc.. 863,  2842 
Illegally  paid  and  received.  .2887 
Medium;  paid  otherwise  than  in  money.  .849,  2842a 
Paid  in  stock.  .2003,  2842a 
Paid  in  notes.  .2842b 
Minors:  by  parents.  .1037 

Nonresident  aliens:  services  rendered  abroad.  .663,  1339,  1346,  2877 
Percentage  of  net  profits.  .881, |1994, .2842,  2884 
Seamen:  alien.. 3433.  3609 
Self:  salary  paid  to.  .1039 

Smith-Lever  Act:  exemption  of  salaries.  .1015,  2875b 
Soldiers  and  sailors:  while  in  service,  by  employees.  .2007,  2890 
pfi,  Soldiers  and  sailors:  by  Government.  .1006,  2875c 

State  and  municipal  employees.  .1013.  2875b,  3313,  3334 
Stockholdings:  salaries  based  on.  .1983,  1998,  2883,  2886 
Traveling  men . . 2966 


Index  Page  21 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Salaries  paid: — Concluded. 

Widow  of  former  employee:  for  short  period,  ,962,  2010,  2890 
Withholding  based  on  calendar  year.  .596 

(See  “Withholding  at  the  Source”  at  2,  Index  Page  25.)  , 

“Same  interest.^”:  meaning  of  term  in  connection  with  affiliated  corporations.  .3235,  3295 
Sample  room : traveling  men . . 2966 
Scientific  organizations.  .1745,  3191 
Scrip.  .618 

Dividend  paid  in.  .789 
Interest  paid  in . . 928 
Seamen,  alien., 3433,  3609 

Second  assessments:  abatement  and  refund.  .2498,  2590 

Burden  of  proof  under  statute  prior  to  present  amendment .. 2593 
Secrecy  of  returns. . 1637.  2645,  3063,  3066,  3508 
Returns  of  amounts  withheld  at  source.. 2649 
Secret  processes  and  formulae:  depreciation  of.. 29 12,  3594 
Secret  societies:  fraternal.  .1742 
Secretary  defined . .751 

Secured  debts:  amounts  paid  to  states.  .2897 
Securities  as  medium  when  making  deductible  gifts.. 3 550 
^ Securities:  shrinkage  in  value  of.  ,1070,  1074,  2067,  2123,  2904 
1 Charging  off  worthless  securities.  .2909 
Separation  agreement.  .1012,  2864a,  2965 
Ships:  income  from  foreign  owned.  .2877 

Ships  used  for  war  purposes:  amortization  fund ..  1093,  2164,  2922 
Shipwreck  losses . .1086,  2901 

Sickness  a cause  for  securing  extension  of  time  for  filing  return.  .1501,  3026 
Single  persons: 

Returns  by.  .1142,  3013 
Specific  exemption  allowed  to  . .1128,  3245 
Sinking  fund.  .2162,  3218 
Investments . . 1814 

Smith-Lever  Act:  exemption  of  salaries.  .1015,  2875b 

Societies  for  the  prevention  of  cruelty  to  animals  or  children . . 1745 

Soldiers: 

Allotments  under  War  Risk  Insurance.  .2864 
Commutation  of  quarters,  etc.,  .863 

Compensation  from  Government  during  war.  .1006,  2875c 
Expenses  of.  .2965 

Extension  of  time  for  filing  returns  if  abroad.  .1512,  3027,  3168,  3336 
Salaries  continued  by  employers,  while  in  the  service.  .2007,  2890 
Where  returns  are  to  be  filed . . 1529 
“Source"  defined,  .589 

Source  within  the  United  States:  meaning  of,  in  connection  with  income  of  nonresident  aliens 
and  foreign  corporations.  .2288 
Specific  credit  of  $2,000:  corporations,  .2330,  3224 

Apportioning  when  accounting  period  is  changed  . .1485.  3232 
Specific  exemption  (See  “Exemption.' personal  specific”  at  1,  Index  Page  9.) 

Specific  penalties.  .1572,  3051 
Attach  to  the  person . . 1579 

Not  asserted  under  certain  circumstances.  .1581,  3260 
Spending  or  treating  money.  .2011 
Stamp  taxes  are  deductible . . 2898 
State,  etc.:  contract  work  done  for.  .1014,  2844 
State:  income  accruing  to.  .1005,  2875a 
State  obligations.  .963,  968,  2865 

Interest  on  paid  out  as  dividends.  .788 
Political  subdivisions  defined.  .970 
Return  of . .967 

State  officers  may  inspect  returns.  .1638,  1658,  3064 
State  taxes  are  deductible.  .1055,  2897 
State  taxes:  covenant  in  bonds  to  pay.  .3212 

States,  cities,  etc.:  salaries  paid  by.. 1013,  2875b,  3313,  3334 
Statistics:  annual  report  by  Commissioner.  .1661,  3067 
Steamship  companies:  foreign.  .2294 

Stock  acquired  as  compensation  for  services  rendered.  .2842a 

Stock  acquired  as  gift:  sale  of.  .934 

Stock;  common  as  bonus:  sale  of.  .933,  2846 

Stock  contingently  credited  to  employees.  .2862c 

Stock  dividends.  .811,  3097 

Allocating  to  prior  years.  .831,  3098,  3122-3123 
Dividends  of  foreign  corporations . . 844 
Imposing  the  tax  in  such  cases.  .1678,  3122-3123 
Capitalization  of  good  will,  increase  in  value  of  assets,  etc.  .800,  826,  3097 
Case  testing  constitutionality  under  Act  of  1916.. 815,  3333 
Claims  for  refund:  Act  of  Oct.  3,  1913  . .2492 
Claims  for  refund:  Acts  of  1916  and  1917.  .2496 

Determination  of  profit  or  loss  on  disposition  of  stock  received . .818,  3099 
Macomber  vs.  Eisner.. 815,  3333 
Towne  vs.  Eisner  decision.  .2738 
Effect  of  on  present  Act.  .812 
Refund  claims.  .2492 

Stuck  farms  (See  “Farms  and  Farmers”  at  2.  Index  Page  9.) 

Stock  redeemed  on  stipulated  premium  basis.  .2083 


Index  Page  22. 


I 


CONSULT  THE  PINK  SHEET. 

GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Stock  received  in  exchange  for  property  (sale  to  corporation).  . 3106a,  3577,  3627 
Stock  received  in  connection  with 'merger,  consolidation  or  reorganization.  .1910  3107 

3432.  3578,  3627 

Stock:  record  vs.  actual  owners  of.  .3016 
Stock:  sale  of  by  nonresident  aliens.  .520 

Stock:  sold  from  different  lots:  profit  or  loss.  .827,  1875,  2846 

Stock:  taxes  paid  thereon  for  stockholders  by  corporations.  .796,  2050,  3213 

Stock  trust  certificates:  income  from  . .1837 

Stock:  value  of  as  of  March  1,  1913.  includes  good  will  of  corporation.  . 3506 
Stock:  worthless .. 2904 

Stocks  and  bonds  (See  “Securities”  at  1,  Index  Page  22.) 

Stockholders  of  corporation  may  inspect  its  return.  .1639,  1654,  3065 
.‘Storm  losses.  .1086,  2901 

Subcontracts  in  connection  with  Government  contracts.  . 1313,  3080a 
Subsidiaries  (See  “Affiliated  Corporations”  at  3,  Index  Page  1.) 

Subsidiaries:  as  agents  or  branches  merely.  .1710 

Subsidiaries:  earnings  of,  taken  up  on  books  of  parent  month  by  month.  .2104 
“Substantially  all  the  stock”:  affiliated  corporations.  .3235 
Substitute  certificates.  .629,  3001 
Foreign  items.  .3061 

How  entered  on  monthly  list  returns.  .718,  3002 
Suits  for  collection  of  taxes:  5-year  limitation  . .2360,  3038 
Prior  3-year  limitation , .2364 

Suits  to  recover  taxes  under  second  assessment.  .2498,  2590 

Burden  of  proof  under  Sec.  3225  prior  to  present  amendment . . 2593 
Suits  to  recover  taxes  wrongfully  collected . .2613,  2614,  3049 
Second  assessments.  .2498,  2590,  2593 
Suits  to  restrain  assessment  and  collection  of  taxes.  .2579,  3049 
Suits  to  restrain  assessment  and  collection  of  penalties.  .2589,  3049 
Sundays  in  connection  with  last  due  date.  .1476,  3028a 
Supplementary  statements  on  returns.  .1447,  30i7a 
Supreme  Court  cases.  .2668 
Surtax.  .736,  2829 

Actual  or  record  owner  of  stock:  dividends.  .3016 
Beneficiaries:  income  received  through  fiduciaries.  .741 
Computation  of  tax  on  specified  amounts.  .2830 

Corporations  availed  of  to  prevent  imposition  of  surtax  on  stockholders.  .746,  2996 

Corporations  are  not  subject  to  surtax.  .742 

Deductions  as  offset  against  dividends  received.  .3328 

Maximum  limitation:  mines  or  wells.  .738,  2831 

Nonresident  aliens.  .500,  591,  2829. . 

Stock  actually  owned  by  nonresident  alien  but  otherwise  recorded . 3016 
Rates  for  1913,  1914,  and  1915.  .841 
Rates  for  1916  and  1917.  .842 
Separate  incomes  of  husband  and  wife.  .739,  2829 
Specific  exemption:  relation  to  surtax.  .744,  1139,  2829 

Tax  Board:  Advisory ..  2652,  3124 
Discontinued.  .3.587 
Membership.  .3249 
Tax-free  covenant  obligations: 

Bonds  without  covenant  may  not  bo  Iroalcd  by  debtor  as  tax-free  covenant  bonds.. 
3471 

Covenant  guaranteeing  1 % tax  only.  .611 
Covenant  to  pay  State  taxes.  .3212 

Debtor  not  obligated  to  pav  interest  free  of  tax  (State  Court  case) . .622 
Exemption  claims.. 638.  641.  655.  2997.  3060.  3566 
Foreign  corporation  bonds.. 655.  3060 

Interest  received  by  bond  holder:  manner  of  returning.  .1147,  1824 
One  form  of  covenant  which  does  not  necessitate  withholding.  .621 
Tax  paid  additional  income  to  creditor ..  2841,  3567 
Taxes  withheld  are  not  deductible  by  debtor.  .2061,  3212 
Trust  deeds  containing  covenants:  bonds  issued  under.  .2996 
Withholding  the  tax.. 604.  655,  2996,  3060.  3225.  3320 
Exemption  claims  by  nonresident  aliens.. 6 11,  2997,  3566 
Tax  paid  additional  income  to  creditor.  . 2841 , 3567 
Tax-free  obligation.s:  interest  paid  on  indebtedness  to  purchase  or  carry.  .1050,  2028,  2895 
Tax  liens:  enforcement  of.  .3040 

Tax:  manner  of  collecting  to  be  determined  by  the  Commissioner.  .592 
Tax:  payment  of.  .2339,  3031 

All  of  balance  due  on  demand  if 'any  installment  not  paid  when  due.  .2347,  3031 
Penalty.. 2397,  3036 

All  of  tax  may  be  paid  on  or  before  due  date  for  filing  return  . .2348,  3031 
Assessment  of  the  tax  In  the  first  instance.  . 2423,  3036,  3042 
Subsequent  adjustment .. 23 4 9,  3036-3037,  3042 
Commissioner  making  return.  .1549,  2359,  3032,  3034 
Distraint:  collection  by . .3039 

Estimating  the  tax  for  the  purposes  of  the  first  installment  covering  1918  taxes . .3138,  3158 
Excess  amounts  paid:  credit  or  refund.  .2488,  3045 
Claim  to  be  made  within  5 years.  .2489 

Extension  of  time  for  filing  return;  bearing  on  first  in.stallment . . 2345,  3031.  3336 
Fiscal  year  ending  in  1918:  additional  tax  liability  under  1918  Act.  .3180a,  3246 
Fractional  part  of  cent.  .2426,  3127 


Index  Page  23. 


CONSULT  THE  PINK  SHEET.  kii-  Vf 

GENERAL  INDEX.  ' 

The  references  are  to  paragraph  numbers.  1" 


Tax;  payment  of: — Concluded. 

Installments  due  when.  .2840,  3031 
Second  installment:  1919. .3331 

Interest  runs  on  deferred  payments  due  to  extension  of  time  for  filing  return  at  request  of 
taxpayer. .2346,  3033 
Liens:  enforcement  of . .3040 

Notice  and  demand  for  first  installment.  .2423,  3036,  3042 

For  the  other  installments. . 2399,  3036-3037,  3042.  3331 
Penalty  for  failure  to  pay  when  due.  .1572,  2347,  2397,  3033,  3036,  3051 
When  claim  for  abatement  is  pending.  .2398,  3033,  3036 
Receipts  for  taxes.  .2465,  3044 

Amounts  withheld  at  source.  .2471 
Simulation  of  tax  receipts. . 3465 

Recomputation  of  installments  after  examination  of  the  return.  .2349,  8031,  3042 
Second  installment:  1919.. 3331 
Suits  to  collect  the  tax.  .2360,  3038 
Suita  to  restrain  collection.  .2579 

Taxpayer  planning  to  leave  jurisdiction.  .2425,  3043 

Treasury  certificates  of  indebtedness. . 2428,  3128,  3371.  3518,  3565 

Uncertified  checks. . 2428,  3130,  3380 

Warrant  of  distraint:  $5  penalty  if  nece.ssary  to  serve.  .2424,  3036 
Withholding  at  the  source.. 720,  3002 
Tax  rates:  corporations. . 1681.  3182 
Tax  rates;  individuals; 

Normal  tax.  .471,  497,  2826 

Lower  rate  on  first  $4,000  applies  to  each  separate  individual.  .2826 
Surtax.. 600,  736,  2830 

Proceeds  of  sale  of  mine  or  well . .738,  2831 
"Taxable  year"  defined.  .477,  1663,  2839,  3093 
First  taxable  year.  .479,  1665,  2839 
"Taxpayer”;  term  defined.. 761 
Taxes:  assessment  of  within  five  years.  .2360,  3042 
Taxes  deductible:.  .1052,  2036.  2897,  3209,  3428.  3631 

Taxes  paid  by  bank  or  other  corporation  for  stockholders. . 796,  2050.  3213.  3692 
Taxes  paid  by  tenants  in  lieu  of  rent.. 851,  1976 

Taxes  paid  by  debtor  for  creditor:  tax-free  covenant  bonds.. 2841,  3567 
Taxes  paid  by  vendee  for  vendor.. 332 2 

Taxes  (other  than  income  and  profits  taxes)  erroneously  paid  in  one  year  refunded  in  anot  he 
year;  amended  returns.  .2059 

Taxes;  redetermination  of,  because  of  adjustment  of  amortization  fund.  .1095,  2927 
Taxes;  redetermination  of,  because  of  1918  inventory  depreciation  or  because  of  1919  rebate 
payments  on  1918  sales  on  1918  contracts ..  1123,  2963 
Taxes  withheld  at  source:  payment  of.  .720,  3002 

To  be  credited  against  amount  of  tax  otherwise  due  from  creditor.  .731,  2322,  2338 
Taxes  withheld  on  tax-free  covenant  obligation  interest  not  deductible  by  the  debtor.  .2061 
Tenants.  .851,  1716,  1836,.  1967 
Tentative  returns.  .1439,  3017a,  3026 
For  1918. .3138,  3158,  3241 
For  1919:  fiscal  year  corporations .. 3329 
Penalty  for  failure  to  file  final  return.. 3630 
Timber:  depletion  of  (See  "Depletion”  at  1,  Index  Page  6.) 

Timber  and  lumber:  profit  or  loss  from  sale  of.  .1899 
Tips  as  taxable  income . . 2842 

Title  to  property:  defending  or  perfecting.  .1954,  2967 
Trade  marks:  depreciation. . 2912,  3594 

Distillers  and  liquor  dealers:  obsolescence.  .3554.  3561 
Trading  as  a principal  in  relation  to  personal  service  corporations.  .1311,  3084 
Trading  stamps:  redemption  of.  .2021,  2875e 

Transfer  (inheritance)  tax  (New  York  State)  not  deductible.  .1256,  2900 
Travelling  expenses.  .2966 

Treasury  certificates  of  indebtedness .. 2 4 2 8 . 3128,  3371.  3518,  3565 
Interest  on:  exemption  of.  .975,  2869,  3169 
Treasury  derisions:  effective  date  of.  .2592 
Treasury  stock.. 1832,  1833,  3202 

Truck  farms  (See  "Farms  and  Farmers”  at  2.  Index  Page  9.) 

Trust;  deed  to  be  irrevocable.  .1245,  2991 

Trust  deeds  containing  tax-free  covenants;  bonds  issued  under.  .2996 
Trustees  in  bankruptcy  to  make  returns.  .1429,  3022.  3228,  3613.  3633 
Trustees' services;  compensation  for ..  885 
Trusts  (See  “Estates  and  Trusts”  at  1,  Index  Page  8.) 

Trusts:  business:  as  corporations.  .1687,  3076 

Uncertified  checks  in  payment  of  taxes.. 2428,  3130,  3380 
Understatements  in  returns: 

Due  to  negligence  on  part  of  taxpayer.  ,2357  .3033,  3035 
Increases  by  the  collector.  .1399,  1538,  3030T;"*t^ 

Appeal  from  collector’s  decision.  .1539,  3030 
Not  due  to  fault  of  taxpayer.  .2356 
Wilfully  on  part  of  taxpayer.  .1549,  1572,  2358.  3035 
Undistributed  distributable  interests: 

Of  estates  or  trusts . . 1207,  2994 
Of  partnerships . . 1280,  2978-2982 
Of  personal  service  corporations.  .1307,  2983-29901 
Undistributed  profits  of  certain  corporations . .746,|2995,  3292 


Index  Page'24. 


11-10-19 


CONSULT  THE  PINK  SHEET. 


h 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Umdlstribated  profits  tax;  colorations  with  fiscal  years  ending  In  1918. .3332 
Undisfibuted  profits  tax  not  deductible.  .3285 
Unearned  increment  in  relation  to  depreciation.  .2149 
Unenforceable  government  contracts  subsequently  ratified.  .3080a 
1 United  States  bonds.  .965,  2868 

Credit  of  interest  for  income  tax  by  corporations.  .2326,  3224 
Credit  of  interest  for  normal  tax  by  individuals.  .1127,  2968 

Partnerships  and  personal  service  corporations.  .1289,  2978b,  2986 
Information  at  source  does  not  apply  to  interest  payments.  .1376 
Liberty  bonds.. 975.  2869.  3169.  3277.  3278.  3284.  3325 
Advertising  sale  of:  expense  of.  .3210 

Beneficially  owned  by  nonresident  aliens  or  foreign  corporations.  .991,  2877a,  3180 
Corporations.  .989 
Dividends  paid  in.  .774 
Cash  value  of . .786 
Income  paid  in.  .848 
Installment  plan  purchases  . .990 
Partnerships.  .985,  1289,  2874,  2978b 
Personal  service  corporations.  .985,  1289,  2874,  2986 
Tabulation  of  exemption  status  of  Liberty  bonds  and  notes.. 3 325 
Trusts.  .983,  2994a 

Ownership  certificates  not  required.  .993,  1376 

Penal  bonds:  U.  S.  bonds  as  security  for.. 2220.  3583 

Return  of.  .967,  992 

Victory  Liberty  Loan  notes. . 2872a,  3169,  3297,  3311,  3325,  3389,  3429 
Withholding  at  source  on  interest:  none.  .619 
“United  States”  defined.. 2281 
United  States  employees:  salaries.  .764 
Information  at  the  source.  .1320 

United  States  possessions  (See  “Possessions”  at  1.  Index  Page  18.) 

United  States  taxes  deductible  or  otherwise.  .1053,  2037,  2897,  3209 
Validating  clause.  .2667 

Verification  by  oath  or  affirmation  of  returns.  .1451,  3017 
Verification  of  correctness  of  return  by  Commissioner.  .1631 
Vessels  used  for  war  purposes:  amortization  fund.  .1093,  2164,  2922 
Vessels:  income  from  foreign  owned.  .2877 
Victory  Liberty  Loan  Act.  .2872a,  3169 

Exempt  status  of  interest  on  notes.. 3297,  3311,  3325,  3389,  3429 
Violations  of  law;  collector  to  report.  .2651 
Virginia  partnership  associations.  .3078 
Voluntary  offerings  to  clergymen,  etc.  .886,  2842 
Waiving  3-year  limitation  on  assessments  under  prior  laws.  .2390 
War  chests:  contributions  to.  .2962 

W’ar  equipment  investments:  amortization  fund.. 1093,  2164,  2922,  3390,  3391 
War  Finance  Corporation  bonds:  interest  on.  .966,  975,  2968 

Beneficially  owned  by  nonresident  alien  individuals  and  corporations.  .991,  2877a,  3180 
Credit  for  income  tax  by  corporations.  .2326,  3224 
Credit  for  normal  tax  by  individuals.  .1127,  2968 

Partnerships  and  personal  service  corporations . . 1289,  2978,  2990 
Return  of.  .967,  3013a 

War  hazards;  property  lost  or  destroyed:  compensation  for.  .1840,  2860 
War-profits  taxes  (See  “Excess  Profits  Taxes”  at  3,  Index  Page  8.) 

War  Risk  Insurance:  allotments,  allowances,  etc..  .2864 

War  savings  stamps:  expense  of  advertising  sale  of.  .3210 

War;  termination  of  to  be  fixed  by  President’s  proclamation.  .1009 

Warrant  of  distraint:  $5  penalty  for  causing  to  be  issued . .2424,  3036 

Warrants:  city,  town,  etc..  .1803,  2844 

Wear  and  tear  (See  “Depreciation”  at  2,  Index  Page  6.) 

Wells;  depletion  of  (See  "Depletion”  at  1,  Index  Page  6.) 

Wells,  sale  of:  maximum  surtax.  .738,  2831 
Widow;  statutory  allowance  paid  out  of  corpus.  .2991a 
Wife,  American:  of  nonresident  alien.  .492 
Wife;  separate  estate.  .1151 

(See  “Husband  and  Wife”  at  2,  Index  Page  12.) 

“Withholding  agent”  defined  . .584,  3093 
Indemnifying  of , .729 
Liability  of . .728 

— Withholding  at  the  source.. 5 53,  2996 
* 1918  specifically.. 3003-3004,  3244,  3394 

1919  specifically.. 3003,  3244,  3394 
Abatement  claims.  .2519 
Accounts  current;  interest  on.. 331 4 

Bond  interest  (See  “Corporate  obligation  interest”  below.) 

Bank  deposits:  interest  on.. 598,  3314,  3342,  3607 

Bonds:  advance  retirement  of  within  an  interest  period.  ,682 

Bonds,  foreign  owned:  coupons  belonging  to  domestic  corporation. . 687,  3496 

Bonds,  foreign  owned;  usufruct  belonging  to  citizen  or  resident.  .685 

Bonds:  purchase  and  sale  of  between  interest  dates.  .684 

Bonds  purchased  by  trustee  under  mortgage  deed  of  trust  but  not  retired.  .688 
Citizens  and  residents:  no  withholding  except  on  tax-free  covenant  bonds . .603,  2996, 3060 
Collected  and  paid  in  year  subsequent  to  that  in  which  it  became  due  and  pay- 
Corporate  obligation  interest. . 601.  2996,  3060,  3318 
able.. 3431,  3547,  3551,  3569,  3676 
Defined . .61.5 


Index  Page  25. 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Withholdin«r  at  the  source: — Concluded. 

Credit  for  amount  of  tax  withheld.  .731,  2322,  2338,  3007a 
Creditor  paying  the  tax  himself . . 734 
Waiving  of  penalties.  .735,  3007a 
Debtor  only  withholds  the  tax . . 628 
Dividends:  no  withholding.  .560,  2997 

Releasing  amounts  withheld  in  1918.  .3004,  3283 
Exchange  of  interest  coupons  for  funding  bonds.  .681 
Exemption  claims.  .650,  654,  2997,  3060 

Citizens  and  residents.  .638,  654,  2997,  3000,  3060 
Domestic  corporations.  .654,  3000 
Fiduciaries.  .680,  3000 

More  than  one  estate  or  trust.  .661,  3006 

Foreign  corporations  engaged  in  business  in  the  United  States . .576,  654,  3000,  822i 
Nonresident  aliens.. 541.  641.  2977.  2997.  3275,  3394.  3398.  34.36.  3492. 
Partnerships  (other  than  tax-free  covenant  interest) . .654,  3000 
Prorating  between  husband  and  wife . . 673 
Fixed  or  determinable  annual  or  periodical  income  defined.  .2996a 
Foreign  corporations. . 572,  2996.  3225,  3342.  3507 
Engaged  in  business  in  U.  S. . .576,  654,  2997,  3225 
Tax-free  covenant  obligation  interest. . 610,  2996,  3320 
Foreign  government  ..3474 

Income  on  which  tax  is  withheld  to  be  included  in  return . . 730,  3007  i 
Indemnifying  of  wdthholding  agents.  .729 
Interest.. 553.  2996.  3314,  3318.  3342 

Corporate  obligation  interest.  .601.  2996,  3060 

Collected  and  paid  in  year  subsequent  to  that  in  which  It  faecame  due  a«d 
payable.. 3 431,  3547.  3551,  3569,  3576 
Liability  of  withholding  agents  . .728 
Miscellaneous  income:  withholding  on . . 553,  2996 
Defined . . 594 

Nonresident  aliens.. 553.  2976.  3394.  3398,  3436 

All  aliens  are  presumed  to  be  nonresident  aliens.  .2976.  2997.  3152.  3394.  3898, 
3436.  3492,  3525 
Seamen.  .3433,  3609 
Notes  in  lieu  of  cash . . 597 

Owner  not  known.. 692,  612.  651.  2996.  3001a.  3321,  3303.  3591 
Ownership  certificates.  .643.  650,  2998,  3060,  3293,  3338,  3470 

No  ownership  certificate  accompanying  coupons.  .692.  612.  651.  2996.  3Wla, 
3321.  3383.  3591 

(^ee  “Ownership  certificates”  at  1,  Index  Page  16.) 

Partnerships:  withholding  against.  .609,  2996 
Paying  agents:  appointment  of.  .624 
Payment  of  taxes  withheld  . .720,  3002 
Receipts  for . . 2471 
Refund  claims.  .2518 

Refund  of  excess  amounts  writhheld.  .733,  3004,  3283 

In  connection  with  deferred  collection  of  interest  on  bonds.. 3431,  3651.  3569, 
3576 

Refund  on  change  of  status:  nonresident  to  resident.  .3406.  3436.  3525 
Registered  interest.  .645,  3001b,  3057 
Returns  of  amounts  wdthheld.  .698,  3002 
Bond  interest.  .702,  3002 
Miscellaneous  income . . 700,  3002 
Notice  of  failure  to  file.  .719 

Return  by  creditor  of  income  on  which  tax  has  been  withheld.  .730,  3007a 

Salaries:  based  on  calendar  year.  .596 

Secrecy  of  returns.  .2649 

Substitute  certificates.  .629,  3001 

Tax  exempt  organizations  to  withhold . .598 

Tax-free  covenant  obligations. . 604,  655,  2996,  3060,  3225,  3320 

Bonds  without  covenant  may  not  be  treated  by  debtor  as  having  covenant.  .3471 
Exemption  claims  by  nonresident  aliens.. 641.  2997,  3566 
Tax  paid  additional  income  to  creditor. , 2841,  3567 
Tax  withheld  to  be  credited  against  tax  to  be  paid  by  creditor . .731,  232  2.  23.38.  3007a 
United  States  bond  interest.  .619,  2998 
Withholding  agents:  definition  of  term . . 584 
Workmen's  compensation . . 998,  2864 

State:  income  accruing  to  fund.  .2875a 
Worthless  debts  (See  “Bad  Debts”  at  1,  Index  Page  2.) 

Worthless  stock.  .2904 


Index  Page  26. 


■Ik'.r- 


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Wi)t  Corporation  tlTrust 


Orgaikized  in  1892 


SERVICES 


The%  are  loo®eaf  binder  services  containing,  in  addition  to  the  respective  acts  as 
ar?fended  and  now  in  effect,  all  otEcial  matters,  in  force,  issued "" since  the 
passage  of  the  respective  original  Acts,  compiled,  cross-referenced,  and 
J indexed,  and  kept  up-to-date  at  all  times  by  means  of  additional  sequentl-  " 
ally  numbered  printed  pages  sent  to  subscribers  under  first-class  postage^ 
^Pbrmal  regulations,  informal  rulings,  Supreme  Court  decisions  and  lower 
court  ceises  are  embodied  in  these  services. 


INCOME  TAX  SERVICE—Covers  the  Federal  Income  Tax  Law  affd  the 
official  regulations,  etc.,  bearing  thereon. 


WAR  TAX  SERVICE—* Covers  practically  all  the  strictly  Internal  Revenue 
Tax  Laws,  except  the  Income  Tax  Lav/,  due  to  the  war,  and  the  official 
9-*)  reigSa^ons,  etc.,  bearing  thereon.  (Does  not  touch  on  beer,  wine  and 
spirits  or  on  tobacco.) 

FEDERAL  RESERVE  ACT  SERVICE—Covers  the  Federal  Reserve  Act 
and  the  official  regulations,  etc.,  bearing  thereon. 

ERAL  TRADE  COMMISSION  SERVICE-Covers  the  Federal 
Trade  Commission  Act  and  the  Federal  Anti-Trust  Act  (the  Clayton 
and  the  official  orders,  rulings,  complaints,  etc.,  bearing  thereon. 

DEPARTMENTS 


Act) 


^RPORATION'DEPARTMENT— Assists  attorneys  in  the  organization 
of  corporations  and  in  the  licensing  of  foreign  corporations  m every  state 
and  the  Provinces  of  Canada. 


*ORT  AND  TAX  DEPARTMENT— Attends  for  attorneys  to  corpO" 


ration  reports  and  lax  matters  in  every  State  and  Province. 


iGISLATIVE  DEPARTMENT— Reports  on  pending  legislation;  funiishes 
copies  of  bills  and  new  laws  in  every  State  and  Congress.  o 


:/rRUSf  DEPARTMENT-Acts  as  trustee  under  deed  of  trust,  cuslcdian**c^ 


securities^^.  escrow  depository  and  depository  for  reorgankatidn  conimiltees. 


SFER  DEPARTMENT^ — Acts  as  registrar  and  tran-sfer  agent  of  stocks,® 
and  notes. 

f*  ' ' 

DEiPARTME^1n’ — Reports  decisibnj  of  th^e  United  States  S^prerOift^ 
Court,  rulings  of  the  Interstate  Commerce  ConrinViSsipu,  Federal  rr4<le§l 
fpommissioDi  Bureau  of  Internal  Rev'enlis  and  Federal  Reserve  BriardK 


' ’ 'rumishes  agent  at  Washington  for  common  carriers /fo,  accept 
orders,  process,  etc.,  of  Interstate  Commerce  v ' ; 


The  CoRPORATSON  Trust  Comp ANy  ' 

37  W*H  Street,  New  Yo/k' 

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. : Cld'cac^^^  W.  Adams  .Street 

Pimb«ri202Olia^rBldg.  rt 

, Wasbinston,  D.  C.,  ^^j^lorado  Bld](.^ 


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